TLDR
- IBM stock dropped 8% after reporting Q1 2025 results despite beating estimates.
- Revenue reached $14.54 billion, EPS hit $1.60—both above forecasts.
- DOGE cuts canceled or paused 15 federal contracts, impacting future revenue.
- Software and hybrid cloud segments showed solid growth; consulting declined slightly.
- IBM issued rare Q2 guidance, projecting $16.4B–$16.75B in revenue.
IBM (NYSE: IBM) shares tumbled more than 8% to $225.68 on Thursday morning, even after the tech giant delivered stronger-than-expected first-quarter results. While investors welcomed the Q1 earnings beat, the sharp drop in IBM’s stock was triggered by news that 15 U.S. government contracts had been either canceled or paused due to budget reductions tied to Elon Musk’s Department of Government Efficiency (DOGE).
Earnings Beat Overshadowed by Federal Cutbacks
For the quarter ending March 31, 2025, IBM reported revenue of $14.54 billion, slightly ahead of Wall Street’s $14.4 billion consensus. Adjusted earnings per share came in at $1.60, topping expectations of $1.40. The company highlighted continued momentum in software, hybrid cloud, and AI as key drivers.
However, the positive financials were quickly overshadowed by a $100 million hit to future federal sales revenue. The 15 affected government contracts represent less than 5% of IBM’s total revenue, according to CFO James Kavanaugh. Still, the loss dented confidence in IBM’s consulting pipeline, which is particularly sensitive to discretionary spending and policy-driven disruptions.
Segment Performance: Strength in Software and Hybrid Cloud
Despite macroeconomic headwinds, IBM posted a 7% year-over-year increase in software revenue to $6.34 billion. The hybrid cloud software category, including Red Hat, saw 12% growth, indicating strong demand for cloud and AI integration.
Consulting revenue fell 2% to $5.07 billion, impacted by delayed contract signings and client hesitancy. IBM’s infrastructure unit, home to its mainframe business, reported a 6% decline in revenue to $2.89 billion, still better than analyst forecasts of $2.76 billion.
CEO Arvind Krishna acknowledged that while economic uncertainty lingers, clients continue to prioritize technology investments that enable cost savings and productivity.
Q2 Guidance Issued Amid Market Volatility
In a rare move, IBM issued revenue guidance for the second quarter, citing the need for more transparency amid shifting market dynamics. The company expects Q2 revenue in the range of $16.4 billion to $16.75 billion. The midpoint exceeds analyst expectations of $16.33 billion.
Despite a 1% year-over-year rise in Q1 revenue, net income declined to $1.06 billion ($1.12 per share), compared to $1.61 billion ($1.72 per share) a year ago. Free cash flow remains strong, with IBM reaffirming its full-year forecast of $13.5 billion. The company also anticipates at least 5% revenue growth for 2025 in constant currency terms, with foreign exchange expected to contribute 150 basis points.
Strategic Progress and Acquisitions
IBM closed its $6.4 billion acquisition of cloud software provider HashiCorp during the quarter. It also announced plans to acquire DataStax, a data storage startup, bolstering its capabilities in the AI and cloud data ecosystem.
The recent DOGE-related federal contract losses may pose near-term volatility, but IBM remains focused on long-term growth through AI, hybrid cloud, and strategic acquisitions.
