International Business Machines (IBM) shares logged their worst single-day decline on record Tuesday after the company issued a disappointing preliminary second-quarter earnings report.
The stock plummeted 25%, surpassing the company’s previous worst day on record, when shares fell 23.7% on October 19, 1987.
CEO Arvind Krishna pointed to a sudden and dramatic shift in customer spending habits as the primary driver of the shortfall, catching IBM largely off guard.
“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,” Krishna wrote in a letter to IBM investors.
Krishna added that while IBM anticipated some supply chain impact, the magnitude of the capital expenditure reprioritization was far greater than the company had modeled heading into the quarter.
A global artificial intelligence infrastructure buildout has sent demand for servers, memory chips, and storage surging, creating supply shortages and pushing prices higher across the industry.
IBM’s large corporate customers rushed to lock in hardware purchases before prices climbed further, diverting spending away from IBM’s higher-margin mainframe computers and related software products.
The timing was particularly painful because IBM entered the quarter riding the launch of the z17, its newest mainframe system, described as a “transaction processing powerhouse” with advanced AI capabilities.
IBM posted adjusted earnings of $2.93 per share on $17.2 billion in revenue, missing Wall Street estimates of $3.01 per share and $17.86 billion in revenue respectively.
Infrastructure revenue fell 7% during the quarter, while software grew 5% and consulting remained flat, underscoring where the damage was concentrated.
Not all of IBM’s divisions struggled, however, as distributed infrastructure, the unit selling servers and storage, climbed a record 37% with a backlog approaching $500 million.
IBM’s Red Hat software arm also showed resilience, accelerating to 11% growth even as the broader business came under pressure from shifting customer priorities.
Krishna acknowledged that IBM’s teams failed to respond quickly enough to the changing environment, costing the company several significant deals it had expected to close.
“These conditions require our teams to execute perfectly, and this quarter we faltered,” Krishna wrote. “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.”
The selloff extended well beyond IBM, triggering a broad slump across the software sector, with Microsoft, ServiceNow, Salesforce, and Intuit each falling between 3% and 5% on Tuesday.
