IBM Sees Shift in Client Spending Priorities, Adapts Approach

IBM's CEO Arvind Krishna attributed the company's software shortfall in its second quarter to execution issues. The shortfall was limited to a capex-sensitive area of the portfolio, according to Krishna. He warned investors earlier this month about a big customer shift toward supply chain-constrained hardware and cybersecurity-focused software, away from some of IBM's core software and infrastructure competencies.

Krishna explained that many clients purchase mainframe and associated software through enterprise license agreements, which create a strong incumbency moat for IBM. However, with the recent shift in client spending priorities toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases, these deals were delayed.

The company failed to close a double-digit number of large deals on the timelines expected, accounting for the majority of the shortfall. Krishna said that IBM engaged with clients on the transactions that slipped and have adapted their approach to deliver greater business value to clients around innovation, and greater economic value to align with client priorities.

As of now, about one-third of those shifted deals have closed, giving IBM a good indication that this was deferral rather than destruction. Krishna expressed confidence in the face of investor questions, stating that their conviction in the strength of their business and ability to grow and drive shareholder value remains unchanged.