IBM has reported one of its most disappointing financial quarters in recent years, but the company says artificial intelligence is not to blame for the sharp decline in its mainframe business.
The technology giant posted $17.2 billion in quarterly revenue, $9.9 billion in gross profit, a 58% gross margin, and $2.2 billion in net income. Despite those strong figures on paper, the results fell well below analysts’ expectations.
Ahead of the official earnings release, IBM CEO Arvind Krishna took the unusual step of warning investors that the company’s performance would be worse than expected. In a letter shared before the earnings announcement, he highlighted significant weakness in IBM’s infrastructure division and warned that profit margins would also come under pressure.
The early warning triggered a sharp market reaction, with IBM’s stock plunging 25% in a single day, marking the largest one-day drop in the company’s history. The decline erased much of the momentum the company had built during Krishna’s six-year tenure, a period that had benefited from growing demand for AI infrastructure and data centers.
IBM has also revised its full-year growth outlook downward, signaling that the disappointing quarter is expected to affect the rest of the year. A major factor behind the slowdown was a 42% drop in mainframe sales, one of IBM’s most profitable business segments.
The decline has broader financial implications because the company’s software business is closely tied to its hardware sales. According to CFO Jim Kavanaugh, IBM typically generates about $3 in software revenue for every $1 of mainframe hardware sold, making weaker hardware demand especially painful.
Despite the disappointing performance, IBM executives remain optimistic. Both Krishna and Kavanaugh told investors that the slowdown is temporary and maintained that the company’s long-term outlook remains strong. They also rejected the idea that AI is replacing the mainframe, arguing that the current weakness reflects short-term market conditions rather than a structural shift in customer demand.
