IBM's stock price has slumped after it posted lacklustre revenue figures and revealed a slowdown in demand for consultancy services.
Over the last quarter, IBM earned revenue of $15.0 billion, a slight 1% uplift that brings it $40 million under analysts' predictions. After the disappointing results were posted, shares in IBM dropped by 4% in pre-market trading today.
Mainframe sales also tumbled, with IBM Z revenue down 19%.
IBM executives attributed that to Big Blue now being into the third year of its z16 mainframe availability. Sales here are cyclical and the z16 "continues to exceed prior cycles, delivering revenue growth in eight of the last 10 quarters and program to date installed MIPS are up over 30%" said CFO Jim Kavanaugh.
See also: IBM mainframe licences have a 90% margin, opportunity growing: CFO
Consulting revenues have been "flat" during the last quarter, down 0.5% to $5.2 billion. Growth in demand for GenAI consulting services has failed to move the dial for IBM, which said any uptick is primarily caused by customers reallocating their spending.
Discussing its Q2 2024 results on an earnings call, CEO Arvind Krishna said growth in demand for Gen AI-powered consulting services is the result of a "shift" in customers' spending from other areas of consulting rather than new investments.
GenAI consultancy concerns
Since IBM began offering generative AI services, it has secured more than $2 billion worth of contracts or deals. Approximately 75% of that sum comes from consulting contracts.
The IBM boss does not believe Gen AI will be "cannibalistic" on firms' total consulting spend and chomp down into the wider IT budgets.
He predicted that organisations would increase their investments in AI consulting as they move beyond "early experimentation and proving the value" to "wanting to scale and really get the full benefits of generative AI".
For now, we are "still some time away" from the great generative AI awakening.
Although the CEO does not believe there is a "secular macro trend around weakness" in consulting and said sluggish client spending was caused by temporary "geopolitical uncertainty" such as wars in Europe and the Middle East and high interest rates caused by prolonged inflation. He believes that these may cause spending constraints that persist for at least half a year.
"Is this going to go on for another six months?" he said. "Likely. Is it going to go on for another year? I'm not so sure."
IBM's earnings
In the second quarter, IBM earned $15.8 billion in revenue, $2.8 billion of operating pre-tax income, and 4% revenue growth.
It reported 8% growth in the Software segment, with strong performance across hybrid platforms, solutions, and transaction processing. Infrastructure had "great performance" and grew by 3%, driven by growth in distributed infrastructure and its IBM Z enterprise compute platform.
Software grew by 8% with "solid growth" across hybrid platform, solutions and transaction processing and strong transactional performance.
Overall, consulting was up 2% but "continued to be impacted by a pullback in discretionary spending".
James J. Kavanaugh, Senior Vice President and chief Financial Officer, said: "In April, we discussed that we were seeing solid demand for our large transformational offerings as clients continue to prioritize driving productivity with AI and analytics. At the same time, we saw a pullback on discretionary projects as clients prioritize their spending. The second quarter buying behaviour played out much in the same way."
Signings for the quarter were $5.7 billion, driven by "solid demand for large engagements across finance and supply chain transformation" as well as cloud modernisation and application development.
