IBM shares plunge 25% on 42% mainframe slump driven by AI costs
IBM's mainframe revenue collapsed by 42% after clients diverted IT budgets to cover surging AI-driven hardware costs, sending shares down 25% and signalling broader corporate tech budget strains.
IBM shares suffered their largest single-day decline ever, plummeting 25% after the company reported a 42% collapse in its mainframe business. The 115-year-old tech giant posted $17.2 billion in revenue for the quarter, but the severe miss forced CEO Arvind Krishna to take the unprecedented step of pre-emptively warning investors last week that results would be "worse than our expectations."
The sudden downturn in IBM’s core infrastructure division stems indirectly from the artificial intelligence boom. Instead of upgrading their mainframes, a group of major clients reallocated their budgets to absorb sudden price hikes of 15% to 30% on other data centre gear and personal computers.
“When they were faced with that issue, then they decided to move budget to those areas where they were having that extreme price,” Krishna explained. While only "tens" of customers delayed their purchases, mainframe systems cost hundreds of thousands to millions of dollars and carry lucrative long-term software and maintenance contracts.
For European companies managing large-scale IT operations, the results illustrate a growing dilemma driven by the global AI build-out. Enterprise hardware makers like Dell, HP and Apple have all recently warned that surging demand for components like memory is forcing them to raise prices across the industry.
For IBM specifically, the hardware delay creates a cascading financial hit. CFO Jim Kavanaugh noted that IBM generates $3 in software revenue for every $1 of mainframe hardware sold. The company reported $9.9 billion in gross profit with margins near 58%, but the mainframe drag was severe enough for IBM to lower its full-year growth forecasts.
Management insists the crisis is temporary. Krishna noted that some delayed purchases have already converted into sales this quarter and pledged that clients are not abandoning the platform. “We see no evidence of clients moving off the mainframe,” he said. Despite decades of predictions about the death of the mainframe, IBM's immediate challenge is proving that the AI boom will not permanently starve it of capital expenditure budgets.
