Client AI CapEx eating into IBM’s software business

IBM ’s software business is taking a hit as its clients focus their spending on AI infrastructure development over software. The company reported second-quarter revenue of $17.16 billion, up 1% year over year, according to the company’s Q2 earnings report published July 22. However, its software revenue missed estimates, clocking at $7.8 billion, up 5% YoY. [caption id="attachment_57386191" align="alignright" width="300"] (Courtesy/Bloomberg)[/caption] Bank of America Securities estimated software revenue of nearly $15 billion during the quarter , according to its July 15 note. IBM cut its full-year constant-currency revenue growth forecast to 4%, down from its guidance of more than 5%, Chief Executive Arvind Krishna said during the July 22 earnings call. AI CapEx a problem The drop in software revenue, according to the company, followed the way large enterprise clients, including major financial institutions, changed their capital budgets. “In the final weeks of June, we saw a shift in client spending priorities,” Chief Financial Officer Jim Kavanaugh said during the call. “Many clients redirected spending towards servers, storage and memory purchases to secure supply-constrained infrastructure ahead of expected price increases.” As a result, a number of large deals failed to close when IBM anticipated, Kavanaugh said. Many large clients, particularly banks, purchase IBM's mainframe software stack, including transaction processing software — bundled into enterprise license agreements, Kavanaugh said. When those clients redirected CapEx toward AI hardware, enterprise license renewals slipped. “The volume or the number of those deals [that were missed] was in the low tens,” Krishna said. “We have been very pleased to see that about a third of those have already closed.” IBM Z hardware growing, software lagging IBM Z, the company’s core banking platform , underpins a significant share of the world's financial activity, Krishna said, adding that “IBM Z runs over 70% of the world's transaction volume in terms of value.” IBM Z mainframe revenue dropped by 42% YoY, while z17, the company’s latest mainframe computer, which launched in April 2025, has reported 130% program-to-program revenue growth vs. z16 [launched in 2022] at equivalent lifecycle point, according to the company’s earnings report. The demand for new mainframe computing is growing, but clients are prioritizing AI CapEx over software bundles that come with mainframes, Krishna said. The drop in software revenue is “deferral and not destruction,” he said, adding that the damage was a timing issue, not a demand collapse. Although IBM Z revenue dropped, Bank of America Securities said in a July 22 note that the company “sees no evidence of customers migrating workloads off the platform.” Bank of America Securities also pointed to an emerging AI-driven capacity opportunity for IBM. Nearly 50% of z17 customers invest in IBM’s Spyre Accelerator, another processor that brings gen AI capabilities to the mainframe, including running AI assistants and agents that leverage enterprise data contained within the system, according to the Bank of America report. New age mainframes compatible with AI can be a tailwind for the company’s mainframe software business in the coming quarters, the report stated. Shares of IBM [Nasdaq: IBM] were trading at $205 at market close today, down 0.18% from market open. IBM has a market capitalization of $193 billion. Register here for the FinAi Lending Summit, set for Oct. 7-8 in Las Vegas.

Client AI CapEx eating into IBM’s software business

IBM Z handles 70% of all transactions in terms of value globally

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Client AI CapEx eating into IBM’s software business

IBM Z handles 70% of all transactions in terms of value globally

Finance, tech relationships help Valley Bank identify best AI use cases

ServiceNow’s AI contract revenue soars more than 40% in Q2

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