IBM is cutting its full-year sales forecast after mainframe demand fell 42 percent in the second quarter

IBM on Wednesday cut its full-year sales forecast after reporting a sharp decline in demand for its mainframe business, cutting its revenue growth target to four to five percent from a previous forecast of more than five percent. The company also cut software division leadership, as CFO Jim Kavanaugh said Bloomberg annual software sales will now grow six to eight percent. Kavanaugh said the decline was entirely due to weakness in IBM’s infrastructure division and its associated software, and that the rest of the company performed exceptionally well.

Mainframe sales fell 42 percent in the second quarter ended June 30, reversing strong growth since IBM launched its newest Z systems last year. The company had already flagged weakness when it released preliminary results on July 14, sending shares down 25 percent in a single day, the worst decline in IBM’s history. Shares rose nearly three percent in extended trading on Wednesday after full earnings, suggesting investors were largely overestimating the loss.

IBM has spent tens of billions of dollars to rebuild itself as a high-growth software company by acquiring Red Hat, HashiCorp and Confluent. Powered by AI with OpenAI, the enterprise is driving security. But the software’s early rise has made it a target for investors worried that AI tools will disrupt the business models of IBM’s new acquisition. Kavanaugh pushed back on that concern, arguing that most of IBM’s software is close to corporate infrastructure and data, making it harder to replace applications most vulnerable to AI disruption.

The company said it will accelerate cost-saving initiatives and continues to expect an additional $1 billion in free cash flow this year by cutting third-party technology costs, tightening supply chain management and reducing administrative costs. Kavanaugh said headcount should remain roughly flat for the year. Total revenue for the quarter rose about one percent to about $17 billion, with adjusted earnings of about $3 a share.

The question of AI disruption arose earlier this month when Bloomberg reported that Starbucks wanted to replace software from IBM and other vendors with in-house tools. Kavanaugh admitted that Starbucks spends about $2 million a year on a program it agreed with IBM.will be disrupted by artificial intelligence.” But he argued that most of IBM’s enterprise software is located closer to the infrastructure layer, where it is more difficult to replace, and that the company is investing to maintain its business. A mainframe platform relevant in the era of artificial intelligence through a partnership with Arm Managing modern workloads on Z systems.