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Investing.com - Shares of IBM (NYSE:IBM) fell more than 5% in premarket U.S. trading on Thursday, as weakness in the tech group’s software sales overshadowed better-than-anticipated earnings and revenue driven by ongoing artificial intelligence-driven demand.
Earnings per share came in at $2.80, versus analysts’ estimates of $2.65, underpinned by a 320-basis point expansion in operating margin. Revenue rose to $17 billion, compared to consensus estimates of $16.59 billion.
CEO Arvind (NSE:ARVN) Krishna said IBM “exceeded expectations for revenue [...] and free cash flow,” and pointed to a growing need for generative AI, with that segment’s book of business now exceeding $7.5 billion.
The company lifted its full-year free cash flow outlook to over $13.5 billion, citing a strong first-half performance and expanding margins.
CFO James Kavanaugh said portfolio mix and productivity initiatives had supported “double-digit profit growth.”
In a note, analysts at Morgan Stanley (NYSE:MS) flagged that IBM’s software division underperformed, but was offset by "very impressive" returns from its AI-specialized mainframes.
Sales at IBM’s software unit, typically a solid contributor to the overall group, came in at $7.39 billion, missing estimates of $7.41, according to LSEG data cited by Reuters. But its infrastructure unit, which includes the mainframe business, delivered better-than-anticipated revenue of $4.14 billion.
IBM’s consulting unit unveiled 3% sales growth, in a sign that clients were paying for the company’s expertise on folding in AI into their operations. But IBM executives noted a "prudently cautious" outlook for the division, citing the "current demand environment." Worries have swirled around whether enterprise clients may look to rein in investments during a time of tariff-driven economic uncertainty.
"What surprised us was the degree of mainframe outperformance in the second quarter, and the strength in gross margins, which primarily drove the second-quarter revenue and earnings per share beat," the Morgan Stanley analysts said.
(Pratyush Thakur contributed reporting.)