IBM Chairman and Chief Executive Officer Arvind Krishna has acknowledged that the company underestimated how sharply customers would pivot their technology budgets toward artificial intelligence (AI) infrastructure, admitting the misstep drove a significant revenue shortfall in the second quarter and sent IBM shares tumbling 25 per cent. The admission came in a letter to investors released alongside selected preliminary Q2 results on 15 July.

What Krishna Said

In the investor letter, Krishna was direct about the failure to anticipate the scale of the shift. “What played out was worse than our expectations,” he wrote. “These conditions require our teams to execute perfectly, and this quarter we faltered. 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.”

Krishna explained that clients shifted their quarterly technology budgets in the final weeks of June to secure supply-constrained infrastructure — specifically servers, storage, and memory — ahead of anticipated price increases. IBM had expected some supply chain disruption, but the magnitude of customers reprioritising capital expenditure toward AI infrastructure caught the company off guard.

Preliminary Q2 Financial Results

IBM reported preliminary second-quarter revenue of $17.2 billion, up just 1 per cent year-on-year — a figure well below market expectations. Software revenue rose 5 per cent, while consulting revenue remained flat and infrastructure revenue declined 7 per cent. Diluted earnings per share fell 2 per cent to $2.27, though operating (non-GAAP) earnings per share increased 5 per cent to $2.93.

The revenue shortfall was largely driven by weaker-than-expected performance in IBM’s Z mainframe business and its associated software stack, particularly transaction processing software, according to Krishna.

Cybersecurity Concerns Added to the Pressure

Beyond the AI infrastructure spending shift, IBM also cited rapidly evolving, industry-wide cybersecurity concerns as a factor that distracted customers during the quarter. This combination of headwinds — budget reprioritisation toward AI hardware and heightened security anxiety — created an unusually difficult operating environment for deal closures. Notably, this is not an isolated dynamic: several enterprise technology vendors have flagged similar disruptions as AI infrastructure buildout accelerates globally.

IBM’s Strategic Outlook

Despite the quarterly miss, Krishna maintained confidence in the company’s longer-term direction. “While performance in the quarter was below our expectations, we have conviction in the strength of our portfolio and the strategic transformation of our business,” he said. He added that IBM continues to invest aggressively in both artificial intelligence and quantum computing.

IBM clarified that it is still finalising its quarterly financial statements, with complete second-quarter results scheduled for release on 22 July. Investors and analysts will be watching that report closely for any revision to full-year guidance.