IBM's Earnings Miss Wall Street Expectations as Mainframe Sales Plummet

On Wednesday, IBM officially reported earnings and the news was as bad as everyone knew it would be.

While the 115-year-old company still generates boatloads of 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 — its results fell well short of Wall Street’s expectations.

It was such a bad miss that IBM CEO Arvind Krishna and the board took the unprecedented step of warning investors ahead of time that earnings “was worse than our expectations,” offering everyone a sneak peek.

He published a “letter to investors,” last week sharing preliminary results. It warned of abysmal revenue in the company’s all-important “infrastructure” category and said that profit margins were also going to take a hit. The company’s stock instantly tanked 25%, it’s biggest single-day decline ever. Until then, the stock had performed well under Krishna’s six years of leadership, buoyed by the AI data center boom that had been lifting all boats.

On Wednesday, IBM also lowered its full-year growth forecasts, meaning this horrible quarter would impact the rest of the year. The culprit? IBM’s cash-cow mainframe business was down 42%.

That’s a cascading problem, because as CFO Jim Kavanaugh explained on the quarterly call with investors, IBM earns $3 in software revenue for every $1 of mainframe hardware it sells.

However, the CEO and CFO spent the call insisting that this was a temporary blip and all would be well soon.

What happened, they said, was that “tens” of customers that were due to buy a new mainframe during the quarter opted not to do so. That may not sound like a lot of customers, but mainframes are systems that cost hundreds of thousands to millions of dollars, and with maintenance contracts and software, generate many millions more.

The same AI boom that lifted IBM’s boat also sank it.

Instead of buying a new mainframe, these clients bought other hardware, Krishna explained. They were faced with 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,” Krishna said.

Enterprise hardware makers like Dell and HP have warned that rising costs on components like memory, caused by the AI build-out boom, have forced them to raise prices. Apple has said the same.

But Krishna promised that those customers will still buy their new mainframes eventually — along with their new software contracts. In fact, he said some of them have already done so this quarter. “We see no evidence of clients moving off the mainframe,” he said.

We’ll have to wait and see. But the tech industry has predicted the death of the mainframe for many decades now. Maybe even AI won’t kill it.