What hit IBM's mainframe business wasn't customers abandoning core processing. Surging demand for AI data centers tightened the supply of memory and storage, and companies fearing price hikes redirected their end-of-June capital spending toward those items instead. Major deals for the IBM z17 and its associated software were delayed in closing, and when IBM released preliminary results on July 14, its stock fell 25.2% in a single day. A mere shift in the timing of quarterly purchases ended up casting doubt on the very growth mechanism IBM had promised investors.
Market Responds to $660 Million Revenue Miss with 25.2% Stock Drop
The scale of the problem was already clear when IBM released preliminary figures eight days ahead of its regular earnings announcement. Second-quarter revenue is expected to come in at $17.2 billion, up 1% year-over-year, with adjusted earnings per share of $2.93, up 5%. According to the Associated Press, market estimates compiled by FactSet had called for revenue of $17.86 billion and adjusted EPS of $3.01. That leaves a revenue shortfall of $660 million, or 3.7%, and an EPS miss of $0.08, or 2.7%.
The stock fell 25.2% that same day, marking its worst single-day performance on record according to FactSet data going back to at least 1972. Adjusted EPS actually increased, and the adjusted pre-tax profit margin rose 0.3 percentage points year-over-year. This wasn't a case of collapsing profits. Yet the market still wiped out a quarter of the company's value, because two assumptions underpinning growth expectations for 2026 were shaken simultaneously.
As of April, IBM had maintained its full-year guidance for revenue growth of 5% or more (excluding currency effects) and software growth of 10% or more. The company had also expected second-quarter constant-currency revenue growth to track the full-year pace. But in the preliminary figures, software growth came in at just 5%, while Infrastructure revenue fell 7%. Because the reporting bases differ, these growth rates can't simply be subtracted from one another, but a clear gap has opened up in the full-year scenario, which had counted on software acceleration and monetization following the z17 rollout.
Servers and Memory Steal End-of-June Capital Spending
CEO Arvind Krishna's explanation was specific. In the final weeks of June, customers shifted their quarterly capital spending toward servers, storage, and memory to secure supply-constrained equipment before prices rose further. IBM had anticipated some impact from supply chain conditions, but failed to gauge the scale of this budget reallocation. Several large deals didn't close as scheduled, and that accounted for the bulk of the revenue miss, he said.
The delays hit IBM Z and its associated software lineup hardest, particularly Transaction Processing. The preliminary announcement did not break out individual growth rates for Z and Transaction Processing, nor did it specify the dollar amount of deals pushed into the third quarter. Krishna also mentioned that customers were distracted by rapidly evolving cybersecurity issues across the industry, but offered no specifics on particular incidents or their financial impact.
It would be premature to conclude from this that demand for z17 has evaporated. According to IBM, the generation-over-generation comparison metric for z17 still stands at roughly 130%, and 85% of customers with installed MIPS are maintaining or increasing their processing capacity. IBM has said it sells Z not by unit count but according to processing capacity measured in MIPS (millions of instructions per second). These metrics indicate that adopting companies are not scaling back their core workloads. At the same time, it remains an unavoidable fact that deals expected to close by the end of June did not close. Whether demand exists and whether sales execution can convert that demand into quarterly revenue are two separate matters.
Supply Tightness Spreads from HBM to Commodity DRAM
IBM's explanation aligns with warnings previously issued by memory makers and server vendors. In its late-June earnings call, Micron said demand for DRAM and NAND was significantly outpacing supply, with tightness expected to persist beyond 2027. In Micron's fiscal 2026 third quarter, average selling prices for DRAM rose in the low-60% range quarter-over-quarter, while NAND prices rose in the mid-80% range. HBM, which AI demands, consumes more wafer capacity during manufacturing, and as each generation advances, it further squeezes the supply available for commodity DRAM.
The price surge isn't confined to the periphery of AI accelerators. Micron projects that calendar-year 2026 bit shipments of DRAM and NAND for data centers will more than double compared to two years ago, with shipments of conventional servers also growing in the mid-teens percentage range. This is because CPU servers running AI agents and the storage systems retaining contextual data are both expanding outside the GPU rack itself.
In its February earnings call, Dell Technologies disclosed that DRAM spot prices had risen roughly 5.5-fold over six months, while NAND prices had risen roughly 4-fold. The company revised its server pricing structure in a short span of time and shortened quote validity periods to their briefest ever. Hewlett Packard Enterprise likewise noted in March that orders for conventional servers had jumped by double digits, as customers anticipated ongoing supply constraints and cost increases, and that average unit prices for servers and storage would rise further within the year.
This chain of events could explain IBM customers' behavior: AI investment tightened the overall memory supply, driving up prices for servers and storage, and companies rushed to secure inventory. However, IBM's letter to shareholders did not disclose the intended use of the equipment purchased. What can be confirmed is only that AI demand intensified upstream supply constraints—it cannot be concluded definitively that z17 budgets were directly redirected to AI servers.
The 3-4x Z Stack Effect Working in Reverse
What amplified this quarter's shortfall is the fact that IBM Z revenue doesn't stand alone as hardware. At the end of 2025, IBM told investors that Z adoption generates a 3-4x stack effect across the company. Transaction Processing includes CICS, storage and analytics/integration software running on IBM's proprietary OS, and AI assistants and security products built for Z. Once a z17 is installed, revenue from the software and services that leverage its processing capacity is expected to follow.
This purchase sequencing was clearly visible when the z17 became generally available in the second quarter of 2025. IBM Z revenue grew 67% and Infrastructure grew 11%, while Transaction Processing fell 2% and Distributed Infrastructure fell 17%, as customers bought new Z hardware first. Subsequently, in the fourth quarter of 2025, Z grew 67% and Transaction Processing grew 8%; in the first quarter of 2026, the figures held at 48% and 2% growth, respectively. The plan—place hardware first, then layer on software revenue—was actually working as designed.
In the second quarter, the same mechanism worked in reverse. As customers prioritized Power servers and storage, IBM's Distributed Infrastructure grew a record 37%, with the backlog at quarter-end reaching approximately $500 million. However, the delay in Z deals reduced hardware revenue and also halted Transaction Processing monetization. Because this affected even software—which IBM calls a major source of profit and free cash flow—the growth in distributed hardware wasn't enough to fill the gap.
July 22 Will Reveal Whether This Is a "Deal Delay" or "Demand Destruction"
The first thing to verify in the official earnings report is what happened to the large deals that didn't close. If they remain in the backlog and a specific closing timeframe for the third quarter is disclosed, this quarter's decline can be judged as timing shift caused by the reordering of capital spending priorities. But if instances of deal shrinkage or cancellation increase, the gap between z17's strong generation-over-generation metrics and quarterly revenue will persist longer.
Full-year guidance will also likely need revision. In its July 14 letter, IBM did not issue new full-year guidance, saying it would revisit its targets—revenue growth of 5% or more, software growth of 10% or more, and an approximately $1 billion year-over-year increase in free cash flow—on July 22. The individual growth rates for Z and Transaction Processing, the scale of deferred deals, and the unexplained cybersecurity factor will determine how realistic maintaining these targets actually is.
It's also difficult to dismiss the memory shortage as a one-off external factor. Micron expects the supply-demand tightness to persist beyond 2027, and if companies keep repeating pre-price-hike procurement rushes, IBM's deal timelines will be disrupted again. What IBM needs to demonstrate on July 22 is the dollar value and expected closing timeline of the deferred Z deals, along with a sales plan capable of holding to that timeline even amid ongoing supply constraints.