Shares of IBM Corp. plunged 25% today after it posted preliminary second-quarter earnings that missed expectations.

The company estimates that it generated $17.2 billion in revenue during the three months ended June 30. Analysts polled by FactSet expected $660 million more. IBM’s adjusted earnings of $2.93 per share also fell short of the consensus estimate of $3.01 per share.

IBM Chief Executive Officer Arvind Krishna attributed the weak results to slow mainframe demand. In April, the company debuted a new flagship mainframe called the IBM z17. It features a custom chip with an eight-core central processing unit and an artificial intelligence accelerator. Krishna wrote in an investor letter that “this was the strongest start to a mainframe program in our history” but sales ultimately missed expectations.

The slowdown dented demand for IBM’s mainframe-based transaction processing software, which further weighed on its revenue. The company says its mainframes help process 87% of all financial transactions. IBM’s mainframe business counts 44 of the world’s 50 largest banks as customers.

Krishna attributed the slow demand to changing customer priorities. The executive wrote in today’s investor letter that IBM clients prioritized servers, storage and memory over mainframe purchases in the second quarter. 

“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.”

The spending shift to servers and storage had a silver lining for IBM. The company’s distributed infrastructure business, which includes its Power server line and storage systems, saw sales grow 37% year-over-year. That’s an all-time record, but IBM’s overall infrastructure revenue still declined 7% on account of weak mainframe sales.

The strong demand for IBM’s distributed infrastructure products wasn’t the only bright spot in its second-quarter earnings. The company’s software revenue rose 5% year-over-year thanks partly to its recently acquired HashiCorp and Confluent units. The former business develops tools that automate infrastructure management tasks. Confluent, in turn, sells a platform that enables companies to move data between applications in near real-time.

IBM’s consulting revenue rose only 1%. However, Krishna noted that the company experienced “continued growth in consulting signings led by strong GenAI contribution.” In May, IBM and Red Hat teamed up to provide AI-powered cybersecurity services through an initiative called Project Lightwell. It’s designed to help organizations fix vulnerabilities in the open-source components that power their software. 

Photo: IBM