IBM had its worst quarter in years. It blames AI for that too.
A handful of big customers skipped their mainframe upgrades to cover soaring AI hardware costs. The result: IBM's stock suffered its biggest single-day drop ever.
Key points
- IBM reported $17.2 billion in revenue for Q1 2025, but the figure fell short of Wall Street's expectations.
- IBM's mainframe hardware business fell 42% in the quarter compared to the prior year.
- IBM stock dropped 25% in a single day after the company issued an early warning about the results, its largest one-day decline on record.
- CEO Arvind Krishna said some customers delayed mainframe purchases to cover hardware cost increases of 15% to 30% caused by the AI data-centre build-out.
- IBM lowered its full-year growth forecast after the quarter, meaning the damage extends beyond one bad period.
IBM is 115 years old and still generates serious money. For the most recent quarter, it brought in $17.2 billion in revenue, $9.9 billion in gross profit and $2.2 billion in net earnings. Those are not the numbers of a company in trouble.
The results landed so far below what analysts had expected that CEO Arvind Krishna took the unusual step of publishing a letter to investors last week, sharing preliminary figures before the official earnings date. It warned of weak results in IBM's infrastructure division, which sells the large, expensive computers called mainframes that power banks and airlines. When the letter went out, IBM's stock dropped 25%, its largest single-day fall on record. We reported on that drop on 14 July in "IBM shares fall 25% after profit warning as tech spending slows".
Why did a handful of missed sales cause so much damage?
Mainframes aren't like laptops. A single system can cost hundreds of thousands to millions of dollars, and the maintenance contracts and software that follow generate many millions more over time. CFO Jim Kavanaugh told investors the company earns roughly three dollars in software revenue for every one dollar of mainframe hardware it sells. Lose the hardware sale and a cascade of future income disappears with it.
Krishna said "tens" of large customers who were expected to buy new mainframes during the quarter simply didn't. The reason, he argued, is the same AI spending boom that had been lifting IBM's stock through his six years of leadership.
Companies building AI data centres are facing cost increases of 15% to 30% for components like memory, according to Krishna. Dell and HP Enterprise have said the same publicly, and Apple has flagged similar pressure.
Faced with those unexpected bills, several IBM clients shifted budget away from mainframe upgrades to cover AI hardware costs instead.
"When they were faced with that issue, then they decided to move budget to those areas where they were having that extreme price," Krishna said on the investor call.
His reassurance: those customers still need their mainframes. Some have already placed orders this quarter. "We see no evidence of clients moving off the mainframe," he said.
Should you worry about this?
For most people, the impact is indirect. The banks and insurers running mainframes are the ones managing the delay. But IBM also cut its full-year growth forecast on Wednesday, turning one bad quarter into an anchor on all of 2025. The next earnings report will show whether those deferred orders actually came back.
What strikes me most here is the irony: the AI boom that padded IBM's valuation for years is now the thing raiding its clients' hardware budgets. Whether this is a one-quarter blip or the start of a longer squeeze is the question worth watching.
