By Laura Bratton

The IBM logo at the headquarters of IBM Germany. (Matthias Balk/picture alliance via Getty Images)

International Business Machines (IBM) stock fell 6.6% Thursday after the tech giant's first quarter earnings revealed that Elon Musk's highly controversial cost-cutting agency DOGE canceled some of its contracts with the US government, news that overshadowed an otherwise positive report for the company.

The Department of Government Efficiency, a newly formed government agency under Trump, has spearheaded efforts that have resulted in the widespread firing of federal workers and the cancellation of billions in government funding. The department has also faced legal challenges related to its efforts.

IBM CFO James Kavanaugh told analysts in a call late Tuesday following the company's earnings report that DOGE's cuts resulted in cancellations of contracts described as "less than $100 million of backlog over a duration of multiple years."

US government contracts represent less than 5% of IBM's total annual revenue and less than 10% of its consulting business.

Read more about IBM's stock moves and today's market action.

"Consulting is also more susceptible to discretionary pullbacks and DOGE-related initiatives," IBM CEO Arvind Krishna said on the call. "While no one is immune to uncertainty, we entered this environment from a position of relative strength and resiliency." Krishna noted that IBM's impact from Trump's new tariffs, for instance, is "minimal."

Kavanaugh added: "While we have limited direct exposure outside the United States, we are tactically evaluating alternative sources and other strategy to mitigate tariffs."

"As everyone knows, there is a level of macro uncertainty that exists and is hard to predict."

The stock's drop on Thursday comes despite IBM's first quarter earnings beating Wall Street estimates.

IBM reported adjusted earnings per share of $1.60, ahead of the $1.42 expected, according to Bloomberg consensus estimates. Its quarterly revenue of $14.5 billion was above the projected $14.4 billion.

IBM said it expects second quarter revenue between $16.4 billion and $16.75 billion, ahead of the $16.28 billion guidance expected by Wall Street analysts, according to Bloomberg data.

Still, its software business — which includes its AI offerings and is its largest revenue contributor — underperformed relative to Wall Street's expectations for the first time in several quarters, Morgan Stanley analysts noted Thursday.

Analysts at Morgan Stanley and Evercore ISI have noted that IBM stock is a "safe haven" in the current volatile macroeconomic environment.

"Overall we view IBM's print/guide as solid especially given ongoing macro dynamics," said Evercore ISI analysts in a note Wednesday following IBM's earnings report, maintaining their Outperform rating on the stock.

Jefferies analyst Brent Thill maintained his Hold rating on the stock, stating: "We believe an increase in Generative AI business use cases could drive growth in the strategic consulting business. However, lackluster infrastructure performance and concerns around the monetization of AI keep us on the sidelines."

IBM's AI business is worth $6 billion, Wedbush analyst Dan Ives noted.

"Despite seeing significant pressure that may impact discretionary projects for IBM products and services, we believe that IBM is well-positioned to navigate the macro storm and capitalize on the current demand shift for hybrid and AI applications with more enterprises looking to implement AI for productivity gains and drive long-term profitable growth," Ives wrote in a note Thursday morning, maintaining his Outperform rating on the stock.

Laura Bratton is a reporter for Yahoo Finance. Follow her on Bluesky @laurabratton.bsky.social. Email her at laura.bratton@yahooinc.com.

Source: Yahoo Finance