IBM's second-quarter miss hits lighter second time around

IBM's (IBM) second-quarter miss didn't knock the stock down the second time around as shares increased 2% during early post-market trading on Wednesday.

The Arvind Krishna-led company took its licks earlier by releasing the preliminary results last week. Revenue for the quarter ended June 30 increased 1% year over year to $17.16B, missing analysts' expectations of $17.9B. It reported adjusted earnings per share of $2.93, which was less than the consensus estimate of $3.02. Shares plummeted 24% following the early results. 

Krishna attributed the shortfall to customers shifting capital spending toward servers, storage and memory to secure AI infrastructure ahead of expected price increases.

The revenue miss stemmed from shortfalls in the Software and Infrastructure business segments. Software revenue totaled $7.76B compared to the $7.99B estimate, and Infrastructure was $3.84B versus the $3.96B consensus. 

IBM did not release many details on its outlook, only indicating it expects full-year revenue to increase by 4% to 5%. The company also expects to increase its free cash flow by about $1B.

"We fundamentally believe that we are in the early innings of a structural shift for business and that our portfolio—across software, infrastructure, and consulting—is well-positioned to help our clients tap the value and manage the challenges of an AI-driven future," Krishna said. "In addition, we are taking action to accelerate our revenue growth and profitability, driving productivity across the company with AI and automation, and heavily investing in commercializing innovation at speed and scale. We now expect constant currency revenue growth in the range of four-to-five percent, and we continue to expect free cash flow to increase by about $1 billion year-over-year for the full year."

"Although we faced revenue headwinds late in the second quarter, we continued to focus on the fundamentals of our business, including driving productivity, strengthening our portfolio, and generating free cash flow," said IBM CFO James Kavanaugh. "In a quarter like this, it is critical that our financial and operational discipline remain strong and that we continue to invest for growth while returning value to shareholders through our dividend."

The company declared a dividend of $1.69 per common share.

On the quantum side, IBM said it expects to deliver the first large-scale fault-tolerant quantum computer by 2029. It plans to invest more than $10B into quantum computing over the next five years.

"IBM reported the weak Q2 numbers in line with previous guidance, but the company did maintain better than feared revenue guidance for the full year at 4% to 5%," said Stone Fox Capital, Investing Group Leader for Out Fox The Street. "The AI story is still shattered with Software and Consulting divisions reporting limited growth. The stock trades at about 17.5x EPS targets, and with the AI story fading away, IBM is still viewed as a Sell at around $205."