IBM reported a miss in earnings on Wednesday, and the figures confirmed the gloomy forecasts.
The 115-year-old firm delivered $17.2 billion in revenue, $9.9 billion in gross profit, and $2.2 billion in net earnings. Margins sat near 58%. Wall Street expected better. The gap between reality and expectation was wide enough to warrant an unprecedented warning from CEO Arvind Krishna and the board before the results were officially released.
That warning came in a letter last week stating the quarter would be worse than anticipated. Revenue in the infrastructure category, a key segment for the business, looked abysmal. Profit margins were also set to fall. The stock fell 25% on the news, marking its largest single-day drop in history. Under Krishna, who has led the company for six years, shares had generally performed well, riding the wave of the AI data centre boom.
IBM also cut its full-year growth guidance. The mainframe business, usually a cash cow, dropped 42%. This decline creates a wider problem. CFO Jim Kavanaugh noted that for every dollar of mainframe hardware sold, the company generates three dollars in software revenue.
Krishna and Kavanaugh described the situation as a temporary blip. They said tens of customers who planned to buy new mainframes during the period decided against it. These systems cost hundreds of thousands to millions of dollars, and their maintenance contracts and software add many millions more in value.
The same AI boom that helped IBM also hurt it. Clients chose other hardware instead. Krishna explained that data centre gear and PCs saw price increases of 15% to 30%. When faced with those costs, budgets shifted to areas with extreme price hikes.
Enterprise hardware makers like Dell and HP have warned that rising component costs, driven by the AI build-out, force price hikes. Apple has stated the same.
Krishna promised those clients would eventually return to buy mainframes and new software contracts. He noted some had already done so this quarter. He said there is no evidence of clients moving away from the mainframe.
The tech industry has predicted the death of the mainframe for decades. Whether AI saves it remains to be seen.
What it means
Customers are not abandoning mainframes entirely, but they are delaying purchases to spend on cheaper alternatives. The business model relies on long-term software contracts, so a temporary dip in hardware sales does not necessarily mean a permanent loss of revenue.
