IBM Q2 Earnings Call Flags Execution Reset and Lower Growth
International Business Machines Corporation IBM used its second-quarter 2026earnings callto defend the durability of demand after a late-quarter shortfall forced a lower full-year revenue outlook. Management framed the miss as a timing issue tied to client budget shifts toward infrastructure purchases, not a broader deterioration in enterprise spending.
The key debate on the call was whether delayed software deals return quickly enough to support a second-half rebound. Executives argued that early third-quarter closures, strong recurring software growth and infrastructure demand support that view.
IBM Resets the 2026 Revenue View
IBM reported second-quarter operating EPS of $2.93, in line with the Zacks Consensus Estimate. Revenues of $17.16 billion marginally missed the Zacks Consensus Estimate of $17.17 billion. The metric rose 1% year over year.
International Business Machines Corporation Price, Consensus and EPS Surprise
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Chief executive officer Arvind Krishna said the quarter fell short because execution broke down in the closing weeks of June as clients redirected spending toward servers, storage and memory. Krishna stressed that IBM’s portfolio positioning and long-term growth opportunity remain intact.
The company now expects 2026 constant-currency revenue growth of 4% to 5%, down from its prior 5%-plus view, while still targeting about $1 billion of year-over-year free cash flow growth.
IBM Software Mix Shaped the Quarter
Chief financial officer James Kavanaugh said software revenues grew 5%, but flat organic growth masked a sharp split inside the segment. Kavanaugh said roughly 80% of annual software revenues are recurring and delivered healthy growth, while the more transactional portion tied to enterprise license agreements was hit by delayed client purchases.
That showed up in segment detail. Red Hat revenues rose 11%, data increased 18% at constant currency and automation grew 3%, but transaction processing fell 9%. Annual recurring revenues reached $24.6 billion, up 8% from a year ago.
Krishna and Kavanaugh both emphasized that the shortfall was concentrated in a CapEx-sensitive slice of the portfolio rather than in the broader subscription and consumption base. That distinction was central to management’s claim that the problem was delay, not demand destruction.
IBM Leans on Infrastructure Strength
Infrastructure revenues fell 7%, reflecting a 42% decline in IBM Z revenues, but distributed infrastructure jumped 37%, its best growth quarter on record. Kavanaugh said IBM exited the quarter with about $500 million of backlog in distributed infrastructure, giving management confidence in the second half.
Krishna said the z17 cycle remains the strongest in reported history on a program-to-program basis, running at nearly 130% of the prior cycle despite the quarterly shortfall. He also said IBM saw no evidence of clients moving off the mainframe.
That strength supported a more constructive infrastructure outlook. IBM now expects the segment to grow low single digits in 2026, helped by power and storage demand and continued solid z17 performance.
IBM Presses New Growth Priorities
Krishna used the call to reinforce where IBM wants investors focused. He highlighted watsonx, Red Hat, HashiCorp, Confluent and storage as areas with momentum, while also pointing to changes in the go-to-market model to expand sales coverage beyond IBM’s traditional large-enterprise base.
Krishna also pointed to Lightwell, IBM’s new open-source security offering, as a fresh growth vector. Management said more than 7,500 remediated package versions were made available in the first two weeks and described the opportunity as a multibillion-dollar market.
Quantum remained another strategic talking point. Krishna reiterated IBM’s plan to invest more than $10 billion in quantum over the next five years and said it remains on track to deliver a large-scale fault-tolerant quantum computer by 2029.
IBM Q&A Focused on Deal Slippage
Analysts pressed hardest on whether the missed software deals were deferred or lost. In response to an Evercore ISI question, Krishna said about one-third of the slipped large CapEx deals had already closed in the first three weeks of the third quarter, which he presented as evidence that spending had shifted in timing rather than disappeared.
Kavanaugh told Jefferies that IBM’s guidance was built with a cautious low-end assumption that recent buying behavior persists, while the high end assumes more normal pipeline conversion. He also tied the second-half outcome closely to software closure rates and sustained strength in the mainframe cycle.
In another notable exchange, Krishna reaffirmed IBM’s long-term goal of double-digit software growth, arguing that the mix continues to shift toward higher-growth recurring revenues and newer assets such as HashiCorp, Confluent and watsonx.
IBM Leaves Investors Watching Execution
The call’s overarching message was confidence in portfolio direction but impatience with quarter-end execution. Krishna said management has engaged directly on the slipped transactions and is accelerating productivity actions across software development, sales and supply-chain operations.
Kavanaugh reinforced that posture by maintaining the free cash flow target and raising the full-year operating pretax margin expansion outlook to 100 basis points. That combination left IBM arguing it can protect profitability and restore revenue momentum.
Zacks Signals on IBM Stock
IBM currently carries a Zacks Rank #4 (Sell), alongside a Value Score of C, Growth Score of C, Momentum Score of D and VGM Score of D. Under the Zacks framework, Style Scores work best as a complement to strong ranks, while a weak Zacks Rank remains the more important signal for near-term stock performance.
That setup points to a cautious near-term profile despite mixed fundamental signals across value and growth. The current Zacks Rank can still change as analysts revise estimates after the quarter, so the latestearnings callmay matter most through its effect on those revisions in the weeks ahead.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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