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    IBM
    Earnings call· Jun 2026(Q2 FY26)

    INTERNATIONAL BUSINESS MACHINES Q2 FY26 earnings call IBM

    Jul 22, 2026 Source

    Executive summary

    International Business Machines Corporation Q2 FY26 — Software Shortfall, Mainframe Strength, and Maintained FCF Guidance

    IBM reported Q2 FY26 results below expectations, primarily due to a shift in client spending priorities impacting large CapEx-sensitive software deals. Despite this, the company maintained its full-year free cash flow guidance, driven by strong productivity actions and growth in recurring software and distributed infrastructure. Management expressed confidence in the deferred demand and the long-term growth trajectory of its hybrid cloud and AI portfolio.

    Highlights

    5

    • Distributed Infrastructure revenue grew 37%, exiting the quarter with $500 million backlog, its highest on record.

    • Software Annual Recurring Revenue (ARR) reached $24.6 billion, up 8% year-over-year, with 80% of software revenue being recurring.

    • Mainframe z17 refresh cycle is at nearly 130% program-to-program, well ahead of prior cycles.

    • Free cash flow guidance of growing by $1 billion for FY26 was maintained despite revenue shortfall.

    • Operating pretax margin expanded by 30 basis points in Q2 FY26 and is expected to expand by 100 basis points for FY26.

    Concerns

    5

    • Overall revenue grew 1% in Q2 FY26, falling short of expectations due to a shift in client spending priorities.

    • Software revenue grew 5% (constant currency) with flat organic growth, impacted by large CapEx deals slipping.

    • Transactional processing software revenue declined 9% in Q2 FY26.

    • Infrastructure revenue declined 7% in Q2 FY26, with mainframe performance below expectations.

    • Currency is expected to be a 1.5 point headwind to revenue growth in Q3 FY26.

    Guidance & targets

    13
    CategoryTargetConfidence
    Full-year 2026 revenue growth
    4% to 5%
    high materiality
    Medium
    Full-year 2026 free cash flow growth
    about $1 billion
    high materiality
    High
    Full-year 2026 software growth
    6% to 8%
    medium materiality
    Medium
    Full-year 2026 Infrastructure growth
    low single digits
    medium materiality
    High
    Full-year 2026 Consulting revenue growth
    low to mid-single digits
    medium materiality
    High
    Full-year 2026 operating pretax margin expansion
    100 basis points
    medium materiality
    High
    Full-year 2026 operating tax rate
    mid-teens
    low materiality
    High
    Q3 FY26 constant currency revenue growth
    consistent with the full year
    medium materiality
    Medium
    Q3 FY26 currency headwind to revenue growth
    1.5 point
    medium materiality
    High
    Q3 FY26 operating pretax margin performance
    similar performance to the second quarter
    medium materiality
    Medium
    Q3 FY26 operating tax rate
    mid-teens
    low materiality
    High
    Quantum investment
    more than $10 billion
    high materiality
    High
    Fault-tolerant quantum computer installation
    2029
    high materiality
    High

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    Software
    Shortfall due to CapEx-sensitive large deals slipping. Strong underlying demand in subscription and consumption-based software.
    Organic revenue growth: flatRecurring revenue: 80% of totalTransactional revenue: 20% of totalTransactional revenue growth: down high single digitsSubscription and consumption-based revenue: grew nicelyTransaction processing revenue: declining 9%Data revenue: grew 18%Automation revenue: grew 3%
    		—5% (constant currency)—expanded 110 basis points
    Infrastructure
    Mainframe performance below expectations but still well ahead of prior cycles. Strong growth in Distributed Infrastructure driven by AI adoption.
    z17 program-to-program: nearly 130%Distributed Infrastructure revenue growth: 37%Distributed Infrastructure backlog: $500 million
    		—declined 7%—declined 150 basis points
    Consulting
    Driven by demand for application modernization, data transformation, and cybersecurity services. Strong momentum in Gen AI.
    Signings growth: 6%Generative AI share of signings: about 50%Generative AI share of backlog: over 30%Strategy and technology revenue growth: up 1%Intelligent Operations revenue growth: up 1%
    		—grew 1%—expanded 160 basis points

    Operational metrics

    29
    Adjusted EBITDA
    $700 millionincrease year-over-year
    H1 FY26

    Primary driver of free cash flow growth, offset by inventory, higher cash taxes and net interest expense.

    Free cash flow margin growth (4 years)
    700 basis pointsgrowth
    last 4 years

    Reflects strong productivity mindset and operating leverage.

    Inventory
    up $600 millionyear-over-year
    H1 FY26

    Proactively built to strengthen supply chain and support anticipated customer demand in H2, will become a tailwind.

    Operating gross profit margins
    down 70 basis points
    Q2 FY26

    Largely driven by revenue shortfall and mix.

    Adjusted EBITDA expansion
    expanded 20 basis points
    Q2 FY26

    Productivity ahead of plan, absorbing Confluent dilution and investing for growth.

    Operating pretax margin expansion
    expanded 30 basis points
    Q2 FY26

    Productivity ahead of plan, absorbing Confluent dilution and investing for growth.

    Diluted operating EPS growth
    5%growth
    Q2 FY26

    Reported for the quarter.

    Software recurring revenue percentage
    80%
    annual

    Made up of subscription and consumption-based revenue, including Red Hat, HashiCorp, Confluent, and support revenue.

    Software transactional revenue percentage
    20%
    annual

    Predominantly related to mainframe incumbency and enterprise license agreements.

    Red Hat revenue growth acceleration
    1 pointaccelerated sequentially
    Q2 FY26

    Accelerated to 11%, driven by improvement in subscription business and stable consumption-based services.

    OpenShift ARR
    $2.2 billionup 8% since last year
    Q2 FY26

    Reflects strong demand for containerization and virtualization products.

    OpenShift contracts signed
    $680 million
    since early 2024

    Reflecting demand for containerization and virtualization products.

    Mainframe program-to-program performance
    nearly 130%well ahead of prior cycles
    Q2 FY26

    z17 is having the best refresh cycle in reported history, $1 billion more of mainframe revenue compared to z16 at similar point.

    Installed MIPS
    over 140 million
    current

    Running mission-critical transactions across every industry.

    Installed MIPS capacity growing/stable
    85%
    current

    Clients representing this percentage are either maintaining or growing capacity.

    z17 customers investing in AI capabilities
    nearly 50%
    current

    Investing in AI capabilities with Spyre Accelerator.

    MIPS capacity growth (AI adopters)
    3x fasterthan non-adopters
    current

    Clients deploying watsonx Code Assistant for Z are growing MIPS capacity 3x faster.

    Total cost of ownership benefit (mainframe)
    2 to 15xversus moving workloads off platform
    current

    Depending on size and complexity of workloads.

    World's transaction volume (by value)
    over 70%
    current

    IBM Z runs over 70% of the world's transaction volume in terms of value.

    Inferences per day (mainframe)
    450 billion
    per day

    At 1 millisecond with 8 9s availability.

    Cash balance
    $8.2 billion
    Q2 FY26 end

    Strong liquidity position.

    Debt balance
    $62 billion
    Q2 FY26 end

    Includes $13 billion for Financing business.

    Financing business receivables portfolio
    80%
    Q2 FY26 end

    80% investment grade.

    Shareholder returns (dividends)
    $3.2 billion
    H1 FY26

    Returned in the form of dividends.

    Software revenue shortfall
    $400 million to $500 million
    Q2 FY26

    In aggregate, the miss in software overall.

    Slipped deals closed
    about 1/3
    first 3 weeks of Q3 FY26

    Of the low tens of large CapEx deals that slipped in Q2, indicating deferral not destruction. Typically, only about 75% of such deals close.

    Lightwell open source packages available
    more than 7,500
    first 2 weeks of availability

    Packages remediated or validated for open source security.

    Lightwell subscription price
    $1 million
    per year

    Clients can subscribe to access open source packages.

    Software revenue as % of total revenue
    nearly 45%
    Q2 FY26

    Repositioned to higher growth end markets across hybrid cloud, data, automation and mission-critical transaction processing software.

    Industry KPIs

    4
    MetricValueDetails
    Rpo current rpoover 30%%
    Software recurring arr$24.6 billionUSD
    Bookings tcv book to bill6%%
    Genai ai book of businessabout 50%%

    Orderbook & backlog

    1
    Distributed Infrastructure backlog$500 millionQ2 FY26 end

    highest on record

    Supports continued momentum.

    Product announcements

    3
    ProductTypeDetails
    Anderonlaunch
    Smaller LinuxONE systemlaunch
    Lightwelllaunch

    Deals & partnerships

    2
    U.S. Department of CommerceLetter of intent to build Anderon, the world's first pure-play quantum foundry.$1 billion (chips incentives) + $1 billion (IBM cash)

    Partnership to build a quantum foundry, part of IBM's broader quantum investment.

    Bank of America, BNY, Citi, Goldman Sachs, JPMorgan Chase, Mastercard, Morgan Stanley, Royal Bank of Canada, State Street, Visa, Wells FargoEarly adopters of Lightwell for open source security.

    Organizations subscribing to Lightwell for $1 million per year to access remediated open source packages.

    Capital programs

    2
    Quantum foundry (Anderon)announced$2 billion
    Funding: $1 billion in chips incentives (Department of Commerce) + $1 billion cash contribution (IBM)

    Benefit: World's first pure-play quantum foundry

    Letter of intent to build Anderon, part of a larger $10 billion Quantum investment over 5 years.

    Quantum investmentunderwaymore than $10 billion

    Benefit: Spanning R&D, CapEx, manufacturing scale-up, M&A and ecosystem expansion, leading to a fault-tolerant quantum computer by 2029.

    Supports roadmap to installing the world's first large-scale fault-tolerant quantum computer in 2029.

    Risks & headwinds

    5
    Shift in client spending prioritiesQ2 FY26

    Tens of large deals failed to close on time, accounting for majority of Q2 software shortfall.

    Mitigation: Engaging with clients on slipped transactions, adapting to deliver greater business and economic value, accelerating productivity actions.

    Currency headwindQ3 FY26

    1.5 point headwind to revenue growth

    Mitigation: Not explicitly stated, but implied by constant currency reporting.

    Supply-constrained infrastructure environmentQ2 FY26

    Clients redirected spending towards servers, storage, and memory purchases ahead of expected price increases.

    Mitigation: Proactively took actions through H1 to strengthen supply chain and support anticipated customer demand in H2, building inventory.

    RHEL performance impacted by constrained hardware availabilityQ2 FY26

    Similar to last quarter

    Mitigation: Not explicitly stated, but likely part of broader supply chain efforts.

    Revenue dynamics creating margin pressureQ2 FY26

    Operating gross profit margins down 70 basis points

    Mitigation: Accelerating productivity initiatives to enhance margin, expecting 100 basis points operating pretax margin expansion for FY26.

    What to watch in Q3 FY26

    5

    Slipped software deals closure rate

    next quarter / next 6 months
    Currentabout 1/3 of low tens of deals closed in first 3 weeks of Q3
    Target2/3 to 3/4 of slipped deals closed over next 6 months

    Why it matters

    Indicates whether Q2's software shortfall was deferral or destruction of demand, impacting full-year software growth.

    The fact that 1/3 have already closed in the first 3 weeks gives us an indication, not yet full evidence, but a good indication that this was deferral and not destruction.

    Q&A highlights

    6

    Is the Q2 shortfall due to deferred or destroyed demand, and what gives confidence in maintaining FCF guidance?

    Arvind stated that 1/3 of the slipped deals have already closed in Q3, indicating deferral. Jim explained FCF confidence comes from strong adjusted EBITDA, front-loaded CapEx/cash taxes, and strategic inventory build for H2 demand.

    “The fact that 1/3 have already closed in the first 3 weeks gives us an indication, not yet full evidence, but a good indication that this was deferral and not destruction.”

    asked by Amit Daryanani · answered by Arvind Krishna

    2 min read6 chapters

    Detailed Narrative

    01

    Q2 Performance and Strategic Positioning

    IBM's Q2 FY26 revenue fell short of expectations due to a shift in client spending priorities, particularly impacting large CapEx-sensitive software deals. Despite this, management reaffirmed confidence in its business model, highlighting the repositioning of software to higher-growth markets and the strength of its hybrid cloud and AI portfolio. The company believes its AI strategy, focused on neutrality, enterprise-grade control, and orchestration, is well-aligned with client needs for secure, cost-effective, and scalable AI deployment.

    02

    Software Dynamics and Recurring Revenue Strength

    The software shortfall was concentrated in a CapEx-sensitive area, specifically transactional processing software, which declined 9%. In contrast, 80% of software revenue is recurring (subscription and consumption-based) and delivered healthy growth. This recurring revenue stream, including Red Hat, HashiCorp, and Confluent, provides a strong foundation and confidence in long-term double-digit software growth aspirations.

    03

    Infrastructure Momentum and Mainframe Resilience

    While overall Infrastructure revenue declined 7%, Distributed Infrastructure saw record growth of 37%, driven by AI adoption and enterprise data growth, exiting the quarter with $500 million in backlog. The z17 mainframe refresh cycle continues to outperform prior cycles at nearly 130% program-to-program, with 85% of installed MIPS maintaining or growing capacity. IBM Z's compelling TCO advantage and AI capabilities are driving continued client investment.

    04

    AI and Consulting Demand

    Generative AI is a significant growth driver for Consulting, representing about 50% of signings in the quarter and over 30% of backlog. Clients are increasingly turning to consulting for AI-powered transformations, moving from pilots to enterprise-wide deployments. IBM is also investing in specialized technical talent and accelerating go-to-market changes to capture wallet share opportunities beyond the Fortune 1000.

    05

    Productivity and Free Cash Flow

    IBM is accelerating productivity actions, including leveraging AI for software development, improving sales efficiency, and optimizing the supply chain. These initiatives are expected to enhance margins and free cash flow, allowing the company to maintain its full-year free cash flow growth target of $1 billion despite the revenue miss. The company proactively built inventory in Q1/H1 to meet anticipated strong demand in Distributed Infrastructure for H2.

    06

    Quantum Computing Investment

    IBM announced a letter of intent to build Anderon, the world's first pure-play quantum foundry, supported by $1 billion in chips incentives and $1 billion cash contribution. The company plans to invest over $10 billion in Quantum over the next 5 years, targeting the installation of a large-scale fault-tolerant quantum computer by 2029.

    AI-generated summary of the company’s earnings call. Not investment advice.