IBM Growth Slows Sharply on Infrastructure Pullback
The technology giant’s revenue rose just 1% in the quarter, missing its own full-year target.
International Business Machines (IBM) reported a sharp deceleration in revenue growth in the second quarter, as a pullback in mainframe demand and softer consulting activity offset strength in distributed infrastructure. Total revenue rose 1% year-over-year to $15.7 billion, a marked slowdown from 9% growth in the prior quarter and well below the company’s expectation of more than 5% constant-currency growth for the year.
The deceleration was broad-based, with only one major segment posting accelerating growth. Software revenue growth slowed to 5% from 11% in the first quarter and 14% in the fourth quarter of 2024, while consulting revenue was flat year-over-year, down from 4% growth in the prior quarter. The infrastructure segment, which had been a key driver of growth, declined 7% after surging 15% in the first quarter and 21% in the fourth quarter of 2024.
The infrastructure shortfall was driven by a sharp reversal in IBM Z revenue, which had grown 51% in the first quarter and 67% in the fourth quarter of 2024 but declined significantly in the latest period. Clients shifted capital expenditures toward servers, storage, and memory ahead of expected price increases. Distributed Infrastructure revenue surged 37%, its strongest performance on record, but was not enough to offset the mainframe weakness. IBM disclosed a $500 million backlog in Distributed Infrastructure exiting the quarter, a new metric not reported in prior periods.
Earnings reflected the revenue slowdown. GAAP diluted earnings fell 2% year-over-year to $2.27 a share, while operating (non-GAAP) earnings rose 5% to $2.93 a share. Both figures decelerated from the prior quarter. Gross profit margins compressed, with GAAP gross margin down 100 basis points to 57.7% and operating gross margin down 70 basis points to 59.4%. Free cash flow declined to $4.8 billion in the first half of 2025 from $7.2 billion in the same period a year earlier, missing the company’s prior full-year guidance of approximately $14 billion.
IBM launched Lightwell, a $5 billion AI-driven enterprise clearinghouse for open-source software vulnerabilities, with early adopters including major financial institutions. The company also announced a $10 billion investment in quantum computing over five years, including the Anderon quantum wafer foundry. However, IBM stopped disclosing its generative AI book of business growth in the quarter, after reporting $12.5 billion in the fourth quarter of 2024.
The company did not provide updated guidance for the full year, but the results suggest challenges in meeting its prior targets. Annual Recurring Revenue (ARR) growth was not disclosed, after rising 9% year-over-year to $23.2 billion in the third quarter of 2024. Consulting signings growth and automation and data revenue growth were also omitted from the latest disclosures.