After a shocking quarter, IBM insists that AI is not killing the mainframe

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

While the 115-year-old company still generates significant amounts of cash — $17.2 billion in revenue, $9.9 billion in gross profits, roughly 58% margins, and $2.2 billion in quarterly net earnings — its results fell well short of Wall Street expectations.

It was such a huge mistake that IBM CEO Arvind Krishna and the board took the unprecedented step of warning investors in advance that earnings were “worse than our expectations,” giving everyone a sneak peek.

to publish “Message to investors” Last week shared preliminary results. It warned of very poor revenues in the company’s critical “infrastructure” category, and said profit margins would also be hit. The company’s shares immediately fell by 25%. It’s the biggest single-day drop ever. Even then, the stock had performed well under Krishna’s six-year leadership, buoyed by an AI data center boom that was lifting all boats.

On Wednesday, IBM also lowered its full-year growth forecast, meaning this terrible quarter will impact the rest of the year. The culprit? IBM’s cash cow mainframe business fell 42%.

This is a cascading problem, because as CFO Jim Kavanaugh explained in his quarterly call with investors, IBM earns $3 in software revenue for every $1 of mainframe computers it sells.

However, the CEO and CFO spent the call insisting that this was just a temporary issue and that everything would be fine soon.

What happened, they said, was that “dozens” of customers who were scheduled to purchase a new mainframe during the quarter chose not to do so. This may not seem like a lot to customers, but mainframes are systems that cost hundreds of thousands to millions of dollars, and with maintenance and software contracts, generate millions more.

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

Instead of buying a new mainframe, these customers bought other machines, Krishna explained. They faced huge cost increases of 15% to 30% for data center equipment and computers.

“When they faced this problem, they decided to shift the budget to those areas where they were paying such a high price,” Krishna said.

Enterprise device makers such as Dell and HP have warned that rising costs for components such as memory, caused by the AI ​​building boom, It forced them to raise prices. Apple has said the same thing.

But Krishna promised that those customers would 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 don’t see any evidence of clients moving off the mainframe,” he said.

We’ll have to wait and see. But the technology industry has predicted the death of the mainframe for many decades. Maybe even AI wouldn’t kill him.