IBM announced a sharp profit warning for the second quarter, signaling an unexpectedly difficult period amid the ongoing transformation driven by artificial intelligence (AI). The company’s board, aware that the AI revolution would affect IBM’s business, opted to pre-emptively disclose the disappointing financial results ahead of the scheduled quarterly earnings release. This move aimed to maintain transparency but triggered a 25% plunge in IBM’s stock, marking the largest single-day drop in the company’s more than 100-year history.

Under Chief Executive Arvind Krishna, IBM has been confronting the challenges posed by rapidly evolving AI technologies, which are reshaping customer spending patterns and internal operations. Despite investments in hybrid cloud computing, quantum computing, and acquisitions such as the cloud-software company HashiCorp, IBM’s efforts to pivot have not fully alleviated the financial pressures. The warning highlights the difficulty of balancing traditional hardware sales with the accelerated demand for AI-related infrastructure and software.

The company’s client base, which includes major financial institutions and retailers, is reportedly re-evaluating discretionary IT spending amid the AI shift. Some customers are delaying expensive hardware upgrades, such as mainframe replacements, which historically have involved large but irregular transactions. Analysts noted this dynamic contributes to uneven revenue cycles and raises questions about IBM’s reliance on a relatively narrow set of large accounts.

Discussions within IBM’s board have focused on strategies for diversification, including expanding into mid-sized markets, but executives and observers acknowledge that results from such efforts would take time. The board is set to meet again later in July, with close attention on Krishna’s leadership as the company navigates this transitional period.

Krishna, who joined IBM in 1990 and became CEO in 2020, has expressed confidence in the company’s portfolio and strategic direction, emphasizing continued commitment to its hybrid cloud and AI businesses. Last year, his vision included expectations that AI would significantly transform workflows by automating about half of routine tasks, boosting productivity but also requiring workforce adjustments. IBM has implemented workforce reductions alongside reskilling programs to adapt to these shifts.

The abrupt profit warning has sparked speculation on Wall Street about IBM’s future structure, including the possibility of activist investors seeking to push for changes or the company breaking apart. Observers point to the company’s current market capitalization falling below $200 billion, considerably smaller than peer firms like Broadcom and Advanced Micro Devices (AMD).

While some market analysts expressed concern over the potential for more cautious approaches that might limit growth, others in the technology community, including former IBM executives now leading AI ventures, called the market reaction excessive and emphasized IBM’s resilience through multiple technological upheavals over its history.

IBM’s transformation efforts also include its high-profile $34 billion acquisition of Red Hat and recent government-related initiatives such as a $1 billion quantum computing grant awarded during the previous U.S. administration, supported by matching investments from IBM.

The company plans to provide further details during its quarterly earnings conference call scheduled for the following week. Meanwhile, investors remain watchful as IBM attempts to reconcile its legacy business with the demands of the emerging AI-driven technology environment.