IBM Q2 revenue grows by only 1%, lowers full-year revenue forecast, mainframe sales slump drags down performance | Earnings Report

IBM's Q2 revenue and profit both missed expectations, and the company has lowered its full-year revenue growth forecast from over 5% down to 4%–5%. However, after issuing an earnings warning a week earlier, IBM’s stock price rose about 3% in after-hours trading.

On July 22, after the US market closed, IBM released its Q2 financial report, showing revenue increased year-over-year by only about 1% to $17.2 billion, while adjusted EPS was $2.93, both falling short of analysts’ expectations.

IBM has revised its revenue growth outlook for 2026, lowering it from "over 5%" stated in April to "4%–5%".

Analysts expect that, as the abnormal mainframe sales cycle is gradually digested and the software business continues to push forward, IBM’s ability to meet its full-year free cash flow guidance will become the next focal point for the market.

Wallstreet Insights noted that in a letter to investors last week, CEO Arvind Krishna pointed out that enterprise clients rushed to purchase hardware ahead of anticipated price increases, resulting in Z series mainframe and transaction processing software sales underperforming against plans.

Following the earnings release, the stock price rose about 3% in after-hours trading. Year-to-date, shares have fallen roughly 30%, while the S&P 500 Index has risen about 10% over the same period.

IBM's Infrastructure business generated $3.84 billion in Q2 revenue, down 7% year-over-year. Notably, Z series mainframe revenue plummeted 42% year-over-year, serving as the main reason for the quarter’s earnings pressure.

Kavanaugh explained that the drop in demand was mainly due to a mismatch in client procurement timing: enterprises concentrated their hardware purchases ahead of expected price hikes, thus overdrawing sales demand during the normal cycle.

This left consulting business revenue flat year-over-year at $5.33 billion, failing to provide effective support for the company overall.

Preliminary earnings data released by IBM last week had already revealed these issues, and revenue and adjusted EPS numbers formally published on Wednesday were largely in line with the data disclosed a week ago.

This rare earnings warning is uncommon in the technology sector and triggered a strong market reaction at the time, with IBM’s share price plunging 25% in a single day—the largest one-day drop in the company’s history.

Compared to the sharp decline in the Infrastructure segment, IBM’s high-margin Software division performed relatively well.

Q2 Software revenue was $7.76 billion, up 5% year-over-year. Kavanaugh stated that the software division’s full-year revenue growth forecast remains at 6%–8%.

In recent years, IBM has pushed its strategic transformation towards high-growth software companies by acquiring Red Hat, HashiCorp, and Confluent, and the software business has become a major source of profit for the company.

However, IBM also faces market skepticism fueled by AI disruption. Wallstreet Insights noted that Starbucks is considering replacing the software provided by several suppliers, including IBM, with in-house tools.

In response, Kavanaugh stated that Starbucks pays IBM about $2 million annually for the application and admitted that the application is “easily disrupted by AI.”

But he also emphasized that the vast majority of IBM’s software products are deeply embedded in clients’ business infrastructure and data systems, making them much more difficult to replace than such edge applications.

Facing a slowdown in performance, IBM announced that it will accelerate cost reduction initiatives.

Kavanaugh stated that these measures include cutting third-party technology spending, optimizing supply chain management, and reducing administrative costs, with the total number of employees expected to remain largely stable for the year.

In its Wednesday statement, IBM said that the company is leveraging artificial intelligence to expand software development capacity, enhance sales and marketing effectiveness, and optimize the supply chain. The statement read:

These initiatives will help improve profit margins and free cash flow, enhancing IBM’s ability to seize significant growth opportunities.

Meanwhile, IBM signed a Letter of Intent this quarter to build a quantum chip foundry in the United States and launched the AI coding tool Bob. The tool is based on multiple generative models and has already been adopted by more than 80,000 employees.