What happened
IBM reported Q2 2026 earnings below expectations, with revenue of $17.2 billion and net income of $2.2 billion. The company's flagship IBM Z mainframe sales plunged 42%, contributing to a significant decline in its Infrastructure segment. This performance led IBM to lower its full-year 2026 revenue growth forecast. CEO Arvind Krishna attributed the mainframe sales drop to customers reallocating budgets towards other hardware, facing 15-30% cost increases for data centre gear and PCs due to the AI build-out. IBM's stock dropped 25% following a preliminary earnings warning.
Why it matters
Procurement teams face significant budget reallocations as AI infrastructure demand drives up component costs. The 42% drop in IBM's mainframe sales, directly linked to customers diverting spend due to 15-30% price increases for other data centre hardware, shifts capital from long-term core systems to immediate AI-driven needs. This shift in hardware procurement, especially given IBM's model of earning $3 in software revenue for every $1 of mainframe hardware sold, directly impacts IT budget allocation and future software spend. This follows a broader trend of megacaps facing scrutiny over AI spending concerns, indicating a re-evaluation of IT budgets across the industry. Teams should assume AI-related hardware cost inflation will continue to impact non-AI IT budgets, necessitating flexible capital expenditure planning.
