IBM quarterly results reignite AI disruption fears as software growth slows to 11.3%

IBM Revenue Growth Slows Despite Beating Estimates

IBM posted first-quarter revenue of $15.92 billion, surpassing analysts' average estimate of $15.62 billion, yet the company's stock fell approximately 6% in extended trading as investor concerns about AI disruption intensified 1

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. The IBM revenue growth of 9% represented a notable slowdown from the 12.2% growth achieved in the previous quarter, raising questions about the sustainability of Big Blue's transformation strategy 5

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. While the company's adjusted profit came in at $1.91 per share, compared with profit estimates of $1.81, the market response underscored deeper anxieties about AI's impact on software business models across the industry 3

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The company's software segment, which includes its high-margin Red Hat hybrid cloud unit and Watsonx AI tools, grew 11.3% to $7.05 billion in the period ended March 31 1

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. This represented a deceleration that failed to reassure investors who were looking for stronger results to counter concerns that AI tools might replace traditional software products. Big Blue has refashioned itself into a high-growth software company through major acquisitions of Red Hat, HashiCorp, and Confluent, making the software sales performance particularly critical to its investment thesis 1

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Anthropic Tool Amplifies Investor Concerns About AI

Investor concerns about AI have been building since February when Anthropic unveiled tools that could help modernize COBOL, a dated programming language that runs on IBM mainframes 1

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. The announcement triggered IBM's steepest selloff in decades, highlighting the market's sensitivity to potential AI disruption of the company's core business. Anthropic launched additional tools in February that automated tasks across domains, including marketing and data analytics, raising broader questions about the pressure such products could put on traditional software businesses 2

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CFO James Kavanaugh pushed back against these investor fears, arguing that generative AI actually accelerates mainframe consumption. "Gen AI in modernization of mainframe is actually an accelerator and accretive to the mainframe portfolio overall," Kavanaugh told Reuters, noting that clients using IBM's Watsonx Code Assistant are seeing faster growth in mainframe adoption 3

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. The company expects 2 percentage points of growth for its software unit tied to generative AI work this year, with AI-related work increasing demand for IBM's infrastructure software that lets clients work with leading AI models 1

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US Software Stocks Tumble on Broader AI Disruption Fears

The IBM quarterly results triggered a wider selloff across US software stocks in premarket trading, with ServiceNow also reporting challenges that reignited sector-wide anxieties 2

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. Microsoft lost 1.8% in premarket trading, Adobe fell 2%, CrowdStrike was off 2.2%, Intuit declined 3.2%, and Datadog shed 2.4% before the bell 4

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. IBM shares themselves dropped 7.4% as the market digested the implications of slowing software growth 2

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Analysts at UBS Global Wealth Management noted that "the challenge is shifting from simply having an AI story to proving that it can support products, workflows, and returns," while suggesting that "widespread disruption in software is more likely a long-tail scenario than an immediate one, especially for enterprise-facing and mission-critical providers with sticky customer relationships" 2

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. The contrasting fortunes between sectors became starkly apparent, with the S&P 500 software and services index down over 13% so far this year, while the Philadelphia SE Semiconductor index has jumped almost 40% 4

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Enterprise Demand for Generative AI and Hybrid Cloud Remains Strong

Despite the market's negative reaction, enterprise demand for generative AI and hybrid cloud continues to surge as businesses automate workflows and manage large amounts of data 3

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. IBM's infrastructure segment, which includes mainframe computers, generated sales that rose 15.2% to $3.33 billion, outperforming analysts' estimates and representing a bright spot for over a year 3

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. The continued adoption of the latest generation z17 mainframes has driven this growth, with these secure, high-performance servers processing millions of daily transactions for major banks, airlines, and retailers .

IBM's consulting unit revenue increased 4% to $5.27 billion, marking the highest growth rate for the struggling business since 2023 1

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. The company maintained its earlier forecast for revenue to grow more than 5% this year when adjusting for currency fluctuations, signaling confidence in its ability to navigate the shifting technology landscape 1

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. Brent Thill, an analyst at Jefferies, suggested that Wall Street is likely to ask whether customers are delaying purchases with IBM while they test out tools from AI firms, highlighting the uncertainty that software providers now face 1

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. CFRA analyst Brooks Idlet noted that "the stakes around these results were higher than normal given the software/services selling pressure the market has seen this year amid AI competition fears," though he suggested the Q1 results did not necessarily validate those concerns 5

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