IBM warns AI boom is squeezing software budgets

TL;DR:

• IBM said it had “faltered” as corporate spending shifted from software to data-centre infrastructure, forecasting second-quarter revenue and profit below estimates.
• Shares fell 25%, on track for a steeper single-day drop than the company suffered in the 1987 Black Monday crash.
• CEO Arvind Krishna said “numerous large deals” failed to close as clients rushed to secure supply-constrained servers, storage and memory.

The AI boom has started taking money from the software industry rather than giving it, and IBM has become the clearest illustration. The company said it had “faltered” in keeping pace with a shift in corporate spending from software to data-centre infrastructure, and warned of a significant second-quarter earnings hit. Its shares fell 25%, on course for a steeper single-day decline than during the 1987 Black Monday crash. Microsoft, ServiceNow, Salesforce and Intuit fell between 2% and 5%.

Capex reprioritised, deals unclosed

The mechanism is a scramble for hardware. “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,” CEO Arvind Krishna told investors. “While we anticipated some supply-chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization,” he said, adding that “numerous large deals” had failed to close.

IBM expects revenue to rise just 1% to $17.2 billion, against analyst estimates of $17.86 billion, with adjusted earnings per share of $2.93 versus $3.02 expected — its weakest revenue growth in more than a year. Weakness sat largely in the mainframe business. The company was set to lose $70 billion from its $272.78 billion valuation if the losses held.

Two AI-driven forces are working against IBM at once. Businesses are diverting budget to infrastructure, and they are also prioritising cybersecurity — a response to Anthropic’s Mythos model and its ability to expose flaws in existing software and encryption. The same capability UK banks are complaining they cannot access is, from IBM’s side of the ledger, reshaping what its customers buy.

“This is an ugly moment for IBM and software stocks… the big question will be how long the shift to infrastructure and cybersecurity lasts,” said Chris Beauchamp, chief market analyst at IG Group. “A few more months might be bearable, but more than that and serious questions will be asked all over again about software stocks.”

For UK enterprise buyers the read-across is about sequencing rather than sentiment: when infrastructure and security absorb the budget, conventional software renewals are what gets deferred. That squares with KPMG’s finding that firms are pausing projects when costs outrun value — the same discipline, seen from the vendor’s accounts.

Looking forward

IBM pointed to more than $10 billion in quantum computing investment and expanding AI partnerships including with OpenAI, but conceded these are early-stage and not yet large enough to offset core weakness. Second-quarter results are due on 22 July.