IBM's board was staring down difficult news: The second quarter had been a bust.
Directors had long known that the artificial-intelligence revolution would upend the technology icon's business, but the pain came sooner than expected, leaving the company with a tough choice, according to people familiar with the discussions.
Board members debated whether to issue a rare warning that bad news was coming or wait for the numbers to hit the tape a week later when executives could discuss them with investors, the people said.
After asking tough questions of CEO Arvind Krishna, the board agreed to take its medicine and disclose the disappointing results in the hopes of winning credibility for transparency. "This quarter we faltered," Krishna wrote in an investor letter that IBM published hours before markets opened Tuesday.
The stock plunged 25%, the worst day in the century-old company's history.
International Business Machines, a company that helped send humans to the moon, worked on America's Social Security system and built a supercomputer that beat contestants at "Jeopardy!" is reckoning with the punishing realities of the AI boom.
It is one of the first big corporations to confront the costs and disruptions of the fast-evolving technology -- and have to explain itself to anxious investors. Even as IBM helps its customers adapt to the AI age, it was caught flat-footed by it.
The news has sparked discussions on Wall Street about whether IBM should be broken apart or an activist investor will come hunting for Big Blue. It isn't clear how much guidance the company will be able to give investors when it reports full quarterly results next week, one of the people said.
Krishna "needs to get this straightened out quickly because the last thing any 63-year-old CEO can afford is being stigmatized as a spotty executor that is responsible for historic selloffs," said Don Bilson, head of event-driven research at Gordon Haskett, in a note to clients this week.
IBM declined to comment. Krishna promised to go into deeper detail when he hosts a conference call next Wednesday. "We have conviction in the strength of our portfolio and the strategic transformation of our business," the IBM boss wrote in his letter.
Fears that AI tools from companies such as Anthropic and OpenAI would replace software have rattled the shares of Salesforce, Workday and Snowflake over the last year. IBM presents a different problem. Its warning this week showed that investments in AI infrastructure such as memory and new cybersecurity concerns are displacing spending on hardware, too.
Squeezed between server orders and AI buildouts, some of IBM's customers now treat the tech giant as discretionary spending, said Daniel Morgan, a portfolio manager and analyst at Synovus Trust.
"I think you might see some, 'Hey, we'll hold off on this for a couple quarters...we don't need to upgrade to the new mainframe right now,'" Morgan said. "That's kind of hurting them."
Missing out
Unlike other AI-infrastructure providers and cloud companies such as Nvidia, Google and Oracle that rent computing capacity, sell chips and offer networking hardware, IBM sells hardware and software systems that corporate customers install at their own sites. Its customer base includes leading financial-services firms and retailers.
The company's top leaders have discussed whether it has become too reliant on large accounts that come with inconsistent deals and upgrade cycles that they can push off in lean times, people familiar with the matter said. They have talked about the need to diversify and court a wider range of customers, such as medium-sized companies, but it would take time to see if such an approach paid off, one of the people said.
Board members will be watching to see if Krishna's team comes together, because this will be a test of his leadership. Some also are concerned that the company might swing to a more conservative stance that could hamper growth. The board is expected to meet again in late July.
One IBM alum, who now runs his own AI company, praised Krishna for his candor and said the market reaction was overblown.
"The punishment doesn't fit the crime," Debanjan Saha, CEO of DataRobot, wrote on LinkedIn. "This selloff wasn't about a quarter. It was the market repricing a question: can a 115-year-old enterprise company lead the agentic era, or merely survive it?"
IBM has reinvented itself many times, transitioning from tabulators and time clocks in its earliest days to personal computers, mainframes and supercomputers and later AI and hybrid cloud computing.
Saha noted that the company had survived antitrust battles, the PC wars and the rise of the internet. "Every obituary was premature," he wrote. "This one will be too."
Krishna's era
Krishna, who joined IBM in 1990 as a software engineer, was appointed in 2020 to succeed CEO Ginni Rometty. The selection of an executive who had been senior vice president for cloud and cognitive software signaled where the company was headed.
IBM bought open-source software company Red Hat for $34 billion, a deal Krishna helped integrate and would become a major growth driver. Software accounted for about $30 billion of IBM's $67.5 billion in revenue last year.
IBM further sharpened its focus on the cloud-computing market with investments in hybrid cloud computing software and quantum computing. It spun off IT-outsourcing business Kyndryl to further simplify the business and bought cloud-software company HashiCorp.
Krishna told people last year that he expected AI would replace around half of the work in many workflows, increasing productivity and job reallocations. IBM has trimmed thousands of roles from its 260,000-person workforce and has hosted reskilling programming for its own staffers.
While Wall Street was initially skeptical of Krishna, his strategy started to bear fruit. As recently as last year, the company's army of consultants had built up billions of dollars of bookings helping customers navigate how generative AI would change their business, and its software business was growing.
In April, IBM struck a first-of-its-kind settlement with the federal government, paying more than $17 million related to its diversity practices. The next month, its stock popped when the Trump administration awarded the company $1 billion in grants to boost quantum computing. IBM said it would invest $1 billion of its own cash alongside the award to set up a specialized quantum-chip manufacturing facility.
The stock's drop this week has pushed its market capitalization below $200 billion, leaving it dwarfed by companies such as Broadcom ($1.8 trillion) or AMD ($800 billion) that were once seen as small suppliers to giants like IBM.
IBM and its advisers are aware that this week's bad news could make it vulnerable to an activist investor showing up in its shares or pushing it to examine potentially splitting the company up, according to people familiar with the matter.
The quarterly warning was especially unusual coming from IBM, an American blue chip that held a reputation among investors for results that are steady, if unspectacular. For decades, IBM chief executives didn't even participate on earnings conference calls, leaving such matters to the company's financial executives.
Board members are aware that the near-term is likely to be messy and that an impatient Wall Street is unlikely to tolerate two or three more quarters of underperformance, according to the people familiar with the board discussions.
Gary Cohn, who has been IBM's vice chairman since 2021, suggested Wednesday on CNBC that the change in companies' spending on technology products and services might be temporary. While IT budgets set months ago have been disrupted by high spending on computing, companies are now starting to question the return on investment. Some, Cohn said, are asking whether they should go back to reinvesting in proven enterprise infrastructure.
Asked about the decision to warn about the poor results, Cohn said, "Arvind took it upon himself to say, 'Look, I want to be transparent with the world. I don't want to surprise them.'"
Write to Emily Glazer at Emily.Glazer@wsj.com, Anissa Gardizy at anissa.gardizy@wsj.com and Lauren Thomas at lauren.thomas@wsj.com
(END) Dow Jones Newswires
July 16, 2026 18:00 ET (22:00 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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