IBM cuts annual revenue growth forecast as customers prioritize AI infrastructure spending

Updates shares in paragraph 3

By Anhata Rooprai

July 22 (Reuters) - IBM cut its annual revenue growth forecast on Wednesday, days after shocking Wall Street with a warning that corporate spending was shifting toward AI-focused data-center gear at the expense of its software and mainframe computers.

The company IBM.N also missed profit and revenue expectations for the second quarter ended June 30. Executives sought to reassure shareholders that customers prioritized spending on AI in the quarter but were not looking to move away from mainframes in the longer term.

The Armonk, New York-based company's shares dipped marginally in extended trading, following a 2% rise earlier.

CEO Arvind Krishna said last week IBM had "faltered" in adapting and "numerous large deals" had slipped, sending the company's shares down 25%, its steepest one-day fall in more than a century.

On the earnings conference call, Krishna said a "majority of what didn't happen in the second quarter was large capex deals at large clients" and added that about one-third of those deals had now closed in the current third quarter.

"A lot of the demand is deferred, not destroyed," Krishna said.

IBM's forecast spotlights how the scramble for AI hardware has stoked investor fears that companies rushing to secure scarce servers, chips and networking gear could be cutting back on spending on the wider software sector.

IBM now expects 2026 revenue growth between 4% and 5%, down from its previous expectations of more than 5% growth. The midpoint of the forecast is below analysts' average estimate of a 4.8% rise to $70.77 billion in revenue, according to data compiled by LSEG.

"For the broader software sector, this should be treated as a positive print, with IBM's software woes more likely to reflect specific IBM-related hardware issues, as management outlined in its investor letter last week," CFRA analyst Brooks Idlet said.

Revenue from IBM's Z mainframe, which processes millions of daily transactions across industries such as banking and airlines, slumped 42% in the second quarter, dragging infrastructure revenue down 7% to $3.84 billion.

"That mainframe stack of hardware and transaction processing software impacted IBM's growth by over five points in the quarter," IBM finance chief James Kavanaugh told Reuters. "We were only expecting about a point or two of an impact."

He said IBM sees "no evidence of clients moving off a mainframe," adding that it expects "significant outperformance in the program to continue through the second half."

Software revenue in the second quarter rose 5% to $7.76 billion but missed an average estimate of $7.88 billion.

The company's second-quarter revenue ticked up 1% to $17.16 billion, missing estimates of $17.58 billion. IBM reported a net profit of $2.17 billion, a dip from a year earlier, while adjusted profit of $2.93 per share missed an average estimate of $2.97.

(Reporting by Anhata Rooprai in Bengaluru and Stephen Nellis in San Francisco; Editing by Pooja Desai and Rod Nickel)

((Anhata.Rooprai@thomsonreuters.com))