IBM, in business for 115 years, reported $17.2 billion in revenue and $2.2 billion in net income for the quarter, along with $9.9 billion in gross profit and an approximate 58% gross margin. Despite these absolute figures, the results fell short of Wall Street expectations. In an unusual move, Chief Executive Arvind Krishna and the board preannounced the shortfall: Krishna sent a letter to investors last week outlining preliminary results and warning that performance had been "worse than our expectations."
The most consequential factor was a 42% decline in mainframe hardware sales. That drop is especially damaging because, as Chief Financial Officer Jim Kavanaugh explained on the quarterly investor call, each dollar of mainframe hardware sold historically generates roughly $3 of software revenue for IBM, so a hardware shortfall translates into much larger downstream revenue losses.
Following the disclosure, IBM shares fell about 25% in a single day — the largest one-day decline in the company’s history. Until this quarter, the stock had generally performed well under Krishna’s six-year tenure, supported in part by demand for AI-related data center infrastructure; however, that same AI-driven demand appears to have contributed to current strains.
Krishna and Kavanaugh told investors that the immediate cause was that “several dozen” customers who had planned to buy new mainframes during the quarter chose not to proceed. While “several dozen” may sound like a modest number, mainframe systems, plus associated maintenance and software agreements, can represent transactions ranging from hundreds of thousands to multiple millions of dollars, so even a relatively small number of delayed purchases can have outsized financial impact.
Management attributed customers’ decisions in part to sharp price increases for certain data-center components and PCs. Krishna said companies have faced steep cost pressure — component and PC prices have risen substantially, in some cases by 15–30% — prompting customers to reallocate budgets toward areas where price spikes were most acute. He noted that other enterprise hardware vendors, including Dell and HP, and even Apple, have warned about rising component costs such as memory as AI-infrastructure buildout increases demand.
Despite the setback, IBM’s leadership called the decline temporary and said they expect customers to return and complete mainframe purchases, along with the attendant software deals; Krishna said some customers have already done so in the quarter. “We see no evidence that customers are turning away from the mainframe,” he said.
IBM also reduced its full-year growth guidance after the quarter, indicating the weak results will affect expectations for the rest of the year. The long-standing industry debate over whether mainframes will disappear continues, but for now IBM’s executives argue the platform remains strategically important and that the current slowdown is transitory. The coming quarters will show whether that assessment holds true.
