IBM on Wednesday lowered its 2026 growth outlook and reported second-quarter results that came up short of Street expectations, even after the company had issued an earnings warning a week earlier. Management said it will focus on productivity and margin expansion while continuing investments in software, AI tooling and a planned quantum foundry.
Quarterly results and revised guidance
IBM reported adjusted earnings per share of $2.93 for the quarter versus the LSEG consensus of $2.97, and revenue of $17.16 billion compared with $17.58 billion expected. Revenue increased about 1% year over year. Net income was $2.17 billion, or $2.30 per share, slightly below the prior year’s $2.19 billion, or $2.36 per share.
Following the results, the company trimmed its full-year revenue growth target to 4%–5% in constant currency. That is below the pace IBM outlined in April, when it was aiming for growth above 5%. IBM reiterated a target to generate an additional $1 billion in free cash flow in 2026 and said it expects to widen its full-year pre-tax margin by roughly one percentage point through higher productivity.
Where revenue came from
IBM’s segment results reflected uneven demand across its portfolio. High-margin software revenue rose 5% to $7.76 billion, while consulting revenue held steady at $5.33 billion. Infrastructure revenue declined 7% to $3.84 billion, driven by a sharp drop in sales tied to Z mainframes, which fell 42% in the quarter.
Company management attributed much of the mainframe weakness to a pull-forward of purchases. In a letter to investors included with preliminary results last week, CEO Arvind Krishna said customers rushed to buy hardware earlier than planned ahead of anticipated price increases, leaving mainframe orders softer in the quarter.
Stock reaction and analyst adjustments
Investors punished the news. IBM’s stock plunged 25% in a single session after the preliminary results and investor letter — the steepest one-day decline on record for the company. Through Wednesday’s close, IBM shares were down about 30% year to date, while the S&P 500 had risen roughly 10% in the same span.
Analysts cut estimates after the company’s early disclosure of weaker-than-expected results. The revenue and adjusted EPS figures announced on Wednesday were consistent with the preliminary numbers IBM released a week earlier.
Cost, productivity and AI investments
IBM framed the weaker quarter as an opportunity to accelerate productivity initiatives. The company said it will scale software development using AI, sharpen the effectiveness of its sales and marketing teams, and optimize supply chain operations. Those efforts are intended to lift margins and free cash flow while positioning IBM to pursue growth opportunities.
On the product front, IBM highlighted two strategic moves in the quarter. The company said it signed a letter of intent to build a U.S. quantum chip foundry, and introduced Bob, an internal AI coding tool that combines multiple generative models. IBM reported that more than 80,000 employees were using Bob, indicating broad internal adoption of the technology.
Implications and near-term outlook
The results underscore a transition IBM is navigating: balancing legacy infrastructure exposure with higher-growth software and consulting work while deploying capital to AI and quantum initiatives. Management’s decision to push for a one percentage point pre-tax margin expansion and an extra $1 billion of free cash flow signals a sharper focus on profitability amid slower hardware demand.
For investors and customers, the mainframe slowdown is the immediate concern, given the segment’s outsized decline. At the same time, the strength in software and the rollout of internal AI tools highlight areas IBM is betting on to stabilize growth. How quickly those investments translate into sustained top-line acceleration will be a key metric to watch in coming quarters.
IBM’s revised guidance and the market’s reaction leave the company with near-term work to regain investor confidence while executing on productivity gains and new technology commitments.
Source: CNBC