On Wednesday, IBM officially announced earnings, and the news was as bad as everyone knew it would be.
While the 115-year-old company is still generating plenty of cash — $17.2 billion in revenue, $9.9 billion in gross profit, nearly 58% profit margins and $2.2 billion in net income for the quarter — its results fell well short of Wall Street expectations.
It was so bad 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.
Post it a “letter to investors”, last week sharing the preliminary results. He warned of abysmal revenue in the company’s all-important “infrastructure” division and said margins would also take a hit. The company’s stock immediately fell 25%, it’s the biggest one-day drop ever. Until then, the stock had performed well under Krishna’s six-year leadership, boosted by the AI data center boom that had lifted all boats.
On Wednesday, IBM also cut its full-year growth forecast, meaning this horrible quarter will affect the rest of the year. The culprit? IBM’s cash-cow mainframe business fell 42%.
That’s a trickle-down problem, because as CFO Jim Kavanaugh explained on the quarterly call with investors, IBM earns $3 in software revenue for every $1 of mainframe hardware it sells.
However, the CEO and CFO passed the call insisting that this was a temporary blip and everything would be fine soon.
What happened, they said, was that “dozens” of customers who were going to buy a new mainframe during the quarter chose not to. This may not sound like much to many customers, but mainframes are systems that cost hundreds of thousands to millions of dollars, and with maintenance contracts and software, they generate many millions more.
The same AI explosion that lifted IBM’s boat also sank it.
Instead of buying a new mainframe, these customers bought other hardware, Krishna explained. They faced astronomically high cost increases of 15% to 30% for data center equipment and computers.
“When they faced that issue, then they decided to move the budget to those areas where they had that extreme price,” Krishna said.
Corporate hardware makers such as Dell and HP have warned that rising costs in items such as memory, caused by the boom in AI creation, forced them to raise prices. Apple said the same.
But Krishna promised that those customers will still eventually buy their new mainframes — 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 that customers are moving off the mainframe,” he said.
We will have to wait and see. But the tech industry has been predicting the death of the mainframe for decades. Maybe even AI won’t kill it.
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