IBM trims revenue outlook as mainframe sales plummet
IBM has cut its full-year growth target after a 42 percent plunge in mainframe sales, highlighting the volatility of its hardware business and investor fears that AI could erode its newly acquired software portfolio.
IBM lowered its full-year revenue growth forecast to between four and five percent on Wednesday, down from a previous estimate of above five percent. The downgrade follows a 42 percent collapse in second-quarter sales of its Z system mainframes. Total revenue for the quarter ending June 30 grew just one percent to roughly $17 billion, while adjusted earnings hit nearly $3 per share.
The company had pre-announced the mainframe weakness on July 14, triggering a historic 25 percent single-day drop in its share price. Following the full earnings release, shares recovered about three percent in extended trading, indicating that investors had already absorbed the worst of the shock.
The sudden reversal highlights the persistent cyclicality of IBM's hardware business. The company had enjoyed strong growth since launching its latest Z systems last year, but that momentum has now evaporated. Chief Financial Officer Jim Kavanaugh told Bloomberg that the revised guidance is tied entirely to the infrastructure unit and its associated software, trimming annual software sales growth expectations to between six and eight percent, though he noted the rest of the company is performing "extremely well."
Beyond the immediate hardware slump, IBM faces deeper questions about whether artificial intelligence will disrupt the software empire it spent tens of billions of dollars building. Acquisitions like Red Hat, HashiCorp, and Confluent were meant to transform IBM into a high-growth software provider, partly through an AI partnership with OpenAI.
Those fears surfaced earlier this month when reports emerged that Starbucks was looking to build internal AI tools to replace software from IBM and others. Kavanaugh acknowledged that Starbucks spends about $2 million annually with IBM on an application he agrees is "prime to be disrupted by AI."
However, the CFO argued that the vast majority of IBM's software sits much closer to enterprise infrastructure and data, making it difficult to replace. To bolster this defensive moat, IBM is partnering with Arm to run modern workloads on its mainframes, attempting to keep legacy Z systems relevant in the AI era.
To offset the revenue pressure, IBM is accelerating cost-saving measures. The company expects to generate an additional $1 billion in free cash flow this year by reducing third-party technology spending, tightening supply chains, and cutting administrative overhead. Despite these reductions, Kavanaugh said headcount should remain roughly flat for the year.
