IBM trims revenue forecast as customers divert budgets to AI hardware

Mainframe sales drop 42% after enterprise clients shift spending to servers and memory

IBM confirmed Wednesday that its full-year revenue growth will be lower than previously forecast, now expecting a range of 4% to 5% compared with the more than 5% the company had projected earlier this year. The downgrade formalized the disappointing results that IBM disclosed in a rare preliminary letter to investors on July 14 — a move that erased about $67 billion in stock market value and sent shares down 25% in their worst single-day decline, as MSI previously reported.

The company’s infrastructure revenue of $3.8 billion fell 7% from a year earlier, dragged down by a 42% drop in sales of data center mainframes, which are the core of IBM’s data center business. Chief Executive Arvind Krishna attributed the miss to customers redirecting late-quarter budgets toward servers, storage and memory to lock in AI-related hardware before anticipated price increases, and to a pause on some deals as clients reassessed cybersecurity spending.

The distributed infrastructure business, which includes IBM’s Power server line and storage systems, saw sales grow 37% year-over-year — an all-time record — but infrastructure revenue still declined 7% on account of the mainframe weakness, according to the company’s results.

“We are taking action to accelerate our revenue growth and profitability, driving productivity across the company with AI and automation, and heavily investing in commercializing innovation at speed and scale,” Krishna said in a statement.

IBM earned $2.2 billion on revenue of $17.2 billion in the second quarter. The company still expects full-year free cash flow to increase by about $1 billion from last year. Shares rose as much as 3.5% in after-market trading following the release of the formal earnings report.

Chief Financial Officer James Kavanaugh told The Wall Street Journal that IBM failed to close “tens of deals” in the second quarter, which led to the disappointing results. He said the company has since closed roughly a third of those deals. Kavanaugh said the company does not expect supply chain constraints in the AI infrastructure market to improve in the near term. “Everyone in the industry is saying this will extend for a period of time,” he said.

The headwinds facing IBM differ from the software-replacement fears that have weighed on companies such as Salesforce, Workday and Snowflake. IBM’s warning indicated that AI infrastructure spending is now displacing hardware budgets as well, squeezing a company whose customers install traditional systems in their own data centers and can defer large-ticket purchases such as mainframe upgrades.

Kavanaugh said that despite the rough quarter, IBM’s mainframe business should grow in the second half of the year. “Mainframe has always been the most secure, resilient, scalable system in the world,” he said. “That’s why it runs over 70% of the world’s transaction volumes in terms of value.”

The episode has put Krishna’s leadership under scrutiny and made IBM, which employs 260,000 people, the subject of breakup and activist speculation, the Journal reported. The board of directors is expected to meet again in late July and faces pressure from an impatient Wall Street that is unlikely to tolerate several more quarters of underperformance, according to the Journal.