IBM's Q1 performance exceeded expectations but failed to alleviate concerns about "AI disruption": both overall and software revenue growth slowed, maintaining annual guidance unchanged.

As of the press release, IBM (IBM.US) stock price fell 7% in after-hours trading on Wednesday. The stock has already dropped 15% since the beginning of the year. The tech giant had previously reiterated its full-year performance forecast, despite announcing that its first-quarter performance exceeded Wall Street expectations. The company failed to alleviate investors' concerns about the potential impact of artificial intelligence on its business. In a statement on Wednesday, the company reported that software revenue grew by 11% to $7.05 billion for the quarter ending March 31, slightly higher than the expected $7.02 billion. Total revenue increased by 9% to $15.9 billion, surpassing analysts' average expectation of $15.7 billion. Adjusted earnings per share were $1.91, also higher than expected. Additionally, IBM's infrastructure business (including mainframes) saw a 15% increase in sales to $3.33 billion, exceeding analysts' expectations. Consulting revenue grew by 4% to $5.27 billion, marking the highest growth rate for this business since 2023, but slightly below expectations. Other revenue amounted to $48 million, a 21% decrease year-on-year. During the earnings conference call, CEO Arvind Krishna downplayed the impact of the Middle East conflict, stating that IBM achieved its strongest growth in the region in decades and could withstand the impact of the closure of the Strait of Hormuz for weeks. The conflict between Iran and the US erupted on February 28, but Krishna stated, "The Middle East situation did not affect us in the first quarter. Although uncertainties remain, our diversified business spans various regions, industries, and large enterprise customers, putting us in a favorable position." Facing the AI wave, IBM is trying to reshape its positioning through strategic acquisitions. By integrating Red Hat, HashiCorp, and the recent early completion acquisition of Confluent for $11 billion, IBM is striving to build an end-to-end data and AI stack, aiming to transform into a high-growth software company. IBM's new strategy has made it the focus of investors' attention, as they are concerned that AI tools may replace many existing software products. In February of this year, AI startup company Anthropic released a tool called Claude Code, claiming to help modernize the migration of COBOL (an outdated programming language running on IBM mainframes for decades) code. Upon this news, IBM's stock experienced the largest sell-off in decades. COBOL language supports core transaction systems in key industries such as global finance and aviation. The complex code logic and high migration costs have long been a solid "moat" for IBM's consulting and mainframe business. Companies wanting to break away from the IBM ecosystem often face significant technical risks and thousands of hours of manual consulting work. The breakthrough with the Anthropic tool lies in AI's potential to significantly lower this exit barrier. Once the system migration costs sharply decrease, IBM's high-profit long-term service contracts and hardware update revenue, on which it relies for survival, may face erosion. Investors' concerns are not about IBM's current profitability, but rather that its future revenue model is being impacted by AI technology. With the introduction of tools that can automate daily business functions, there is a growing concern that AI will erode the software industry. IBM's first-quarter revenue growth rate was lower than the 12.2% increase in the previous quarter. IBM's software department, with high-profit hybrid cloud department Red Hat and AI tool suite under the Watson brand, also experienced slower revenue growth compared to the previous quarter. Jefferies Financial Group Inc. analyst Brent Thill stated in an interview that investors are expecting better performance from IBM's software department. He also added that Wall Street may focus on whether customers are delaying their purchases from IBM because they are trying out AI tools from other companies. Especially with the early completion of the Confluent transaction, it was expected to bring about a 2 percentage point incremental contribution to the software business. However, the management's reiterated outlook for 2026 with revenue growth exceeding 5% at fixed exchange rates, and free cash flow increasing by $1 billion was not adjusted despite the early completion of the acquisition. Some investors interpreted this conservative stance as an indication that even with the injection of new business, management is still uncertain about fully offsetting the potential impact of AI on traditional business. Like most software vendors, IBM is also trying to integrate artificial intelligence into its products and aggressively promoting its ability to provide customers with the latest technology. CFO Jim Kavanaugh stated in an interview that the company expects the software division related to generative AI to achieve 2 percentage points growth this year. He also added that the demand for IBM's infrastructure software has increased with AI-related work, allowing customers to use leading AI models. Currently, Wall Street's view on IBM has shown a clear divergence. Despite several institutions lowering their target prices before the earnings report, most are still maintaining "buy" or "outperform" ratings, believing that the market is overly pessimistic about AI's impact. Bullish views believe that IBM's deep government and enterprise customer relationships and its own AI product layout (such as Watsonx) give it the ability to get a share of the hybrid cloud and AI services field. On the other hand, bears insist that AI automation tools will fundamentally compress the profit margins of software and consulting services, leading to a long-term contraction of IBM's valuation multiples.