On Wednesday, IBM released its earnings report, and the results confirmed the grim expectations many had. Despite being a 115-year-old giant still bringing in significant revenue—$17.2 billion, with a gross profit of $9.9 billion, and net earnings of $2.2 billion for the quarter—IBM's performance was disappointing in the eyes of Wall Street analysts.
In a rare move, CEO Arvind Krishna and the board preemptively cautioned investors about the disappointing earnings, stating that the outcomes were “worse than our expectations.” This transparency included a letter from Krishna outlining preliminary figures, which highlighted poor performance in the crucial "infrastructure" sector and suggested a forthcoming decline in profit margins. Following this announcement, IBM's shares plummeted by 25%, marking the largest single-day drop in its history. Up until this point, the stock had thrived under Krishna’s six-year tenure, benefiting from a booming AI data center market.
Additionally, IBM revised its full-year growth projections downward, indicating that this troubling quarter would adversely affect the entire year. A key factor driving these results was a staggering 42% decline in its mainframe business, a significant revenue stream for the company.
This downturn poses a bigger issue, as CFO Jim Kavanaugh noted during the quarterly investors’ call. IBM generates $3 in software revenue from every $1 of mainframe hardware sold. The decline in mainframe purchases was primarily due to several clients, referred to as “tens,” delaying their new mainframe acquisitions. Although “tens” might not seem like a large number, each mainframe costs hundreds of thousands to millions of dollars, and ongoing maintenance contracts add considerably to that figure.
Interestingly, the same AI surge that buoyed IBM's prospects also contributed to this setback. Instead of investing in new mainframes, clients opted to allocate their budgets to various other hardware purchases. Many were grappling with steep price increases—ranging from 15% to 30%—on data center equipment and personal computers.
“When faced with these rising costs, customers chose to reallocate their budgets towards those areas experiencing the most significant price hikes,” Krishna explained.
Other enterprise hardware vendors, such as Dell and HP, have raised similar concerns, citing increased prices due to component shortages exacerbated by the AI-related expansion. Apple has echoed these sentiments as well.
Despite the recent setbacks, Krishna reassured stakeholders that these clients will still purchase new mainframes and software contracts in due course, with some already beginning to do so within the current quarter. “We see no evidence of clients moving away from the mainframe,” he affirmed.
Only time will tell if this is indeed the case. The tech sector has long predicted the demise of the mainframe, yet it seems resilient—even in an age dominated by AI advancements.
