On Wednesday local time, IBM (IBM) released its second-quarter fiscal 2026 financial results, while simultaneously lowering its full-year revenue outlook and reducing its annual software revenue growth forecast, an area of particular market concern, primarily due to a notable decline in mainframe business demand.
The financial report showed that IBM’s total quarterly revenue was approximately $17.2 billion, up about 1% year-over-year, with adjusted earnings per share of $2.93 for the quarter. Second-quarter mainframe sales fell 42% sequentially. The company now expects full-year 2026 revenue growth of 4% to 5%, below its previous guidance of “above 5%.” Chief Financial Officer Jim Kavanaugh further revealed in an interview that annual software revenue growth is now projected to be in the 6% to 8% range.
Looking at specific business segments, software performance fell short of expectations. Revenue from this segment grew only 5% year-over-year, contrasting with the company’s explicit expectation during the first-quarter earnings call that full-year software growth would reach “above 10%.” Breaking it down, hybrid cloud platform Red Hat grew 11%, data business grew 19%, but transaction processing software was weak, dragged down by mainframe sales. JPMorgan had previously noted that although software accounts for only about 45% of total revenue, it contributes roughly two-thirds of consolidated profits, serving as the cornerstone of the company’s profit quality.
Infrastructure business revenue declined 7% year-over-year, with the core reason being a 42% plunge in z17 mainframe sales. In contrast, distributed infrastructure grew 37%, marking its best quarterly performance ever, reflecting a shift in customer spending away from mainframes toward AI-related hardware. Consulting revenue was flat year-over-year (up 1% at constant currency), as enterprise clients also curtailed spending on traditional consulting services amid the reallocation of IT budgets.
CEO Arvind Krishna acknowledged in a letter to shareholders that in the final weeks of June, clients suddenly shifted quarterly capital expenditures toward server, storage, and memory purchases to lock in supply of tight AI infrastructure ahead of anticipated price increases. The company “did not anticipate the magnitude of the capital expenditure reallocation” to be so large, and multiple major transactions failed to close at the expected time.
This phenomenon has been interpreted by the market as a “crowding-out effect” of AI hardware on traditional software and services—corporate IT budgets are not materially increasing, but are being reallocated within a finite pool of funds, with a substantial flow toward AI computing infrastructure directly squeezing software procurement and mainframe upgrades. Goldman Sachs’ team noted in a research report that the IBM event “will fully confirm the bear-case scenario for the software industry,” anticipating broad selling pressure on software and services stocks. Morningstar analyst Luke Yang summarized this as a new trend where “hardware eats everyone’s lunch.”
On the cost front, IBM said it would accelerate its cost-reduction plan and maintain its full-year expectation of an additional $1 billion in free cash flow. Kavanaugh stated that this would be achieved through cutting third-party technology spending, optimizing supply chain management, and reducing administrative expenses, with total headcount expected to remain roughly flat for the year. Notably, in the second quarter ended June 30, mainframe sales plunged 42% sequentially.
Evercore ISI analyst Amit Daryanani pointed out that this downward revision “was better than market concerns.” In the week prior, IBM had pre-announced preliminary results, and Wall Street had widely expected the company to formally lower its full-year targets. On the stock price front, IBM closed regular trading at $205.77 and rose about 2% in after-hours trading. However, the stock has declined 31% year-to-date, including a 25% single-day drop on the day of the preliminary earnings release.
