Shares of International Business Machines Corporation (NYSE:IBM) experienced a sharp decline on Tuesday, dropping 25.2% after the company released preliminary second-quarter results that fell short of Wall Street expectations. The sell-off erased approximately $70 billion in market capitalization, as investors reacted to a significant revenue shortfall and a notable downturn in key business segments.
According to recent SEC filings, IBM reported a roughly 24% decline in revenue from its mainframe and infrastructure support units. This drop was particularly concerning given that overall second-quarter revenue increased only 1% year-over-year to $17.2 billion, missing the consensus estimate of $17.86 billion by $660 million. Adjusted earnings per share came in at $2.93, below the $3.02 target.
The infrastructure segment was a major drag, with revenue falling 7% compared to the prior year. Within this segment, IBM Z mainframe revenue and Infrastructure Support combined saw an estimated 24% decrease, based on a reconstruction of the company's segment data. This weakness was partially offset by a 37% surge in distributed infrastructure revenue, but that was insufficient to prevent an overall decline in the hardware unit.
The implications of the mainframe slowdown extended beyond hardware. CEO Arvind Krishna noted that the shortfall also weighed on software tied to IBM Z, particularly Transaction Processing. This software unit generated $2.21 billion in the second quarter of 2025, representing nearly 30% of IBM's total software sales. When mainframe orders are delayed, it simultaneously impacts two reported revenue lines.
IBM's software segment grew 5% overall, but Red Hat accounted for more than half of that growth, expanding 11% to about $1.99 billion. Excluding Red Hat and other acquisitions, the rest of IBM's software business grew only 3%. While the company highlighted strong performances from HashiCorp and Confluent, it did not provide specific revenue figures for those units, leaving the performance of legacy software products unclear.
Krishna attributed some of the weakness to clients reallocating capital expenditure toward servers, storage, and memory in late June, as they rushed to secure hardware before price increases took effect. He admitted that IBM "did not anticipate the magnitude of the capex reprioritization" and "did not adapt and move quickly enough." The company still held about $500 million in distributed-infrastructure backlog that had not yet been recognized as revenue.
Chris Beauchamp, chief market analyst at IG Group Holdings (LON:IGG), described the situation as "an ugly moment for IBM and software stocks." He noted that the key question is how long the shift toward infrastructure and cybersecurity spending will persist. If it lasts only a few months, the impact may be manageable, but prolonged weakness could reignite concerns about software demand.
IBM warned of the preliminary results eight days ahead of its scheduled full earnings release. The company had previously guided for full-year revenue growth of more than 5% at constant currency and about $1 billion higher free cash flow compared to the prior year. Executives are expected to provide an updated full-year outlook on July 22.
The estimated 24% decline in mainframe and support revenue is derived from a reconstruction of IBM's segment numbers, as the company has not reported separate dollar figures for these subsegments. IBM rounds its published growth rates, and final results could still shift. Some contracts that were pushed back might close in the third quarter, but there is a risk that weakness persists if customers continue to prioritize hardware and security spending over software.
IBM's stock closed at $217.07 on Tuesday and remained at that level in premarket trading Wednesday. The market's reaction, which wiped out value more than 100 times the revenue miss, suggests that investors see more than just a timing issue. On July 22, IBM will need to clarify how much of the mainframe and software shortfall it can recover and whether its full-year growth and cash targets remain achievable.
