IBM says AI hardware costs delayed mainframe sales after sharp miss
IBM blamed a 42% mainframe sales drop on customers shifting budgets to pricier AI-era hardware, while saying delayed deals should return.
By Theo Nakamura · Staff Writer
· 3 min read
IBM’s latest quarter gave investors a clear reminder that the AI boom can cut both ways. The same rush for computing gear that has helped tech stocks also appears to have pushed some IBM customers to delay big mainframe purchases.
The company reported quarterly revenue of $17.2 billion, gross profit of $9.9 billion, gross margins near 58% and net earnings of $2.2 billion. Even with those large numbers, IBM said results came in below Wall Street’s expectations, with weakness centered in its infrastructure business.
IBM had already prepared investors for the bad news. CEO Arvind Krishna published a letter to investors last week with preliminary results, saying the quarter was worse than the company had expected and warning that infrastructure revenue and profit margins would be under pressure.
The market reaction was swift. IBM shares fell 25% after the warning, the company’s largest one-day decline on record, according to CNBC. On Wednesday, IBM also reduced its full-year growth outlook, signaling that the quarter’s shortfall would affect expectations for the rest of the year.
Mainframes are still central to IBM’s model
The biggest issue was IBM’s mainframe business, which was down 42%. A mainframe is a powerful corporate computer system used by large organizations to run critical work such as transactions, records and other high-volume business processes.
For IBM, the hardware sale is only part of the economics. CFO Jim Kavanaugh told investors on the company’s quarterly call that IBM generates $3 in software revenue for every $1 of mainframe hardware revenue. That means a delayed system purchase can also push out software revenue tied to that machine.
Krishna and Kavanaugh said the company saw “tens” of customers postpone mainframe purchases during the quarter. That number may sound small, but mainframes can cost hundreds of thousands to millions of dollars, with related maintenance contracts and software adding more revenue over time.
AI-related costs shifted customer budgets
Krishna said customers did not abandon the mainframe. Instead, he said they moved spending toward other hardware after facing price 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 said on the earnings call.
The explanation ties IBM’s miss to a broader pressure across enterprise technology. Dell and HP have warned that higher component costs, including memory costs linked to AI infrastructure demand, have led them to raise prices. Apple has also said it raised prices for some hardware.
Krishna told investors he expects delayed mainframe customers to complete those purchases later, along with related software contracts. He said some have already bought systems in the current quarter and added, “We see no evidence of clients moving off the mainframe.”
For investors, the key issue is timing. IBM is arguing that the quarter reflected a budget squeeze caused by AI-related hardware inflation, rather than a structural decline in demand for its mainframe platform. The company’s lowered growth outlook shows that even a temporary delay can matter when a high-margin product line sits at the center of the revenue mix.
This story draws on original reporting from TechCrunch.
