IBM: AI isn’t killing the mainframe after shocking quarter
▼ Summary
– IBM’s Q1 earnings missed Wall Street expectations, with $17.2 billion in revenue and $2.2 billion in net earnings, prompting CEO Arvind Krishna to issue an unprecedented early warning to investors.
– The company’s stock fell 25% in a single day after Krishna’s letter revealed poor revenue in the infrastructure category and declining profit margins.
– IBM lowered its full-year growth forecasts due to a 42% drop in its mainframe business, which also impacts software revenue since IBM earns $3 in software for every $1 of mainframe hardware sold.
– The mainframe sales decline was caused by “tens” of customers delaying purchases due to 15% to 30% cost increases for data center gear and PCs, driven by the AI boom.
– IBM executives insist the downturn is temporary, noting some customers have already bought mainframes this quarter, and they see no evidence of clients abandoning the mainframe platform.
On Wednesday, IBM officially reported its quarterly earnings, and the results were as grim as anticipated. The 115-year-old tech giant still generated substantial cash flow,$17.2 billion in revenue, $9.9 billion in gross profit (nearly 58% margins), and $2.2 billion in net earnings. Yet those figures fell significantly short of what Wall Street had expected.
The miss was so severe that CEO Arvind Krishna and the board took the unusual step of warning investors early. In a “letter to investors” published last week, Krishna shared preliminary results, flagging disastrous revenue in the company’s critical infrastructure category and warning that profit margins would take a hit. The stock immediately plunged 25%, its steepest single-day drop ever. Until then, shares had performed well under Krishna’s six-year tenure, lifted by the broader AI data center boom.
On Wednesday, IBM also cut its full-year growth forecasts, meaning this terrible quarter will ripple through the rest of 2026. The primary culprit? The company’s cash-cow mainframe business crashed by 42%. That’s a cascading issue, as CFO Jim Kavanaugh explained on the earnings call: for every $1 of mainframe hardware IBM sells, it earns $3 in software revenue.
Still, both Krishna and Kavanaugh spent the call insisting this was a temporary hiccup. They explained that “tens” of customers who were expected to buy new mainframes during the quarter chose not to. That may sound insignificant, but mainframes are systems costing hundreds of thousands to millions of dollars, with maintenance and software contracts generating many millions more.
The same AI boom that once lifted IBM’s stock also sank its mainframe sales. Instead of buying new mainframes, these clients purchased other hardware, Krishna said. They faced astronomical cost increases of 15% to 30% for data center equipment 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,” Krishna noted.
Enterprise hardware makers like Dell and HP have similarly warned that rising component costs,driven by the AI build-out,have forced price hikes. Apple has echoed this sentiment.
But Krishna promised those customers will eventually buy their new mainframes and accompanying software contracts. In fact, he said some have already done so this quarter. “We see no evidence of clients moving off the mainframe,” he asserted.
We’ll have to wait and see. The tech industry has predicted the death of the mainframe for decades. Perhaps even AI won’t be the force that finally kills it.
(Source: TechCrunch)
