On Wednesday, IBM officially reported its earnings and the news was as bad as everyone knew it would be.
While the 115-year-old company still generates large amounts of cash ($17.2 billion in revenue, $9.9 billion in gross profit, nearly 58% margins and $2.2 billion in net profit for the quarter), its results fell well short of Wall Street expectations.
It was such a big 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,” offering everyone a sneak peek.
the public a “letter to investors” last week sharing preliminary results. He warned of dismal revenue in the company’s important “infrastructure” category and said profit margins would also take a hit. The company’s shares instantly plummeted 25%. It is the largest drop in a single day in history. Until then, the stock had performed well under Krishna’s six years of leadership, buoyed by the AI data center boom that had been lifting all boats.
On Wednesday, IBM also lowered its full-year growth forecasts, meaning this horrible quarter would impact the rest of the year. The culprit? IBM’s mainframe business, the cash cow, fell 42%.
It’s a cascading problem, because, as CFO Jim Kavanaugh explained on the quarterly investor call, IBM earns $3 in software revenue for every $1 of mainframe hardware it sells.
However, the CEO and CFO spent the call insisting that this was a temporary problem and that everything would be fine soon.
What happened, they said, was that “dozens” of customers who were due to purchase a new mainframe during the quarter chose not to. They may not seem like a lot of customers, but mainframes are systems that cost hundreds of thousands to millions of dollars and, with maintenance and software contracts, generate many millions more.
The same AI boom that raised IBM’s ship also sank it.
Instead of purchasing a new mainframe, these customers purchased other hardware, Krishna explained. They faced astronomically high cost increases, of 15% to 30%, on data center equipment and PCs.
“When they faced that problem, they decided to move the budget to those areas where they had that extreme price,” Krishna said.
Enterprise hardware makers such as Dell and HP have warned that rising costs of components such as memory, caused by the rise of AI, They have been forced to raise prices. Apple has said the same.
But Krishna promised that those customers will eventually buy their new mainframe computers, along with their new software contracts. In fact, he said some of them have already done so this quarter. “We see no evidence of customers abandoning the mainframe,” he said.
We’ll have to wait and see. But the technology industry has been predicting the death of the mainframe for many decades. Maybe not even AI can take him down.
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