IBM has lowered its revenue growth forecast. How is the company trying to reassure investors?

IBM, in announcing its second-quarter results, lowered its revenue growth forecast for the current year to 4–5% in constant currency from the previous forecast of more than 5%. A few days earlier, the company had spooked Wall Street with a warning that corporate clients were shifting spending toward artificial intelligence-focused hardware at the expense of software and mainframes. This triggered a record plunge in IBM’s stock price.

Following the release of its earnings report on July 22, which generally confirmed IBM’s earlier warning, the company’s stock price fell, though only slightly. During a conference call with analysts, IBM management acknowledged that the quarter “fell short of expectations,” but stated that it expects the situation to improve in the second half of the year. Here is what IBM told its shareholders:

— Demand hasn't disappeared; it's just been postponed

Why were initial expectations not met in the past quarter? IBM explains it this way: some major clients who had planned to sign new contracts during the quarter decided to hold off for now. This affected “dozens” of deals and came to light at the last minute, said Arvind Krishna, chairman of the board of directors and chief executive officer: “I believe that even about a month ago, our clients still intended to close these deals,” he said. Krishna attributed this to the fact that, faced with rising costs, customers prioritized purchases whose prices were skyrocketing due to shortages—specifically, servers, data storage systems, and memory. However, he said, they eventually returned to IBM: about one-third of these postponed deals were closed in the first three weeks of the third quarter. This indicates that demand was simply deferred, not lost entirely, the IBM CEO emphasized.

— Mythos is not a threat, but a new opportunity

The release of Mythos, a new artificial intelligence model capable of identifying vulnerabilities in operating systems, is not a threat, but rather a new opportunity worth billions of dollars for IBM as a whole and its Red Hat division, which develops open-source software, Krishna said. IBM and Red Hat are currently selling corporate clients an annual subscription for $1 million to Lightwell—a commercial service that helps identify and fix vulnerabilities in open-source components. Among Lightwell’s first clients are Bank of America, Citi, Goldman Sachs, and other financial giants, Krishna said.

— The free cash flow forecast remains unchanged

IBM maintained its forecast for annual free cash flow growth of approximately $1 billion compared with last year’s figure. For the first half of the year, free cash flow totaled about $5 billion—on par with last year, the company reported. The main reason for this stagnation is a proactive $600 million increase in inventory amid a shortage of infrastructure equipment and strong demand for IBM Power solutions and data storage systems, said James Kavano, the company’s chief financial officer. In the second half of the year, the company expects that the negative impact on cash flow will largely have been offset.

Analysts at J.P. Morgan maintained their “Outperform” rating on IBM, which corresponds to a buy recommendation, with a price target of $250. This is approximately 21% above the current share price.

“We believe that the current stock price already reflects a much more negative scenario than many had expected following the preliminary earnings announcement. However, investors will likely need to see confirmation that the company is executing its plans more effectively before they can expect a significant recovery in the stock price,” said J.P. Morgan analysts, as quoted by Seeking Alpha.

RBC Capital also maintained its “Outperform” rating and $270 price target per share. The updated revenue growth forecast turned out to be even better than the bank’s analysts had expected, according to an RBC Capital note.

Jefferies maintained its “Buy” rating and $260 price target per share. Its analysts called the quarter “disappointing,” but noted that the unchanged free cash flow forecast and management’s statements regarding the signing of approximately one-third of deferred deals suggest that the main reason for the weak results was deal closing timelines rather than a decline in demand. The delayed deals could serve as a catalyst for a sales recovery in the third quarter, the analysts wrote, but they noted that they would only be able to fully trust the forecast once a significant portion of the delayed deals had been officially reflected in the financial statements.

This article was AI-translated and verified by a human editor