IBM Lowers Full-Year Revenue Forecast as AI Shift Hits Mainframe Sales

International Business Machines Corp. on Wednesday lowered its revenue growth forecast for the year and reported second-quarter earnings that fell short of expectations. The company attributed the weakness to a significant shift in corporate spending, with customers prioritizing investments in artificial intelligence-focused hardware over IBM's traditional software and mainframe computers.

Revised Outlook and Q2 Results

IBM now projects its full-year 2026 revenue to grow between 4% and 5%, a reduction from its previous guidance of more than 5% growth. The midpoint of this new forecast is below the average analyst estimate of a 4.8% increase, according to LSEG data. The announcement follows a warning from CEO Arvind Krishna last week that the company had "faltered" in adapting to market changes, which caused a historic single-day drop in its share price.

For the second quarter ended June 30, the company's results missed analyst targets:

• Revenue: $17.16 billion, an increase of 1% but below the estimated $17.58 billion.
• Adjusted Profit: $2.93 per share, missing the average estimate of $2.97.
• Net Profit: $2.17 billion, representing a slight dip from the same period a year earlier.

Mainframe Weakness a Key Factor

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The primary driver of the underperformance was a steep decline in IBM's legacy hardware business. Revenue from its Z mainframe systems slumped 42% in the second quarter, which in turn dragged the company's overall infrastructure revenue down 7% to $3.84 billion. Finance Chief James Kavanaugh told Reuters that the mainframe hardware and software stack impacted IBM's growth by over five percentage points, significantly more than the one or two points the company had anticipated.

While software revenue rose 5% to $7.76 billion, it also missed the average analyst estimate of $7.88 billion. Despite the downturn, Kavanaugh stated that IBM sees "no evidence of clients moving off a mainframe" for the long term and expects a stronger performance in the second half of the year.

Market Context and Investor Reaction

The forecast from IBM underscores a growing concern among investors that the intense corporate scramble for scarce AI servers and chips could be cannibalizing budgets for the broader software and IT services sectors. However, some analysts believe IBM's issues may be company-specific rather than a sign of a sector-wide trend.

CFRA analyst Brooks Idlet noted that IBM's software challenges were likely tied to its own hardware cycle issues, suggesting the report could be viewed as a positive for the rest of the software industry. Following the earnings release and revised guidance, IBM shares rose over 2% in extended trading, indicating the results may not have been as severe as some investors had feared after last week's warning.