IBM Reassures That AI Will Not Undermine the Significance of Mainframes, Despite a Disappointing Quarter

On Wednesday, IBM unveiled its earnings report, highlighting results that fell short of expectations, just as anticipated.

Although IBM is a 115-year-old company generating considerable revenue — totaling $17.2 billion in sales, $9.9 billion in gross profit, nearly 58% margins, and $2.2 billion in net income for the quarter — the results significantly underperformed Wall Street predictions.

The discrepancy was so significant that IBM’s CEO Arvind Krishna and the board took the unusual step of notifying investors in advance, stating that earnings “were below our expectations” to offer insight into the outcomes.

Last week, he sent a “letter to investors” revealing initial results, which pointed to disappointing revenue in the crucial “infrastructure” segment and expected declines in profit margins. As a result, IBM’s stock tumbled by 25%, marking the largest one-day drop in its history. Until that point, the stock had performed well during Krishna’s six-year leadership, bolstered by the thriving AI data center market.

On Wednesday, IBM also lowered its full-year growth forecasts, indicating that this disappointing quarter would impact the entire year. The main issue? A staggering 42% decline in IBM’s key mainframe business.

This creates a ripple effect, as CFO Jim Kavanaugh mentioned during the quarterly call with investors that IBM earns $3 in software revenue for every $1 earned from mainframe hardware sales.

Nonetheless, both the CEO and CFO stressed that this downturn is temporary, and recovery is anticipated.

They indicated that “tens” of customers, who were expected to place orders for new mainframes during the quarter, decided to delay their purchases. While this appears to be a minor number, mainframes are high-cost items, ranging from hundreds of thousands to millions of dollars, along with additional revenue from maintenance contracts and software.

Ironically, the very AI boom that has benefited IBM has also played a part in its current challenges.

These clients have opted for alternative hardware instead of new mainframes due to significant price increases of 15% to 30% for data center equipment and PCs, as noted by Krishna.

“Faced with those price hikes, they chose to allocate budgets to areas with dramatic cost increases,” Krishna explained.

Hardware manufacturers like Dell and HP have warned that rising component costs driven by the AI surge have led to necessary price increases. Apple has faced similar issues.

However, Krishna reassured that these customers will eventually move forward with new mainframe purchases — along with related software contracts. He mentioned that some have already begun making purchases this quarter. “We see no signs of clients abandoning the mainframe,” he stated.

Only time will tell. Nonetheless, the tech industry has long predicted the end of the mainframe. Perhaps even AI won’t signal its demise.