IBM keen on mainframe even after 42% revenue drop in Q2

IBM's mainframe revenue plunged 42% in Q2 2026, dragging infrastructure revenue down 7% to $3.8 billion, but CEO Arvind Krishna and CFO James Kavanaugh reaffirmed the mainframe's role as an AI platform, citing strong early adoption of AI capabilities by nearly 50% of z17 customers and a 2-15x total cost of ownership advantage over off-platform workloads.

Revenue from IBM’s z mainframe portfolio sunk 42% in the quarter ended June 30, dragging infrastructure revenue down 7% compared to the year-ago quarter. But Big Blue executives remain positive on the mainframe’s role as an important AI platform. After warning of an earnings shortfall, IBM lowered its full-year forecast. It now expects 2026 revenue to grow between 4% and 5%, rather than its previous forecast of more than 5% growth. In the latest quarter, some parts of its business did well: Software revenue grew 5% in Q2 https://78449.themediaframe.com/incomm/ibm/ibm260722pressrelease.pdf to $7.76 billion, fueled by 11% growth in hybrid cloud, 18% growth in data, and 3% growth in automation. On the infrastructure side, IBM posted Q2 revenue of $3.8 billion, which is down 7%. Within that business, distributed infrastructure grew 37%, but those gains were offset by a 10% decline in hybrid infrastructure and IBM Z’s 42% drop. In a July 14 letter https://newsroom.ibm.com/2026-07-14-Arvind-Krishnas-Letter-to-IBM-Investors to investors released prior to IBM’s July 22 earnings call, CEO Arvind Krishna warned of the earnings shortfall and laid out current challenges. He related the infrastructure performance shortfall to “wrapping on the launch of z17 in the second quarter” and stated: “Given this was the strongest start to a mainframe program in our history, we expected Infrastructure revenue to decline low-single digits for the year, beginning this quarter. What played out was worse than our expectations, driven by a shortfall in our Z performance and the associated software stack, primarily in Transaction Processing.” In the last few weeks of June, customers shifted capex spending and started purchasing more AI infrastructure components in the form of servers, storage, and memory “to secure supply-constrained infrastructure ahead of expected price increases,” Krishna stated. “This dynamic impacted client buying patterns. While we anticipated some supply chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization.” Yet despite challenges this last quarter, z17 remains at nearly 130% growth program-to-program, according to IBM. That’s “well ahead of z16, which was our strongest program on record, with clients representing 85% of installed MIPs maintaining or growing capacity,” the July 14 letter stated. Mainframe infrastructure momentum is expected to continue, and IBM is anticipating strong workload growth and AI-driven capacity https://www.networkworld.com/article/3845376/ibm-laying-foundation-for-mainframe-as-ultimate-ai-server.html expansion as clients modernize mission-critical systems and emphasize resiliency and security, Krishna said during the company’s Q2 2026 earnings call on July 22. “AI is driving incremental capacity growth and new workloads as clients look to run AI closer to their most sensitive data,” IBM senior vice president and CFO James Kavanaugh said in the call. “We are seeing strong early adoption of our AI innovations with nearly 50% of z17 customers https://www.networkworld.com/article/4193914/ibm-grows-mainframe-family-with-rack-frame-models-targeting-ai-hybrid-clouds.html investing in AI capabilities with Spyre AI accelerator, and clients deploying Watson X Code Assistant for Z are growing MIPS capacity three times faster than those who are not.” “In a world where infrastructure costs are rising and efficiency matters more than ever, IBM Z offers a compelling economic advantage,” Kavanaugh continued. “Depending on the size and complexity of workloads, clients can realize a 2 to 15x total cost of ownership benefit versus moving these workloads off the platform, reinforcing why the platform remains central to their operations and positioning us to capture additional value as AI workloads grow.” “We see no evidence of clients moving off mainframe,” Kavanaugh added. “Clients continue to invest in IBM Z to modernize mission-critical workloads with a focus on resiliency and security.” In responding to an analyst question, Kavanaugh said three key things drive mainframe demand and purchasing requirements: “One is capacity workload. It’s the most important determinant. 85% Of the installed MIPS capacity out there in the marketplace today running all those core mission critical workloads are either stable or growing. Clients are adding capacity and workload to mainframe, the viability. And by the way, that’s coming in new AI workloads, analytics workloads, Linux-based workloads, and those MIPS are growing program to date over 15 to 20% installed capacity,” Kavanaugh said. Number 2 is economic factors. “We don’t talk a lot about this, but I think it’s important for our investors to understand things like total cost of ownership. Depending on the size and complexity of the workload, we have anywhere from a 2 to a 15x TCO advantage running on the mainframe over smaller server systems . Again, we do not see any evidence of clients migrating off mainframe and lease propensity, which is a great indicator,” Kavanaugh said. The third driver is AI. “When you look at it, applications, data security, all on the platform, we do 450 billion inferences per day at 1 millisecond with 8 nines availability,” Kavanaugh said. “We’ve got clients that have already purchased over 50% of our Spire inferencing, and those clients that have purchased that are growing MIPS capacity, the way we monetize value , by over three times faster than others.”