International Business Machines Corporation

IBM reported second-quarter 2026 revenue growth of 1%, operating pretax margin expansion of 30 basis points, and diluted operating EPS growth of 5%. First-half free cash flow was $4.8 billion, flat year over year. Software revenue grew 5% with flat organic revenue growth; Red Hat growth accelerated to 11%; Infrastructure revenue declined 7%; Consulting signings grew 6% and revenue grew 1%; ARR reached $24.6 billion, up 8% year over year. Management now expects full-year 2026 revenue growth of 4% to 5%, software growth of 6% to 8%, Infrastructure to grow low single digits, Consulting to grow low to mid-single digits, operating pretax margin expansion of 100 basis points, and free cash flow growth of about $1 billion. For Q3, IBM expects constant-currency revenue growth consistent with the full year and a 1.5-point currency headwind.

Arvind Krishna framed the quarter as an execution miss rather than a broken demand story, saying IBM’s conviction in the business and its long-term strategy remains unchanged. He emphasized IBM’s position in hybrid cloud, enterprise AI, mainframe, and quantum, arguing that value in AI will increasingly shift to orchestration, data, governance, and trust—areas where IBM says it is differentiated. He also stressed that the software shortfall was limited to a CapEx-sensitive slice of the portfolio and that the company is taking productivity and go-to-market actions to better align with client priorities.

Jim Kavanaugh said the quarter’s shortfall came from a late-June shift in client spending toward servers, storage, and memory, which delayed tens of large deals, mostly in transactional software tied to mainframe ELAs. He pointed to the strength of the underlying model: 80% of software revenue is recurring, ARR was $24.6 billion and up 8%, and IBM generated $4.8 billion of free cash flow in the first half despite higher inventory, cash taxes, and net interest expense. He also said IBM exited the quarter with $8.2 billion of cash, returned $3.2 billion to shareholders in dividends through the first half, and had $62 billion of debt, including $13 billion in Financing.

Analysts focused on whether the June weakness reflected deferred or destroyed demand, what the company would use as proof that conditions were normalizing, and how IBM could maintain free cash flow guidance despite the miss. Management said about 1/3 of the slipped deals closed in early Q3, which they took as an indication of deferral, and said the key KPIs to watch are mainframe program-to-program performance and software conversion rates. They also addressed questions on mainframe and TP declines, saying mainframe remains at nearly 130% of prior-cycle program-to-program performance and that TP is being treated as a 2027 growth vector rather than an immediate rebound item.