IBM Q2 Miss: 5 Things Partners Need To Know About z17, Red Hat And IT Spending

IBM CEO Arvind Krishna promised some ‘new initiatives’ and accelerated initiatives to remedy its challenges, with more details expected on the July 22 earnings call.

IBM CEO Arvind Krishna’s public letter about the technology vendor underperforming during the quarter points to broader trends in the channel: customers have been reworking IT budgets around soaring component costs and fast-moving cybersecurity concerns.

The pressure hit the Armonk, N.Y.-based vendor’s infrastructure and associated software business during a refresh cycle to its z17 mainframe. But solution providers told CRN that the same forces hurting IBM are creating services opportunities around AI-ready infrastructure, financial operations (FinOps), Red Hat and modernization.

In an example of an IBM partner beating a quarterly underperformance and still expecting long-term gains in that side of the business, Chris Bogan, vice president of sales at Houston-based IBM solution provider Mark III Systems, told CRN in an interview that the majority of his company’s IBM business is hardware and he still expects “a banner year.”

“Those mainframes, the Power systems, all of that—the entire world runs on them for a reason,” Bogan said.

[Related: IBM Unveils New Chip Technology That Breaks The 1 Nanometer Barrier]

Why IBM Missed Expectations In The Quarter

CRN has reached out to IBM for comment.

Krishna’s warning eight days before IBM’s official quarterly earnings date sent its stock down 26 percent as of Wednesday afternoon Eastern time, a steeper decline than what IBM experienced since at least 1968, according to Yahoo! Finance.

IBM shares traded at about $213 a share. IBM appeared to trigger falls for other vendors as well, with Salesforce shares, for example falling about 5 percent before a rebound to a decline of about 2 percent as of Wednesday afternoon. ServiceNow, in another channel-focused example, fell 6 percent and rebounded to a decline of about 5 percent.

Krishna promised some “new initiatives” and accelerated initiatives to remedy its challenges, with more details expected on the July 22 earnings call for IBM’s second fiscal quarter, covering the three months ended June 30. Krishna acknowledged IBM’s teams not executing “perfectly,” adapting and moving quickly enough and multiple large deals failing to close on expected timelines.

IBM’s CEO said to expect gross profit of $9.91 billion for the quarter, down less than 1 percent year on year, with acquisition-related adjustments adding $287 million to bring the operating gross profit—which does not use generally accepted accounting principles—to $10.19 billion. That non-GAAP operating gross profit is about flat year on year.

IBM said to expect $17.2 billion in revenue for the quarter, whereas Wall Street expected closer to $17.9 billion.

Here’s more of what IBM’s quarterly performance signals for the channel.

Servers, Storage And Memory Are Winning Enterprise Budgets

Instead of spending on the Z refresh cycle and its associated software, clients moved spending to servers, storage and memory to get ahead of price increases and supply chain constraints, according to IBM.

IBM already expected a low-single-digit decline year on year in its infrastructure business during the quarter, but in the last few weeks of June, customers shifted spending to other areas resulting in “worse than our expectations” results for Z, transaction processing (TPP) software and other associated software, Krishna said in his letter. IBM’s teams also did not “execute perfectly” and adapt quickly enough, with multiple large deals failing to close on expected timelines.

Infrastructure was expected to fall in the low single digits year on year during the quarter. But it is now headed to a 7 percent decline. And the hit to transaction processing (TPP) software dragged down an otherwise strong IBM software portfolio. Wall Street was expecting double-digit growth in IBM software overall, but the vendor now signals just a 5 percent increase year on year.

The miss in Z spending comes as partners with data center capabilities and AI expertise experience strong growth as enterprises invest heavily in AI-ready infrastructure, according to research from CRN sister brand IPED. Channel Census research notes particularly strong momentum among enterprise-focused providers serving data center and infrastructure requirements.

The component price inflation is set to last even into 2030 by most measures. As an example of the dramatic price increases, in the second quarter conventional dynamic random-access memory (DRAM) contract price increased 74 percent to about $17.60 a gigabyte, according to a Bernstein report from July. The investment firm still expects the price increase to decelerate into the third quarter of 2026.

NAND contract price is expected to rise by about 60 percent quarter on quarter to about 25 cents per GB, with a narrower pace expected for the third quarter. Bernstein expects memory prices to gradually peak and begin to normalize from the second half of 2027 into 2028.

Solution providers have sought to help customers sidestep price increases and shipment delays while also facing unprecedented margin pressure as deals become more complicated and customers ask partners to absorb some of the extra cost.

Paul Ponzeka, chief technology officer of New York-based Abacus—No. 174 on CRN’s 2026 Solution Provider 500 and a member of CRN’s 2026 MSP 500—told CRN in an interview that acquiring components for new projects is still difficult.

“Purchasing power has been destroyed,” he said. “That's probably the big driver of what we're seeing ourselves as well as our customers—our per-compute blended cost has gone up about 7x in the last eight months. (And) people are getting less for their money on the hardware side but are redirecting a lot of this to like new AI initiatives.”

Duane Barnes, president of Raleigh, N.C.-based solution provider and Cox company RapidScale—No. 173 on CRN’s 2026 Solution Provider 500—said that supply chain challenges have customers looking to get more out of what they already have.

“That's been ongoing now for a year and a half,” Barnes said. “And it's only getting worse.”

RapidScale, which is part of Cox Communications and is interested in growing a Red Hat practice, has leaned on its financial operations practice, moving customers to the cloud, even upgrading to new vendor products that offer better cost performance where appropriate, Barnes said.

“Our clients are telling us it was incredibly helpful,” he said.

Barnes has seen customers delay decision making on hardware purchases and seek help from solution providers. RapidScale in late 2025 and early 2026 bought more compute infrastructure to get ahead of price increases, a bet the president feels has paid off because RapidScale can serve its clients without raising prices. Customers have also reduced the scope of some projects—going from a full data center refresh, for example, down to a couple of applications due to inflated prices.

Red Hat Remains An IBM Bright Spot

Although the overall IBM software portfolio is expected to disappoint, Red Hat appears likely to beat the 10 percent growth initially forecasted, with the division’s 11 percent growth marking an acceleration from the prior quarter’s growth.

Abacus’ Ponzeka said that the solution provider picked Red Hat as its hypervisor partner of choice despite having no partnership with the vendor a year ago.

The former VMware partner switched to Red Hat for its enterprise support, enabling vendor choice and avoiding lock-in, ability to scale and perform, and the technical prowess of Red Hat’s Kernel-based Virtual Machine (KVM). “They seemed eager to solve our tech problems versus just sell us a solution,” Ponzeka said.

Fueling Red Hat demand for Abacus is its reputation as a VMware alternative. Customers continue to assess the virtualization giant following pricing changes enacted after Broadcom acquired the company in November 2023. Customers who signed three-year contracts with VMware for pricing benefits have been exploring alternatives like Red Hat, Nutanix, Microsoft products and Proxmox, Ponzeka said.

In the days leading up to Krishna’s letter, IBM and Red Hat launched the commercial offer of their Lightwell project, which comes with opportunities for partners.

The Lightwell Network offer, now generally available, brings customers 6,500-plus remediated, digitally signed and certified application-layer dependencies across Java, Python and other major ecosystems. The Lightwell Clearinghouse Premier offer, in limited availability, acts as an intermediary for secured patch embargoes and vertical threat coordination.

Partners already able to provide deployment and strategy services for Lightwell include CRN 2026 Solution Provider 500 members HCLTech, Infosys, Kyndryl, NTT Data, Tata Consultancy Services (TCS), Accenture, Tech Mahindra, Atos and Cognizant, not to mention consulting giants Deloitte and EY.

Cybersecurity And AI Disruption Reshape Customer Priorities

Krishna also partly blamed IBM’s shortcomings in the quarter on clients “distracted with rapidly-evolving, industry-wide cybersecurity concerns in the quarter,” an apparent reference to Anthropic’s Mythos model that promises to upend existing vulnerability management practices.

Concerns over the security implications of Anthropic’s Claude Mythos 5 and Fable 5 reached the point that the U.S. applied export controls to the models. Anthropic redeployed and restored access to the models on July 1, according to the vendor.

The IBM CEO goes on to highlight IBM and its Red Hat division answering Mythos with Lightwell, a $5 billion commitment with new frontier AI capabilities and 20,000-plus engineers addressing open-source software vulnerabilities. Lightwell became generally available on July 8.

Anthropic and OpenAI’s innovations during the year have caused disruption in a number of software sectors including security and software-as-a-service, with some industry watchers questioning the long-term health of SaaS if AI agents become the interface users leverage for making sense of their company data.

Abacus’ Ponzeka did point to a bump from Mythos in terms of customer inquiries on how to protect their IT environments against new threats. The impact on IT environments by quantum has also raised customer concerns.

“We're definitely seeing a lot of noise around, what does this mean from a disruption standpoint?” he said. “It's changing the landscape really quickly versus what things used to be considered secure five or six years ago.”

IBM’s underperformance appeared to contribute to a stock rally for cybersecurity vendors. Crowdstrike’s stock was up about 11 percent as of Wednesday afternoon. Zscaler was up about 6 percent, Palo Alto Networks was up about 8 percent and Fortinet increased about 4 percent, for example.

More Details Needed For Mainframe Execution Fixes

IBM executives should have more details on July 22 around what went wrong in infrastructure spending despite the strong start to the z17 cycle and how the vendor will fix execution.

The new z17 has more than doubled program to program, ahead of its predecessor the z16. Clients representing 85 percent of installed million instructions per second, the capacity measurement for mainframes, maintained or even grew their MIPS.

IBM put z17’s program-to-program growth at nearly 130 percent. A Bank of America report from June put the growth at around 135 percent. Both are ahead of z16’s 120 to 125 percent and the 110 percent experienced generations ago. Before Krishna’s letter, Bank of America championed z17 as a beneficiary for AI workloads in transaction-level intelligence, actuarial modeling, insurance and other broader inferencing use cases.

Although AI optimists have championed the technology as a potential way to move users of legacy technology to more modern environments, IBM has long maintained that AI-enabled code modernization—including through its own Watsonx Code Assistant for Z tool—expand mainframe usage instead of enabling migrations.

Mainframe customers still want the devices’ throughput, resiliency, security and economic benefits, Bank of America said in a report. The investment firm also saw supply chain issues and higher component costs as a benefit for IBM Power, tape, storage and integrated software.

IBM has positioned z17 as able to process 50 percent more AI inference operations per day compared to the z16. And z17’s 250-plus AI use cases include mitigating loan risk, managing chatbot services, medical image analysis support and addressing retail crime.

Although IBM indicated that its execution issues are short term, RapidScale’s Barnes pointed out that the capabilities of AI tooling have plenty of customers looking for how to ditch traditional infrastructure, with mainframes dating back to the mid-20th century a possible use case.

Is IBM Facing A Short-Term Setback Or A Longer-Term Slowdown?

A couple of investment firm reports suggested the damage could impact more than just IBM’s second fiscal quarter. Bank of America, in a Tuesday report, said it expects IBM to lower full-year software revenue expectations to mid-single digit growth plus a mid-single digit decline in infrastructure. Bank of America now expects IBM to miss its expected $1 billion increase year on year in free cash flow.

A Bernstein survey of chief information officers showed that a third of participants planned to decrease MIPS capacity, up from 23 percent of respondents in the November survey, according to a report Wednesday by the investment firm. Its May survey of CIOs showed 54 percent planning to reduce spending with the company compared to 49 percent in November.

The firm’s survey work also gave a signal for disruption to IBM’s consulting business with a net 15 percent decrease in CIOs who expect to increase use of third-party IT consultants for the rest of 2026.

IBM expects consulting to grow 1 percent year on year ignoring foreign exchange. Krishna said the division saw “continued growth in” signings with strong generative AI contribution.

As for long-term innovation, IBM has been investing heavily in a position as the best quantum computing vendor. IBM plans to invest more than $10 billion in quantum research and development (R&D), capital expenditures (CapEx), manufacturing scaling, mergers and acquisitions (M&A), and ecosystem expansion over the next five years.

Krishna has put 2029 as the year IBM delivers the first large-scale fault-tolerant quantum computer, and mainstream adoption of quantum could take another couple of years after that, Krishna said during the October 2025 XChange Best of Breed Conference put on by CRN parent The Channel Company.