IBM's Software Shortfall Explained: Execution Issues, Not Business Fundamental

IBM CEO Arvind Krishna attributed the company's software shortfall in its second quarter earnings to 'execution' issues, not a fundamental problem with its business.

The shortfall was mainly due to a shift in client spending priorities towards hardware and cybersecurity-focused software, which are constrained by supply chain issues. This led to the failure of IBM to close several large deals on time, accounting for most of the shortfall. The number of affected deals was in the 'low 10s', according to Krishna.

However, IBM has already seen a rebound, with about one-third of the shifted deals having closed since the end of the quarter. This is a better-than-expected outcome, as normally only two-thirds to three-fourths of such deals would close within six months. The company's conviction in its business remains unchanged, and it believes its portfolio is well-positioned to help clients realize value in AI.

IBM plans to increase the use of AI to scale software development, bolster sales and marketing efforts, and optimize its supply chain. This will enhance its margin and free cash flow commitments while improving its ability to capture growth ahead.