IBM (NYSE:IBM) shares declined over 5% in Thursday’s premarket session as a drop in software sales overshadowed stronger-than-expected earnings and revenue driven by AI-related demand.

The company posted earnings per share of $2.80, beating estimates of $2.65, supported by a 320-basis point improvement in operating margin. Revenue increased to $17 billion, topping the consensus of $16.59 billion.

CEO Arvind Krishna noted that IBM exceeded expectations for both revenue and free cash flow, pointing to a growing pipeline in generative AI, now valued at over $7.5 billion in business bookings.

IBM raised its full-year free cash flow outlook to more than $13.5 billion, citing robust first-half performance and expanding margins.

CFO James Kavanaugh said improved portfolio mix and productivity efforts contributed to double-digit profit growth.