IBM shares drop as software revenue misses

• IBM delivered stronger results than expected and raised its forecast for full-year free cash flow.
• But revenue and gross margin in the software business were below consensus.
• IBM shares have outperformed the S&P 500 by a significant margin this year.

IBM shares fell as much as 6% in extended trading on Wednesday after the tech conglomerate issued second-quarter results that topped Wall Street projections.

Here's how the company did in comparison with LSEG consensus:

• Earnings per share:$2.80 adjusted vs. $2.64 expected
• Revenue:$16.98 billion vs. $16.59 billion

IBM's revenue increased nearly 8% year over year in the quarter, according to a statement. Growth in the first quarter was below 1%. Net income, which includes costs related to acquisitions, rose to $2.19 billion, or $2.31 per share, from $1.83 billion, or $1.96 per share, a year ago.

“While not a major factor overall, geopolitical tensions are prompting a few clients to move cautiously,” CEO Arvind Krishna said on a conference call with analysts. “U.S. federal spending was also somewhat constrained in the first half, but we do not expect it to create long term headwinds.”

Software revenue climbed about 10% to $7.39 billion, falling short of the $7.43 billion consensus among analysts surveyed by StreetAccount. Hybrid cloud revenue, including Red Hat, showed 16% growth. The software unit's gross margin of 83.9% was barely narrower than StreetAccount's 84.0% consensus.

“Clients reprioritized their spend to the hardware,” Krishna said.

Revenue from consulting rose almost 3% to $5.31 billion, higher than StreetAccount's $5.16 billion consensus.

“Delayed decision making, especially in discretionary projects, as well as prior-year renewals impacted our in-period signings,” said Jim Kavanaugh, IBM's finance chief.

Infrastructure revenue went up 14% to $4.14 billion, above the $3.75 billion StreetAccount average estimate.

During the quarter, IBM announced the next-generation z17 mainframe computer and the acquisition of data and artificial intelligence consulting firm Hakkoda.

IBM's generative artificial intelligence book of business from inception to the present stands at $7.5 billion, up from $6 billion in April, Krishna said.

With respect to guidance, IBM called for over $13.5 billion in 2025 free cash flow, similar to a projection from April. The company still sees at least 5% revenue growth at constant currency for the year.

IBM can also expand through additional deals.

What we've seen over the last four months has made us optimistic that we are now in a rational regulation environment where M&A that makes sense will get approved in reasonable timeframes, Krishna said.

As of Wednesday's close, IBM shares were up 28% so far in 2025, while the S&P 500 index has gained around 8% in the same period.