TL;DR
IBM lowered its revenue growth forecast to four to five percent after mainframe Z system sales fell 42 percent in the second quarter
IBM cut its full-year sales outlook on Wednesday after reporting a sharp drop in demand for its mainframe business, lowering its revenue growth target to four to five percent from a prior forecast of more than five percent. The company also trimmed its software unit guidance, with CFO Jim Kavanaugh telling Bloomberg that annual software sales will now grow six to eight percent. Kavanaugh said the reduction is tied entirely to weakness in IBM’s infrastructure unit and its associated software, and that the rest of the company is performing extremely well
Mainframe sales plummeted 42 percent in the second quarter ended June 30, reversing a run of strong growth since IBM launched its newest Z systems last year. The company had already flagged the weakness on July 14 when it released preliminary results that sent the stock down 25 percent in a single day, the worst drop in IBM’s history. Shares rose about three percent in extended trading on Wednesday after the full earnings, suggesting investors had largely priced in the damage.
IBM has spent tens of billions of dollars remaking itself as a high-growth software company through acquisitions of Red Hat, HashiCorp, and Confluent, and has been pushing into AI-powered enterprise security alongside OpenAI. But the software-first pivot has made it a target for investors who worry that AI tools will disrupt the business models IBM just bought into. Kavanaugh pushed back on that concern, arguing that most of IBM’s software sits close to enterprise infrastructure and data, making it far harder to replace than the applications most vulnerable to AI disruption.
The company said it will accelerate cost-saving initiatives and continues to expect an additional $1 billion in free cash flow this year through reducing third-party technology spending, tightening supply chain management, and cutting administrative costs. Headcount should remain roughly flat for the year, Kavanaugh said. Total revenue for the quarter grew about one percent to roughly $17 billion, with adjusted earnings coming in at nearly three dollars per share.
The AI disruption question surfaced in concrete form earlier this month when Bloomberg reported that Starbucks was looking to replace software from IBM and other vendors with internally built tools. Kavanaugh acknowledged that Starbucks spends about $2 million per year with IBM on an application he agrees is “prime to be disrupted by AI.” But he argued that most of IBM’s enterprise software sits much closer to the infrastructure layer, where replacement is far more difficult, and that the company has been investing in keeping its mainframe platform relevant in the AI era through a partnership with Arm to run modern workloads on its Z systems.
