'This quarter we faltered': IBM CEO says AI spending shift delayed software deals; shares tumble 26%, dragging tech stocks lower

IBM shares sank nearly 25% on Tuesday after chief executive officer Arvind Krishna acknowledged that the company failed to adapt quickly enough to a sharp shift in enterprise technology spending, with customers diverting capital expenditure towards AI infrastructure instead of software. The warning triggered a selloff across software and IT services stocks even as the broader Nasdaq Composite traded about 1% higher, indicating investors viewed the development as specific to the enterprise software sector.

IBM shares were down 26.53% at $218.20 in afternoon trade after the company released selected preliminary second-quarter financial results ahead of its scheduled earnings announcement on July 22.

The weakness spread across peers, with Infosys ADR falling 2.86%, Wipro ADR declining 2.11%, Accenture losing 3.40%, and Adobe dropping 3.36%. Salesforce pared early losses to trade marginally lower.

'We did not adapt quickly enough'

In a letter to investors, Krishna said IBM had expected only a modest decline in its infrastructure business after the launch of its z17 mainframe. Instead, customer spending priorities changed significantly in the closing weeks of June.

"In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases," Krishna wrote.

He added that IBM "did not anticipate the magnitude of the capex reprioritization."

Krishna also cited rapidly evolving cybersecurity concerns that distracted customers during the quarter.

"These conditions require our teams to execute perfectly, and this quarter we faltered," he said.

"We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected."

Revenue misses estimates

IBM expects second-quarter revenue of $17.2 billion, up 1% from a year earlier but below analysts' estimate of $17.86 billion.

Software revenue is expected to rise 5%, consulting revenue remained flat, while infrastructure revenue declined 7%, a sharper fall than the company had anticipated.

IBM expects GAAP earnings of $2.27 per share, the profit calculated under standard accounting rules, down 2% from a year earlier. Adjusted earnings, which strip out certain one-off items and are more closely watched by analysts, are projected at $2.93 per share, up 5% but below market estimates of about $3.01. The company also reported gross margins of 57.7% under GAAP and generated $7.8 billion in operating cash flow and $4.8 billion in free cash flow during the first six months of 2026.

Warning reverberates across software sector

IBM's comments are among the clearest indications yet that enterprise customers are reprioritising technology budgets as AI adoption accelerates. Rather than reducing overall IT spending, customers are front-loading investments in servers, storage and memory needed to support AI workloads, while delaying software purchases and large enterprise contracts.

Despite the disappointing quarter, IBM highlighted several areas of strength. Red Hat revenue growth accelerated to 11%, recently acquired HashiCorp and Confluent delivered strong performance, while its Distributed Infrastructure business grew 37% with a backlog of approximately $500 million. The company also reiterated plans to invest more than $10 billion in quantum computing over the next five years and said it remains on track to build a large-scale fault-tolerant quantum computer by 2029.

IBM will report its full second-quarter earnings and updated guidance on July 22.