IBM had already warned investors something was off. The company issued an earnings alert the week before its full report. But the actual results still managed to surprise to the downside.
Revenue grew just 1% from a year ago, landing at $17.16 billion. That was below the $17.58 billion that analysts at LSEG had projected. Adjusted profit per share of stock came in at $2.93, four cents below the $2.97 target.
Net income for the quarter was $2.17 billion, down from $2.19 billion a year earlier. On a GAAP basis, EPS was $2.30, compared with $2.36 last year. IBM also cut its full-year revenue growth forecast to between 4% and 5% at constant currency, down from an earlier expectation of over 5%.
Investors did not stick around to see if things would improve. The stock tumbled 25% on the day of the report, setting a new record for its worst single-day percentage loss. As of Wednesday's close, IBM shares were down 30% for 2026, while the S&P 500 index was up about 10%.
The biggest headache came from IBM's mainframe computer business. Revenue from infrastructure fell 7% to $3.84 billion, but the Z mainframe line was hit even harder.
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Why the sudden collapse? CEO Arvind Krishna explained in a shareholder note that sales of Z-series mainframes and related software fell short of expectations because clients rushed to purchase hardware before anticipated price hikes.
IBM's software division still managed to grow 5% to $7.76 billion, helped by other products. Consulting revenue was flat at $5.33 billion.
Krishna and his team are trying to shift the focus to artificial intelligence. The company said over 80,000 employees are now using an internal AI coding tool called Bob. The idea is to use AI to speed up software development, improve sales and marketing, and make the supply chain run more efficiently.
In its statement, IBM said it is "accelerating productivity by scaling software development leveraging AI, increasing the effectiveness of its sales and marketing organization, and optimizing its supply chain."
IBM also entered into a preliminary agreement to construct a quantum chip manufacturing facility in the United States.
IBM reaffirmed its forecast of generating an additional $1 billion in free cash flow this year. Additionally, the company stated its goal to increase its full-year pre-tax margin by roughly one percentage point, driven by productivity improvements.
The steep drop underscores the challenges facing IBM as it tries to pivot toward newer technologies. While the company has invested heavily in artificial intelligence and quantum computing, its legacy mainframe division remains a critical revenue source. The 42% plunge in Z-series sales was attributed to clients rushing to purchase hardware before anticipated price hikes.
IBM's AI initiatives, including the internal coding tool Bob used by 80,000 employees, have yet to offset the weakness in hardware. The reduced full-year revenue growth forecast, now 4% to 5%, further weighed on investor sentiment. With the stock already down 30% for the year, the market is demanding clearer proof that IBM's transformation is gaining traction.
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