International Business Machines Q2 Earnings Call Highlights

IBM missed Q2 expectations as large software deals slipped late in the quarter, leading the company to lower its full-year 2026 revenue growth outlook to 4%–5% from above 5%. Management said the issue was tied to a shift in client spending toward infrastructure purchases, while free cash flow guidance was left unchanged. Software and recurring revenue remain a bright spot, with IBM saying about 80% of software revenue is recurring and annual recurring revenue reaching $24.6 billion, up 8%. The company said the weakness was concentrated in CapEx-sensitive enterprise license deals, while subscription and consumption-based offerings were largely unaffected. Other business lines showed mixed performance: consulting signings grew 6% with generative AI representing about 50% of signings, while distributed infrastructure revenue surged 37% and mainframe-related demand remained solid. IBM also reaffirmed major long-term bets in AI, open-source security, and quantum computing. IBM said its second-quarter 2026 results fell short of expectations as some large software transactions slipped late in the period, prompting the company to lower its full-year revenue growth outlook while maintaining its free cash flow target. Chairman, President and Chief Executive Officer Arvind Krishna said IBM’s “conviction in the strength of our business and our ability to grow and drive shareholder value remains unchanged,” but acknowledged that the company “fell short” on execution in the quarter. Chief Financial Officer Jim Kavanaugh said IBM delivered 1% revenue growth in the quarter, along with 30 basis points of operating pre-tax margin expansion and 5% diluted operating earnings per share growth. Through the first half of the year, IBM generated $4.8 billion of free cash flow, which Kavanaugh said was flat year over year. IBM’s software revenue grew 5% in the quarter, while organic software revenue was flat. Kavanaugh said that in the final weeks of June, IBM saw “a shift in client spending priorities,” with many customers redirecting spending toward servers, storage and memory purchases to secure supply-constrained infrastructure ahead of expected price increases. As a result, Kavanaugh said “tens of large deals failed to close on the timelines we expected,” accounting for the majority of the shortfall. He said the impact was concentrated in enterprise license agreements tied to mainframe and associated software, which are generally treated by customers as capital investments. Transaction processing revenue declined 9% in the quarter, while data revenue grew 18% and automation grew 3%. Kavanaugh said transactional software revenue was down high single digits, while IBM’s subscription and consumption-based software was “largely unaffected” by the CapEx dynamics. IBM said roughly 80% of its annual software revenue is recurring, including subscription and consumption-based offerings such as Red Hat, HashiCorp and Confluent, along with subscription and support revenue. Annual recurring revenue was $24.6 billion, up 8% from a year earlier. Krishna said the software shortfall was limited to a “CapEx-sensitive area” of the portfolio, while the recurring portion of the business delivered healthy growth. In response to an analyst question, he said about one-third of the large deals that slipped had already closed in the first three weeks of the third quarter, calling that “a good indication” that demand was deferred rather than destroyed.