IBM hit by 15 contract cancellations linked to DOGE cost cuts

International Business Machines Corp. (IBM) shed more than 6 % in after‑hours trading on Wednesday after disclosing that 15 U.S. federal contracts—worth roughly $100 million—were canceled or paused under the Trump administration’s Department of Government Efficiency (DOGE) austerity initiative.

The setback tempered an otherwise solid first‑quarter report in which Big Blue topped earnings estimates and surprised Wall Street with rare second‑quarter revenue guidance of $16.4 billion to $16.8 billion, above the LSEG consensus of $16.3 billion.

IBM counters tariff turbulence with rare quarterly guidance

Some analysts said the cancellations fanned uncertainty for IBM at a time when U.S. tariffs cloud the global economic outlook.

The firm broke from its long-standing practice of not issuing quarterly forecasts to improve investor confidence. It also reported better-than-expected first-quarter earnings and maintained its target of achieving at least 5% revenue growth on a constant currency basis in 2025.

“We’ve chosen now, in light of the very unprecedented dynamic of uncertainty going on in the market, to give a second-quarter revenue guidance range,” Kavanaugh said. “We felt incumbent upon ourselves to give as much transparency as possible to our investor group.”

Although IBM’s core software segment grew 7 % to $6.3 billion and overall Q1 revenue inched up 1 % to $14.5 billion, analysts flagged the DOGE‑driven cancellations as a warning sign for discretionary tech spending. “Investors were looking for picture‑perfect results. Federal pullbacks inject fresh uncertainty,” said Evercore ISI’s Amit Daryanani on Bloomberg TV.

The cost‑cut directive and new U.S. tariffs have also squeezed rivals such as Accenture, Deloitte, and Booz Allen. IBM insists that its global footprint and limited non‑U.S. exposure shield it from the harshest tariff fallout, but Kavanaugh noted that it is “evaluating alternatives to mitigate levies,” Kavanaugh noted.

IBM leverages AI and cloud growth to navigate consulting challenges

IBM has leaned on cloud and artificial intelligence services to offset slower consulting growth. The company said that bookings tied to AI software and services have surpassed $6 billion since mid‑2023, with roughly 80 % funneling through its consulting arm.

Just recently IBM noted it is releasing the latest version of its mainframe hardware that includes new updates meant to accelerate AI adoption.

The hardware and consulting company announced IBM z17, the latest version of its mainframe computer hardware. The company says this fully encrypted mainframe is powered by an IBM Telum II processor and is designed for more than 250 AI use cases, including AI agents and generative AI.

Mainframes look like old hat, but they’re used by 71% of Fortune 500 companies today, according to one source. In 2024, the mainframe market was worth an estimated $5.3 billion, per consulting firm Market Research Future.

Chief Executive Officer Arvind Krishna called the macro backdrop “fluid” but said IBM has “not seen a material difference in client buying behavior.” The company reaffirmed its target of at least 5 % constant‑currency revenue growth and $13.5 billion in free cash flow for 2025.

Despite Wednesday’s drop to about $230 in late trading, IBM’s shares remain up 12 % year‑to‑date, handily outperforming the S&P 500’s 8.6 % decline. Some portfolio managers view the tech stalwart as a defensive play amid rate‑driven volatility. However, Running Point Capital CIO Michael Ashley Schulman cautioned that “contract cancellations could weigh on sentiment if the economy weakens further.”

Next month, IBM will hold its annual shareholder meeting, where investors are expected to press management on navigating federal budget cuts and sustaining AI‑driven growth.

IBM leadership conceded greater caution around the consulting arm, which CEO Arvind Krishna called “especially vulnerable to discretionary cutbacks and DOGE‑linked initiatives.” 

Yet Bloomberg Intelligence analysts Anurag Rana and Andrew Girard warned in a post‑earnings note that the company’s outlook may underestimate a deeper economic slowdown, risking further revenue pressure on the consulting segment in 2025.

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