IBM lowers its full-year revenue forecast following a 42 percent decline in mainframe demand in the second quarter.

      TL;DR: IBM revised its revenue growth forecast down to four to five percent after a 42 percent drop in mainframe Z system sales during the second quarter.

      IBM adjusted its full-year sales projection on Wednesday following a significant decline in demand for its mainframe business, reducing its revenue growth estimate from a previous prediction of over five percent to four to five percent. The company also lowered expectations for its software unit, with CFO Jim Kavanaugh informing Bloomberg that annual software sales are now expected to grow by six to eight percent. Kavanaugh indicated that this decrease is solely due to weaknesses in IBM's infrastructure unit and its related software, while the rest of the company continues to perform exceptionally well.

      Mainframe sales plunged by 42 percent in the second quarter ending June 30, ending a streak of robust growth since IBM introduced its latest Z systems last year. The company had previously warned of this weakness on July 14 when it shared preliminary results, causing its stock to drop 25 percent in a single day—the largest decline in IBM's history. Shares did rise about three percent in after-hours trading on Wednesday following the full earnings report, implying that investors had largely anticipated the negative impact.

      IBM invested tens of billions of dollars in reshaping itself into a high-growth software enterprise through acquisitions like Red Hat, HashiCorp, and Confluent, and has been progressing into AI-driven enterprise security in conjunction with OpenAI. However, this software-centric shift has attracted concerns from investors anxieties that AI technologies might disrupt the business models IBM has recently adopted. Kavanaugh countered this apprehension, asserting that most of IBM's software is closely tied to enterprise infrastructure and data, making it significantly more challenging to replace than applications that are more susceptible to AI disruption.

      The company announced it will accelerate cost-saving measures and still anticipates an additional $1 billion in free cash flow this year by reducing spending on third-party technology, tightening supply chain management, and cutting administrative expenses. Kavanaugh mentioned that the workforce is expected to remain nearly unchanged for the year. Total revenue for the quarter grew approximately one percent to around $17 billion, with adjusted earnings nearing three dollars per share.

      The question of AI disruption became more tangible earlier this month when Bloomberg reported that Starbucks was considering replacing software from IBM and other providers with in-house developed tools. Kavanaugh acknowledged that Starbucks allocates about $2 million annually to IBM for an application he agrees is "prime to be disrupted by AI." However, he maintained that most of IBM's enterprise software resides much closer to the infrastructure level, where replacement is much more challenging, and that the company is investing in keeping its mainframe platform relevant in the AI age through a collaboration with Arm to support modern workloads on its Z systems.