By Arsheeya Bajwa
(Reuters) -International Business Machines missed analysts’ expectations for third-quarter revenue on Wednesday, citing weakness in the consulting segment as companies cut back on discretionary spending, coupled with declines in the infrastructure sector.
Shares of IBM fell about 4% in extended trading after rising more than 40% this year as investors bet on the company’s potential to capitalize on generative AI through its software and consulting services.
An uncertain macroeconomic backdrop has prompted companies to prioritize spending on long-term AI-centric consulting projects, impacting IBM’s sales from short-term deals.
“A pause in discretionary spending will impact our advisory business,” CEO Arvind Krishna said on a call after the earnings report.
Revenue grew about 1% to $14.97 billion, missing estimates of $15.07 billion, according to data compiled by LSEG. Turnover from consultancy was relatively flat in the third quarter.
The company’s AI Book of Business – a combination of bookings and actual sales of various products – grew to $3 billion, up $1 billion from the second quarter.
“Many customers are looking at how they can free up costs and productivity to invest in GenAI,” Chief Financial Officer James Kavanaugh told Reuters.
The book was driven by consultancy and in the third quarter consisted of one fifth software and four fifths consultancy. However, this growth is not yet reflected in the total consultancy segment.
“Client budgets are not expanding and AI consulting is not additive, but cannibalizes other engagements,” said Michael Ashley Schulman, Chief Investment Officer at Running Point Capital.
Conversely, IBM’s software segment posted the largest increase in quarterly revenue in three years as companies expand cloud infrastructure to accommodate genAI technology.
The software growth helped push third-quarter earnings to $2.30 per share, beating the average analyst estimate of $2.23 per share, according to data compiled by LSEG.
The company’s infrastructure segment, which houses IBM’s mainframe, saw revenue decline 7% as the company enters the tail end of a three-year product cycle where sales are slumping cyclically.
(Reporting by Arsheeya Bajwa in Bengaluru; Editing by Alan Barona)
