IBM's stock falls as software revenue underwhelms

By Britney Nguyen

Investors have been concerned about AI's impact on IBM's software and consulting businesses

IBM's stock fell in after-hours trading Wednesday following its first-quarter earnings report.

Shares of International Business Machines sank in after-hours trading Wednesday, after the company's software and consulting segment revenues for the first quarter came in too close to expectations.

IBM's stock (IBM) has fallen about 15% so far this year as investors worry about the impact that artificial intelligence will have on traditional software and industries such as consulting. The stock dropped 7% in extended trading following its earnings report.

Revenue for IBM's software segment, which includes Red Hat, was $7.1 billion, an increase of 11% from a year ago. That was only slightly above the FactSet analyst consensus for $7 billion. Revenue for the consulting business came in at $5.3 billion, which was up 4% year over year but in line with the $5.3 billion that analysts had been expecting.

The infrastructure division, which includes IBM's mainframes, reported revenue of $3.3 billion, which was just ahead of the $3.1 billion FactSet consensus and represented growth of 15% from the previous year.

Overall, IBM reported first-quarter revenue of $15.9 billion, ahead of the $15.6 billion analysts tracked by FactSet had been expecting, and up 9% from the previous year. Adjusted earnings per share came in at $1.91, which topped the consensus for $1.81.

Despite investors' concerns, IBM CEO Arvind Krishna said that "AI continues to be a tailwind for" the company's global business.

"IBM products and services are helping clients orchestrate, deploy and govern AI across hybrid environments," Krishna said in a statement.

He added that IBM still expects its revenue will grow more than 5% in constant currency in 2026, and that it will see a year-over-year increase of $1 billion in free cash flow.

Ahead of the print, RBC Capital Markets analyst Matthew Swanson noted that while IBM delivered a beat with its last earnings report, the strength of its software segment "came despite slower-than-expected growth" in its Red Hat division, which is the company's open-source hybrid cloud provider.

Investor skepticism coming into the year was around IBM's "ability to return to growth in the consulting vertical while software growth, particularly Red Hat," was under debate, he wrote in a Thursday note.

Swanson also said he expects IBM to address potential threats to its infrastructure business from AI startup Anthropic's Claude Code for COBOL modernization - which poses a challenge to IBM's agentic AI coding assistant, Project Bob, that aims to do the same to the legacy codebase.

Read on: IBM's stock heads for worst month in 34 years - and Anthropic is partly to blame

Investors will also want more details on IBM's generative AI software offerings, such as Red Hat AI Enterprise, and its quantum-computing efforts, Swanson added.

Meanwhile, Jefferies analyst Brent Thill said he was expecting to see upside from IBM's "earlier-than-expected" close of its acquisition of Confluent, a data-streaming platform for companies building AI agents.

That deal, along with expectations for Red Hat to see growth, "creates room for upward estimate revisions," he said in a Monday note.

-Britney Nguyen

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

04-22-26 2022ET