On Wednesday, IBM officially released its earnings report, and the results were as grim as anticipated. Despite the 115-year-old company still generating substantial cash—$17.2 billion in revenue, $9.9 billion in gross profit, margins near 58%, and $2.2 billion in net earnings for the quarter—its performance fell well short of Wall Street’s expectations. The miss was so significant that CEO Arvind Krishna and the board took the unusual step of warning investors ahead of time, admitting that the earnings were "worse than our expectations" and offering a preview. Last week, Krishna published a "letter to investors" sharing preliminary results, which highlighted disastrous revenue in the company’s crucial "infrastructure" category and indicated that profit margins would also suffer. The stock immediately plunged 25%, marking its largest single-day decline ever. Until then, shares had performed well under Krishna’s six-year leadership, buoyed by the AI data center boom that lifted many companies.

On Wednesday, IBM also reduced its full-year growth forecasts, meaning this poor quarter would affect the remainder of the year. The culprit? IBM’s cash-cow mainframe business dropped by 42%. This creates a cascading problem, as CFO Jim Kavanaugh explained during the quarterly investor call: for every dollar of mainframe hardware sold, IBM earns three dollars in software revenue. However, the CEO and CFO spent the call insisting this was a temporary hiccup and that things would soon improve. The issue, they said, was that "tens" of customers expected to purchase a new mainframe during the quarter chose not to do so. While that may not sound like many, mainframes are systems costing hundreds of thousands to millions of dollars, and when combined with maintenance contracts and software, they generate many millions more.

The same AI boom that lifted IBM’s stock also caused its downturn. Instead of buying a new mainframe, these clients opted for other hardware, Krishna explained. They faced steep cost increases of 15% to 30% for data center equipment and PCs. "When they were faced with that issue, they decided to move budget to those areas where they were having that extreme price," Krishna said. Enterprise hardware makers like Dell and HP have warned that rising component costs, driven by the AI build-out boom, have forced them to raise prices, and Apple has echoed this. But Krishna assured that those customers will still eventually purchase new mainframes—and their accompanying software contracts. In fact, he noted that some have already done so this quarter. "We see no evidence of clients moving off the mainframe," he said. Time will tell. Yet the tech industry has predicted the demise of the mainframe for decades, and perhaps even AI won’t be its undoing.