International Business Machines Corporation

IBM · NYSE · USD

Was the second-quarter shortfall a timing problem in large hardware-linked software deals, or a lasting loss of client budget to AI infrastructure?

Last 4 earnings calls · through Q2 FY2026

Bull case

  • Recurring software revenue base

    The bull case is that most of IBM's software revenue is now recurring, so growth depends on expanding subscriptions rather than on winning large one-off license deals.

  • Mainframe capacity monetization

    Each mainframe cycle ships more capacity than the last, and that installed capacity later pulls through transaction processing software, storage and support revenue.

  • Productivity funded cash flow

    Management has funded acquisitions and margin expansion from internal cost savings, so cash generation kept growing even when revenue growth slowed.

  • Private and sovereign AI demand

    Clients increasingly want to run AI in their own data centres or private clouds under their own control, which favours Red Hat, IBM's data products and its consulting work.

Bear case

  • Large software deal slippage

    The bear case is that clients now treat AI hardware as the priority and pay for it by deferring the large software agreements IBM relies on.

  • Lowered full-year outlook

    Management cut both its full-year revenue and software outlook after the second quarter, which weakens confidence in the growth targets set at Investor Day.

  • Consulting growth stalls

    Consulting has barely grown, and management describes a highly price-competitive market for the AI transformation work it is winning.

  • Memory cost inflation

    Rising memory and storage prices pull client budgets toward hardware and can hold back the software and Linux demand that sits on top of server purchases.

Bull and bear points

Growth & Execution

In short: Software is mostly recurring, while large license deals can slip when clients redirect budgets.

Bull · 2

  • Most software revenue is now recurring

    Because about 80% of software revenue is subscription and consumption based, quarterly software growth no longer hinges on a handful of large license signatures.

    Q2 FY2026 call

  • Infrastructure guidance flipped to growth

    Z17 shipments plus record distributed infrastructure demand now mean infrastructure adds to total revenue this year instead of subtracting about half a point.

    Tone shiftQ4 FY2025 → Q2 FY2026
Bear · 2

  • Full-year revenue guidance was cut

    Management replaced its 5% plus growth target with a 4% to 5% range, and reported revenue growth of 4.7% in the third quarter sits inside that band.

    Tone shiftQ4 FY2025 → Q2 FY2026

  • Large license deals slipped in the second quarter

    Tens of enterprise license agreements failed to close when clients moved budget to hardware, showing that a fifth of software revenue still depends on discretionary capital spending.

    Q2 FY2026 call

Profitability & Financial Strength

In short: Free cash flow is durable and costs are falling, while gross margin is pressured by a weaker revenue mix.

Bull · 2

  • Free cash flow held up through the shortfall

    Free cash flow of $14.5 billion over the last twelve months equals 20.8% of revenue, and management still expects roughly $1 billion more this year.

    Q2 FY2026 call

  • Operating margin expanded despite the miss

    Operating margin reached 16.8%, up half a point from a year earlier, as cost actions ran ahead of plan and absorbed the Confluent dilution and lower revenue.

    Q2 FY2026 call
Bear · 2

  • Gross margin is being squeezed by mix

    Gross margin slipped to 56.8% as hardware-heavy infrastructure grew faster than software, and a revenue shortfall spreads fixed costs over fewer sales.

    Q2 FY2026 call

  • Acquisitions added debt and earnings dilution

    Net debt rose to $52.8 billion from $43.1 billion a year earlier after the Confluent purchase, and management guided to about $600 million of dilution from it in 2026.

    Q1 FY2026 call

Market Position

In short: The mainframe installed base is durable, while memory prices and consulting price pressure weigh.

Bull · 2

  • Mainframe installed base keeps expanding

    Z17 has shipped at nearly 130% of the prior cycle and 85% of installed mainframe capacity is stable or growing, which pulls through transaction processing software and storage.

    Q2 FY2026 call

  • Open source security becomes a paid service

    Lightwell charges clients about $1 million a year for remediated open source packages, creating recurring revenue from a security problem that regulation and disclosure make more urgent.

    Q2 FY2026 call
Bear · 2

  • Memory prices now divert client budgets

    Management called memory inflation immaterial one quarter earlier, then blamed it for moving client spending away from software deals and toward servers and storage.

    Tone shiftQ1 FY2026 → Q2 FY2026

  • Consulting pricing pressure limits growth

    Consulting revenue grew just 0.2% year on year as clients push back on rates, which matters because consulting is nearly a third of segment revenue.

    Q4 FY2025 call