IBM Sees Shift Back from Software Shortfall as Execution Issues Blamed
IBM's CEO Arvind Krishna acknowledged that the company experienced a shortfall in its second-quarter software sales, attributing it to 'execution' issues. The shortfall was largely due to a shift in customer spending from traditional IBM software and infrastructure to AI-focused hardware components outside of the company's core offerings.
Krishna explained that this shift was driven by customers prioritizing supply chain-constrained hardware and cybersecurity-focused software, which moved away from some of IBM's core competencies. The CEO noted that about one-third of the 'large deals' that slipped have since closed, with the majority expected to close within the next six months.
IBM CFO James Kavanaugh highlighted that these agreements typically contain a high concentration of transaction processing software, although they may also include data and automation products. Krishna emphasized that IBM is adapting to deliver greater business value to clients around its innovation and economic value to better align with client priorities.
The CEO expressed confidence in the company's ability to grow and drive shareholder value, citing plans to increase AI use for scaling software development, bolstering sales and marketing efforts, and optimizing supply chains. IBM has also accelerated changes to its go-to-market model to expand coverage across thousands of additional clients where its portfolio is highly relevant.
Krishna pointed to recent software-focused acquisitions, including Red Hat, HashiCorp, and Confluent, which power a majority of the company's high-margin subscription-based recurring software revenues. The CFO highlighted record bookings for HashiCorp during the quarter, with Confluent getting off to a strong start and Red Hat posting an increase in revenue growth.