Why IBM shares crashed 26%: CEO highlights customer spending shifts towards AI

IBM Chairman and CEO Arvind Krishna attributed the company's weaker-than-expected second-quarter performance to an unexpected shift in customer spending towards AI infrastructure, including servers, storage and memory, to secure supply-constrained hardware, which affected its Software and Infrastructure businesses.Shares of the company fell over 26% to $213.22 following the update, which was their biggest intraday loss in 58 years, according to a Bloomberg report.IBM said preliminary second-quarter revenue stood at $17.2 billion, missing analysts' expectations of $17.9 billion.

Revenue from its Infrastructure division fell 7%, while preliminary diluted earnings slipped 2% to $2.27 per share.

The company said it is still finalising its financial statements, with official quarterly results due next week and subject to minor revisions.Krishna said customer spending priorities changed sharply in the final weeks of June.“In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases.

This dynamic impacted client buying patterns.

While we anticipated some supply chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization,” he said.Krishna acknowledged execution lapses, saying, ”These conditions require our teams to execute perfectly, and this quarter we faltered.

We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected, driving the majority of our shortfall.”Also Read: Is Wall Street heading towards a massive crash?

Here's what history hintsThe biggest setback came from IBM's mainframe business.

Although the company had anticipated a moderation in Infrastructure revenue after the record launch of its z17 mainframe, the decline was steeper than expected as sales of IBM Z systems and related transaction-processing software fell short of forecasts.IBM also cited rapidly evolving cybersecurity concerns across industries, which distracted customers and delayed technology purchasing decisions during the quarter.Despite the disappointing quarter, IBM highlighted areas of resilience.

Red Hat revenue growth accelerated to 11%, recently acquired businesses such as HashiCorp and Confluent performed strongly, and its Distributed Infrastructure business posted a record 37% growth, supported by robust demand for Power servers and storage systems.

Consulting signings also remained healthy, driven by generative AI projects.Looking ahead, IBM said it is accelerating initiatives to improve execution while continuing to invest aggressively in AI and quantum computing.

The company recently launched Lightwell, a new AI-powered cybersecurity platform, and reaffirmed plans to build a large-scale fault-tolerant quantum computer by 2029.“Lightwell is a $5 billion commitment backed by new frontier AI capabilities and a global force of more than 20,000 engineers.

Early adopters include organizations like Bank of America, BNY, Citi, Goldman Sachs, JPMorganChase, Mastercard, Morgan Stanley, and more,” he said. ...