IBM's second-quarter revenue grew by just 1%, lowering its full-year revenue outlook; mainframe sales plummeted, dragging down performance | Earnings Report Highlights

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IBM's second-quarter revenue and profit both missed expectations, and the company lowered its full-year revenue growth forecast from over 5% to 4% to 5%. However, IBM had issued an earnings warning a week earlier, and its stock price rose about 3% after hours.

After the US stock market closed on July 22, IBM released its second-quarter financial report. Revenue grew only about 1% year-on-year to $17.2 billion, while adjusted earnings per share were $2.93. Both figures fell short of analysts' expectations.

IBM lowered its 2026 revenue growth forecast from "over 5%" in April to "4% to 5%".

Analysts predict that as the abnormal cycle of mainframe sales is gradually digested and software business continues to advance, whether IBM can deliver on its full-year free cash flow guidance will become the next focal point for the market.

Wall Street Insights mentioned that CEO Arvind Krishna stated in a letter to investors last week that enterprise clients rushed to purchase hardware ahead of expected price hikes, resulting in Z-series mainframes and transaction processing software sales falling short of plan.

After the financial report release, the stock rose about 3% after hours. Year-to-date, the share price has fallen about 30%, while the S&P 500 index has risen about 10%.

Mainframe sales plunge, dragging overall performance

IBM's second-quarter infrastructure business revenue was $3.84 billion, down 7% year-on-year. Among this, Z-series mainframe revenue plunged 42% year-on-year, becoming the core source of quarterly pressure.

Kavanaugh explained that the demand decline was mainly due to clients' purchasing timing mismatch—enterprises concentrated hardware purchases before the anticipated price rise, leading to advance exhaustion of normal cycle sales demand.

This also caused consulting business revenue to remain flat year-on-year at $5.33 billion, failing to provide effective support for the overall results.

Preliminary earnings data released by IBM last week already revealed these problems, and the officially released revenue and adjusted earnings per share numbers on Wednesday were basically in line with those disclosed a week earlier.

This rare earnings warning is uncommon in the tech industry and had already triggered a strong market reaction; the stock dropped 25% in a single day, setting IBM's largest single-day fall ever.

Software business relatively robust, supporting profit margin

Compared to the sharp decline in infrastructure, IBM's high-margin software department remained relatively stable.

Second-quarter software business revenue was $7.76 billion, up 5% year-on-year. Kavanaugh said the software segment's full-year revenue growth forecast remains at 6% to 8%.

In recent years, IBM has aggressively pursued strategic transformation towards high-growth software companies through acquisitions of Red Hat, HashiCorp, and Confluent. The software business has become an important profit source.

However, IBM also faces market skepticism about disruption from artificial intelligence. Wall Street Insights mentioned that Starbucks is considering replacing the software from IBM and other providers with in-house developed tools.

To this, Kavanaugh stated Starbucks pays IBM about $2 million annually for the application and admitted the app is "easily disrupted by AI."

But he also emphasized that the overwhelming majority of IBM's software products are deeply embedded in clients' business infrastructure and data systems, making replacements far more difficult than such peripheral applications.

Accelerating cost reduction, responding to growth pressure

Faced with slowing performance, IBM announced it will accelerate cost-cutting measures.

Kavanaugh said these measures include reducing third-party tech spending, optimizing supply chain management, and cutting administrative costs. The total number of employees is expected to remain basically stable throughout the year.

In its Wednesday statement, IBM said the company is leveraging AI to expand software development, enhance sales and marketing efficiency, and optimize supply chain. The statement read:

These initiatives help boost profit margin and free cash flow, and enhance the company's ability to capture important growth opportunities.

Meanwhile, IBM this quarter signed a letter of intent to build a quantum chip foundry in the US and launched the AI programming tool Bob. Based on multiple generative models, the tool is already used by more than 80,000 employees.

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