IBM Reports Disappointing Quarter: Mainframe Sales Plummet 42%, Stock Tanks 25%
IBM's quarterly earnings fell far short of expectations, driven by a 42% drop in mainframe sales, causing a historic 25% single-day stock decline. Management insists the slump is temporary, attributing it to customers diverting budgets to other hardware due to AI-driven cost hikes, and expects clients to return for mainframe purchases.
On Wednesday, IBM officially reported earnings that were as bad as anticipated, despite the 115-year-old company still generating significant cash: $17.2 billion in revenue, $9.9 billion in gross profit (nearly 58% margins), and $2.2 billion in net earnings for the quarter. However, the results missed Wall Street expectations by a wide margin.
The miss was so severe that CEO Arvind Krishna and the board took the unprecedented step of warning investors in advance with a “letter to investors” sharing preliminary results. It warned of abysmal revenue in the crucial “infrastructure” category and profit margin hits. Consequently, IBM’s stock plunged 25% in its largest single-day drop ever. Until then, the stock had performed well under Krishna’s six-year leadership, buoyed by the AI data center boom.
On Wednesday, IBM also lowered its full-year growth forecasts, indicating that the poor quarter would affect the rest of the year. The culprit? The company’s cash-cow mainframe business was down 42%. This is a cascading problem, as CFO Jim Kavanaugh explained: IBM earns $3 in software revenue for every $1 of mainframe hardware sold.
However, the CEO and CFO insisted during the quarterly call that this was a temporary blip. They explained that “tens” of customers that were due to buy a new mainframe during the quarter opted not to do so. While that may not sound like many, mainframes cost hundreds of thousands to millions of dollars and generate many millions more through maintenance and software.
The same AI boom that lifted IBM also sank it. Instead of buying new mainframes, these clients bought other hardware. Krishna noted they faced astronomically high cost increases of 15% to 30% for data center gear and PCs. “When they were faced with that issue, then they decided to move budget to those areas where they were having that extreme price,” he said. Enterprise hardware makers like Dell and HP have warned about rising component costs due to the AI build-out boom, forcing price hikes, and Apple has said the same.
Krishna promised that those customers will still buy their new mainframes eventually, along with new software contracts. He said some have already done so this quarter. “We see no evidence of clients moving off the mainframe,” he stated. The tech industry has predicted the death of the mainframe for decades; perhaps even AI won’t kill it. Time will tell.
