Dive Brief:
- IBM confirmed its infrastructure segment suffered a sharper-than-expected 7% revenue decline as its larger software segment expanded during the three months ended June 30. The company warned investors of a Q2 falloff in mainframe sales last week.
- The IBM Z mainframe division saw revenues slide 42% compared with Q2 of last year, when the first z17 units reached general availability. In contrast, the company’s software revenue increased 5% to $7.8 billion, while its consulting unit was flat year-over-year at $5.3 billion.
- Customers deferred mainframe investments to purchase servers and other hardware as industrywide chip shortages inflated prices, according to IBM CEO Arvind Krishna. “The majority of what didn’t happen in the second quarter was large capex deals,” he said during a Wednesday earnings call. “Our clients themselves had not really thought through that some of the alternate purchases they were doing were increasing 30% in dollar value quarter-to-quarter. When they were faced with that issue, they decided to move budget.”
Dive Insight:
Software and consulting were IBM’s dominant segments, generating more than three-quarters of the company’s Q2 revenues, which grew 1% year over year to $17.2 billion. Yet, the resilient mainframe platform has a symbolic and practical value for the 115-year-old tech vendor.
Despite a tough quarter, IBM Z units continue to run 70% of global transactions by value, Krishna said. The executive shrugged off the recent revenue falloff, framing it in the context of the broader program.
“The z17 is having the best refresh cycle in reported history,” he said. “While clients continually evaluate workload placement, we see no evidence of clients moving off the mainframe.”
A modest z17 sales dip was anticipated, Brian Klingbeil, chief strategy officer at managed service provider Ensono, told Channel Dive. “This is a normal mainframe cycle,” Klingbeil said. “IBM expected mid-single-digit declines in Z and they missed it by just a titch.”
Klingbeil has seen a change in buyer behavior amid component supply chain constraints and a rapidly changing AI landscape.
“Customers are weighing long-term decisions because of the variability of what’s available out there,” Klingbeil said. “Do you want to sign a five-year agreement with one vendor when you might have alternatives a year later? That slows down decision making.”
Most of IBM’s largest segment — software — is annual recurring revenue for the company and operating expenses for its customers. It’s largely insulated from the short-term disruptions in capital investments that afflicted IBM’s mainframe business, the company’s CFO and SVP of Finance and Operations James Kavanaugh said during the earnings call.
“Many clients redirected spending towards servers, storage and memory purchases to secure supply-constrained infrastructure ahead of expected price increases,” Kavanaugh said. “As a result, tens of large deals failed to close on the timelines we expected, accounting for the majority of the shortfall.”
IBM hasn’t written off those deals. The company closed one-third of the delayed Q2 deals shortly after the quarter ended, Krishna said. “Normally, we would not expect all of them to close,” he added. “The fact that one-third have already closed in the first three weeks gives us … a good indication that this was deferral and not destruction.”
