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CEO Krishna: Customers blew their Z budgets on servers and storage before prices spike, Q2 financials 'disappointing'
IBM says customers spooked by soaring demand for AI infrastructure raided their mainframe budgets to stockpile servers, storage, and memory instead, knocking Big Blue's flagship Z business off course.
Ahead of its full calendar Q2 earnings release next week, IBM took the unusual step of publishing preliminary quarterly results alongside a letter from CEO Arvind Krishna explaining why the numbers fell short of expectations.
The biggest disappointment came in Infrastructure, where revenue fell 7 percent, despite what IBM had previously described as the strongest launch of a mainframe generation in its history.
The disclosure has led to a near-26 percent plunge in Big Blue share price.
The Q2 culprit wasn't a sudden loss of affection for mainframes, according to Krishna, but a last-minute scramble to secure hardware increasingly caught up in the AI spending boom.
"In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases," Krishna wrote. "This dynamic impacted client buying patterns."
IBM had expected some disruption from supply chain pressures, he said, "but we did not anticipate the magnitude of the capex reprioritization."
That's an unusually candid admission from a company whose Z mainframes remain one of its highest-margin businesses. Customers, it seems, preferred to refresh infrastructure they fear might soon become more expensive or harder to obtain.
The spending shift also rippled through IBM's software business because fewer mainframe deals meant weaker sales of the transaction-processing software that typically accompanies them.
Krishna pointed to another factor as well, saying clients were distracted by "rapidly evolving, industry-wide cybersecurity concerns" during the quarter, though he offered no further details on what those concerns were or how they affected purchasing decisions.
IBM was willing to shoulder some of the blame. "These conditions require our teams to execute perfectly, and this quarter we faltered," Krishna wrote. "We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected, driving the majority of our shortfall."
Not everything disappointed. Red Hat revenue grew 11 percent, recent acquisitions including HashiCorp and Confluent performed strongly, and IBM's Distributed Infrastructure business posted record reported growth of 37 percent, driven by Power servers and storage systems.
Still, the quarter offers another sign of how the AI infrastructure race is reshaping enterprise IT budgets. For at least one quarter, customers decided the safest investment wasn't the newest mainframe – it was buying as much in-demand hardware as possible before someone else did. ®
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