International Business Machines Corp. (NYSE:IBM) saw its shares drop over 8% in premarket trading on Thursday, as its consulting arm struggles with the effects of enterprises tightening their budgets in response to economic uncertainty and high interest rates.
The consulting segment experienced weakness in smaller discretionary projects, impacting overall performance. However, analysts at J.P. Morgan noted that the backlog could fuel a rebound in the business through 2024.
Analysts at J.P. Morgan acknowledged the positive aspect of software acceleration, but it was overshadowed by a more significant decline than anticipated in consulting, along with projected additional foreign exchange headwinds for the rest of the year.
Despite challenges in the consulting sector, IBM’s software business recorded a 5.5% growth in the quarter. Additionally, the company announced a $6.4 billion deal to acquire cloud software company HashiCorp, aiming to capitalize on the growing demand for cloud-based data storage capabilities driven by artificial intelligence.
IBM reported total revenue of $14.46 billion, slightly below estimates of $14.55 billion, according to LSEG. Sales in its consulting segment remained flat.
Shares of IBM tumbled 8.7% to $168.10 in premarket trading on Thursday. If losses persist, the company’s market valuation is poised to decline by over $14 billion.
Analysts at Evercore noted a slowdown in consulting during this quarter, although there was growth in hardware. They emphasized the importance of IBM’s capability to boost revenue across both consulting and software segments going forward.