IBM's Mainframe Bubble Bursts And Growth Stalls

In its last few quarterly results announcements, IBM has trumpeted unexpectedly strong growth in its mainframe business, and that's helped the technology titan to just-about deliver promised mid-single-digit revenue growth in constant currency. But in its Q3 results announcement on Wednesday, Big Blue revealed mainframe revenue fell 19 percent – and that overall growth came in at just one percent or two percent in constant currency.

IBM's mainframe business is cyclical: buyers spend up big when new machines debut. The current generation of z16 generation mainframes launched in 2022, meaning this cycle is winding down. CEO Arvind Krishna was therefore able to brush off the revenue slump, tell investors z16 did better than its predecessors, and that better times lie ahead when z17 debuts.

But whole-of-business revenue growth of just one percent – to $14.97 billion for the quarter, around $100 million short of expectations with a net loss of $330 million – needed context in the form of reminder that in September IBM transferred defined benefit pension plan obligations, resulting in a charge of approximately $2.7 billion.

Balance sheet formalities aside, Krishna CEO mentioned "economic uncertainty, which stems from several temporary factors including geopolitical issues, upcoming elections, and the changing landscape of interest rates and inflation levels" as reasons customers weren't spending in Q3.

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Software was one bright spot, delivering 9.7 percent growth to deliver $6.5 billion of revenue and improved margins. Red Hat's portfolio grew even faster, at 14 percent year-over-year.

Krishna noted that this quarter marks five years since IBM announced its intention to buy Red Hat, and since then the open source shop "has grown to approximately $6.5 billion, doubling in size and delivering a mid-teens CAGR. OpenShift scaled from about $100 million in ARR to $1.3 billion, expanding more than 10x."

He hinted at a similar outcome for IBM's generative AI portfolio – which he said has $3 billion of revenue on its books – and for recent acquisitions Apptio and Hashi.

Krishna also talked up Big Blue's Granite models – touting them as able to be "trained in weeks instead of months and … easier to fine tune for specific tasks." IBM is betting orgs will see smaller models as delivering better results, faster, at lower cost.

IBM's consulting business delivered flat revenue, but 11 percent profit improvement, which Krishna attributed in part to "yield from our productivity actions." IBM-speak for firing people is "resource actions."

Krishna wrapped his remarks by pointing out that revenue has grown by three percent in the first nine months of its financial year. "We have made solid progress in transitioning our portfolio to a higher growth, higher margin business that is well positioned as we head into next year," he said. Q4 growth was predicted to come in at similar levels, but the CEO predicted profit will rise by around a point.

Some of that will come from those mysterious "productivity initiatives" which IBM now feels will save it $3.5 billion this year – up from its previous forecast of $3 billion.

Investors weren't impressed. IBM scrip took a dive from $233 to $216 after its results were announced, before rebounding to around $225. ®