Markets & Business
IBM insists AI isn't killing the mainframe after a rough quarter
IBM's second-quarter earnings fell well short of Wall Street's expectations, dragged down by a 42% drop in mainframe revenue, but executives insist the pullback is temporary rather than a sign that AI is killing the decades-old business.
IBM reported revenue of $17.2 billion, gross profit of $9.9 billion, margins of nearly 58%, and net earnings of $2.2 billion for the quarter — figures that still fell well short of what Wall Street expected. The miss was bad enough that CEO Arvind Krishna and the board took the unusual step of warning investors ahead of time, publishing a “letter to investors” last week that said preliminary results were “worse than our expectations” and flagged abysmal revenue in the company’s “infrastructure” category along with a hit to profit margins. IBM’s stock tanked 25% on the news, its biggest single-day decline ever, reversing a run that had performed well through Krishna’s six years as CEO, buoyed by the AI data center boom. On Wednesday, IBM also lowered its full-year growth forecasts, meaning the weak quarter will weigh on the rest of the year.
The culprit was IBM’s mainframe business, which was down 42% — a cascading problem, CFO Jim Kavanaugh explained, because IBM earns $3 in software revenue for every $1 of mainframe hardware it sells. Krishna and Kavanaugh said “tens” of customers who were due to buy a new mainframe during the quarter opted not to. That’s a small number of customers, but mainframes cost hundreds of thousands to millions of dollars each, and generate many millions more in maintenance and software revenue. Instead of buying a new mainframe, Krishna said, those clients redirected budget toward other hardware after facing cost increases of 15% to 30% on data center gear and PCs — increases that hardware makers including Dell, HP, and Apple have also blamed on rising component costs tied to the AI build-out.
Krishna and Kavanaugh spent the earnings call insisting the shift is a temporary blip, saying some of the deferring customers have already bought their mainframes this quarter and that more purchases — along with new software contracts — will follow. “We see no evidence of clients moving off the mainframe,” Krishna said.
Why it matters
The tech industry has predicted the mainframe’s demise for decades, and IBM’s bet is that this AI-driven cost squeeze delays purchases rather than displacing the platform altogether — a claim investors will be watching closely given how directly it’s now tied to the company’s software revenue.