IBM reported a disastrous quarter that fell far short of Wall Street expectations, with revenue of $17.2 billion, gross profit of $9.9 billion (nearly 58% margins), and net earnings of $2.2 billion. The miss was so severe that CEO Arvind Krishna and the board took the unprecedented step of pre-announcing the results in a letter to investors, warning that the earnings were “worse than our expectations” and that both infrastructure revenue and profit margins would take a hit. IBM‘s stock immediately fell 25%, its largest single-day decline ever, after having performed well under Krishna’s six-year leadership largely due to the AI data center boom.

The primary culprit was IBM‘s mainframe business, which declined 42%. This is a cascading problem because, as CFO Jim Kavanaugh explained, IBM earns $3 in software revenue for every $1 of mainframe hardware it sells. Krishna attributed the drop to “tens” of customers who were due to purchase new mainframes during the quarter but opted instead to buy other hardware. These clients faced cost increases of 15% to 30% for data center gear and PCs driven by the AI build-out boom, which drove up memory and component costs. Enterprise hardware makers like Dell, HP, and Apple have similarly warned about rising prices. Krishna argued that the decision to defer mainframe purchases was a temporary budget reallocation and that customers eventually will buy new mainframes and software contracts, with some already doing so in the current quarter. He stated, “We see no evidence of clients moving off the mainframe.” The tech industry has long predicted the mainframe’s demise, and the question remains whether even the current AI-driven cost pressures will ultimately kill it.