IBM Reports Disappointing Quarter as Mainframe Sales Drop 42%

IBM officially reported earnings on Wednesday, confirming earlier warnings that the quarter would be dire. The 115-year-old company generated $17.2 billion in revenue and $9.9 billion in gross profit, with margins near 58% and net earnings of $2.2 billion. However, results fell well short of analysts' expectations, triggering a historic 25% stock drop — the largest single-day decline in the company's history.

In an unusual move, CEO Arvind Krishna and the board issued a preliminary earnings warning last week through a letter to investors, signaling that infrastructure revenue would be abysmal and profit margins would suffer. The warning caused the stock to plummet even before the official release.

The main culprit was IBM's mainframe hardware unit, which saw a 42% year-over-year decline. CFO Jim Kavanaugh noted during the earnings call that for every dollar of mainframe hardware sold, IBM earns three dollars in software revenue, amplifying the impact of the drop.

Krishna insisted that artificial intelligence is not replacing mainframes in the long term. He argued that corporate hardware budgets are currently being redirected to AI data center buildouts, a temporary shift that he expects to normalize. Despite the poor quarter, IBM still generated strong cash flow.

The company also lowered its full-year growth forecasts, indicating that the weak performance will persist for the remainder of the year. Prior to this quarter, IBM's stock had performed well under Krishna's six-year tenure, buoyed by the broader AI data center boom.