IBM’s second-quarter earnings are expected to miss expectations, with the company’s CEO, Arvind Krishna, citing challenges in the infrastructure and software business. The pressure on the company’s infrastructure business was exacerbated by a refresh cycle to its z17 mainframe, which was hurt by customers reworking their IT budgets around soaring component costs and fast-moving cybersecurity concerns.
The company’s stock fell 26 percent as of Wednesday afternoon, a steeper decline than what IBM experienced since at least 1968, according to the outlet.
Krishna acknowledged that IBM’s teams did not execute “perfectly,” adapting and moving quickly enough, and multiple large deals failed to close on expected timelines. The company expects gross profit of $9.91 billion for the quarter, down less than 1 percent year on year.
IBM said to expect $17.2 billion in revenue for the quarter, whereas Wall Street expected closer to $17.9 billion. The miss in Z spending comes as partners with data center capabilities and AI expertise experience strong growth as enterprises invest heavily in AI-ready infrastructure.
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Instead of spending on the Z refresh cycle and its associated software, clients moved spending to servers, storage, and memory to get ahead of price increases and supply chain constraints. Chris Bogan, vice president of sales at Mark III Systems, told reporters that the majority of his company’s IBM business is hardware and he still expects “a banner year.”
Bogan said that the entire world runs on mainframes and Power systems for a reason.
Although the overall IBM software portfolio is expected to disappoint, Red Hat appears likely to beat the 10 percent growth initially forecasted, with the division’s 11 percent growth marking an acceleration from the prior quarter’s growth.
Red Hat‘s reputation as a VMware alternative is fueling demand, with customers continuing to assess the virtualization giant following pricing changes enacted after Broadcom acquired the company in November 2023. The Lightwell project, launched by IBM and Red Hat, brings customers 6,500-plus remediated, digitally signed, and certified application-layer dependencies across Java, Python, and other major ecosystems.
Krishna partly blamed IBM’s shortcomings in the quarter on clients “distracted with rapidly-evolving, industry-wide cybersecurity concerns in the quarter,” an apparent reference to Anthropic‘s Mythos model that promises to upend existing vulnerability management practices. IBM and its Red Hat division are answering Mythos with Lightwell, a $5 billion commitment with new frontier AI capabilities and 20,000-plus engineers addressing open-source software vulnerabilities.
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The impact of Anthropic and OpenAI‘s innovations during the year has caused disruption in a number of software sectors, including security and software-as-a-service, with some industry watchers pointing to a potential long-term health issue for SaaS if AI agents become the interface users leverage for making sense of their company data.
It’s likely that IBM will need to adapt to the changing IT spending environment, with a focus on AI-ready infrastructure, cybersecurity, and cloud services. With the right strategy, IBM can potentially turn its current challenges into opportunities for growth and innovation.
A couple of investment firm reports suggested the damage could impact more than just IBM’s second fiscal quarter. They expect IBM to lower full-year software revenue expectations to mid-single digit growth plus a mid-single digit decline in infrastructure. The firm’s survey work also gave a signal for disruption to IBM’s consulting business with a net 15 percent decrease in CIOs who expect to increase use of third-party IT consultants for the rest of 2026.
IBM has been investing heavily in a position as the best quantum computing vendor, with plans to invest more than $10 billion in quantum research and development, capital expenditures, manufacturing scaling, mergers and acquisitions, and ecosystem expansion over the next five years. Krishna has put 2029 as the year IBM delivers the first large-scale fault-tolerant quantum computer, and mainstream adoption of quantum could take another couple of years after that.
