Shares of IBM (NYSE:IBM) dropped more than 5% in premarket trading on Thursday after weaker software sales overshadowed the company’s stronger-than-expected earnings and revenue fueled by ongoing demand for AI technologies.
The company reported earnings per share of $2.80, beating analyst forecasts of $2.65, supported by a 320-basis point improvement in operating margin. Revenue reached $17 billion, above the consensus estimate of $16.59 billion.
CEO Arvind Krishna highlighted that IBM “exceeded expectations for revenue […] and free cash flow,” emphasizing the rising demand for generative AI, with that segment’s business now surpassing $7.5 billion.
IBM raised its full-year free cash flow guidance to more than $13.5 billion, driven by robust performance in the first half and expanding margins.
CFO James Kavanaugh credited portfolio mix and productivity efforts for delivering “double-digit profit growth.”
Morgan Stanley analysts noted that while IBM’s software division underperformed, this was offset by “very impressive” results from its AI-focused mainframe business.
The software unit’s revenue came in at $7.39 billion, slightly below the $7.41 billion expected, according to LSEG data cited by Reuters. Conversely, IBM’s infrastructure segment, which includes mainframes, posted stronger-than-expected revenue of $4.14 billion.
IBM’s consulting arm recorded 3% sales growth, signaling continued client investment in AI integration, though executives described the outlook as “prudently cautious,” given the “current demand environment” and concerns about investment pullbacks amid tariff-related economic uncertainty.
“What surprised us was the degree of mainframe outperformance in the second quarter, and the strength in gross margins, which primarily drove the second-quarter revenue and earnings per share beat,” Morgan Stanley analysts remarked.
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