IBM blames AI hardware costs for 42% mainframe revenue plunge, insists customers will return

IBM reported a 42% decline in mainframe revenue for its most recent quarter, a drop the company attributes to customers diverting budgets to cover surging AI-related hardware costs. Despite the sharp fall in its legacy cash cow, CEO Arvind Krishna and CFO Jim Kavanaugh told investors on Wednesday that the slump is temporary and that clients have already begun placing new mainframe orders in the current quarter.

Why mainframe sales collapsed

IBM’s overall revenue for the quarter reached $17.2 billion, with gross profit of $9.9 billion and net earnings of $2.2 billion. However, the results fell well short of Wall Street expectations. The company pre-announced the miss last week via an unusual letter to investors, warning that revenue in its critical infrastructure category would be abysmal. Shares dropped 25% on the news — the largest single-day decline in IBM’s history.

The culprit, according to Krishna, was that “tens” of mainframe customers opted not to purchase new systems during the quarter. Mainframes typically cost hundreds of thousands to millions of dollars each, and every dollar of hardware generates roughly three dollars in software and maintenance revenue, CFO Kavanaugh explained on the earnings call. That multiplier effect made the revenue hole deeper than the hardware numbers alone suggest.

Krishna said these clients faced 15% to 30% cost increases for data center gear and PCs — driven by the AI build-out boom that has raised prices on components like memory. Enterprise hardware makers Dell and HP have issued similar warnings. Apple has also cited rising component costs. Faced with those pressures, customers shifted budget away from mainframe upgrades toward other hardware.

No evidence of mainframe abandonment, IBM says

Despite the quarter’s dire numbers, Krishna pushed back against any suggestion that the mainframe is dying. “We see no evidence of clients moving off the mainframe,” he said during the call. He noted that some of the customers who delayed purchases have already placed orders in the current quarter, suggesting the dip was a timing issue rather than a structural shift.

The tech industry has predicted the death of the mainframe for decades, and the system has repeatedly outlived those forecasts. IBM’s argument is that the current disruption is about budget allocation during an AI-driven hardware cost spike, not about customers abandoning the platform for alternatives.

What this means for IBM’s outlook

IBM lowered its full-year growth forecasts on Wednesday, acknowledging that the weak quarter will have a ripple effect. The company still generates substantial cash and operates with nearly 58% gross margins, but the mainframe business remains a disproportionate profit driver. If customers delay upgrades further, the financial impact could extend into subsequent quarters.

Krishna’s assurance that clients will return hinges on whether AI-related hardware cost inflation eases. If component prices remain elevated, enterprises may continue deferring mainframe purchases, putting pressure on IBM’s software and services revenue streams that depend on new hardware installations.

Conclusion

IBM’s 42% mainframe revenue drop is a stark reminder that even the most entrenched enterprise technology is vulnerable to macroeconomic shifts. The company is betting that AI-driven cost increases are a temporary distortion, not a permanent change in buying behavior. Whether that bet pays off will depend on how long customers are willing to wait — and whether the mainframe retains its place in the data center through another technological cycle.

FAQs

Q1: Why did IBM’s mainframe revenue drop 42%?
IBM says “tens” of customers delayed mainframe purchases because they redirected budgets to cover 15%–30% cost increases for AI-related data center hardware and PCs.

Q2: Is IBM’s mainframe business in permanent decline?
CEO Arvind Krishna insists the decline is temporary and that clients are not abandoning the platform. Some delayed orders have already been placed in the current quarter, he said.

Q3: How does the mainframe slump affect IBM’s overall financials?
IBM earns about $3 in software revenue for every $1 of mainframe hardware sold. The 42% hardware drop therefore has a multiplied impact on software and services revenue, which is why the company lowered its full-year growth forecast.