Shares of International Business Machines (IBM) fell 6.48% in premarket trading Thursday after the company said some of its federal contracts were suspended, while an uncertain economy poses a further threat to its consulting business.
The software and consulting giant said 15 of its government contracts had been shelved due to cost-cutting initiatives by the Trump administration, amounting to roughly $100 million in lost business, a relatively small portion of its consulting backlog.
Analysts said IBM's consulting business was particularly vulnerable to these cuts and weak customer spending, given its reliance on government and large enterprise clients.
Its results reflected this vulnerability, with the company reporting a 2% drop in revenue from its consulting segment, but IBM maintained its target of at least 5% revenue growth on a constant currency basis in 2025.
Still, Wall Street is keeping a close eye on IBM's software unit, which has emerged as a key area for growth and resilience, with companies paring back spending in a turbulent economy.
"While one quarter doesn't make a trend, what stands out to us is that software growth now needs to accelerate in the face of an uncertain macro backdrop and increasingly more difficult compares," Morgan Stanley analysts said in a note.
The unit, which includes Red Hat and hybrid cloud services, grew modestly during the quarter but fell short of bullish investor expectations.
Morningstar analyst Eric Compton noted that "unlike physical goods, software remains relatively insulated from tariffs and geopolitical uncertainty, reinforcing its role as a critical growth driver."
IBM's increasing focus on high-margin software business has helped the company to not miss quarterly profit estimates for more than a decade.
Its stock, which has gained about 12% this year, trades at 22.35 times the company's profit estimates, compared with 21.67 for Accenture and Oracle's 19.85.
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