IBM Acknowledges Execution Challenges Amid Shift in Customer Spending

IBM CEO Arvind Krishna acknowledged that the company faced execution challenges in its second quarter of fiscal 2026, leading to a software shortfall. The issue was largely attributed to a sudden shift in customer spending from traditional IBM software and infrastructure competencies to AI-focused hardware components outside of the company's core offerings.

According to CFO James Kavanaugh, this shift in client spending priorities towards servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases resulted in IBM failing to close a double-digit number of large deals on time. These deals accounted for most of the shortfall, with the majority being related to mainframe software and associated stacks.

Krishna stated that about one-third of these shifted deals had since closed, which he saw as an indication that this was a deferral rather than destruction of sales. He emphasized IBM's conviction in its business strength and ability to grow and drive shareholder value remains unchanged.

The company is adapting to deliver greater business value to clients around innovation and aligning with client priorities. Krishna also highlighted plans to increase AI use for scaling software development, bolstering sales and marketing efforts, and optimizing the supply chain. IBM's recent software-focused acquisitions, including Red Hat, HashiCorp, and Confluent, power a majority of its high-margin subscription-based recurring software revenues.

Kavanaugh noted that momentum in these operations continues, with HashiCorp registering record bookings during the quarter, Confluent getting off to a strong start, and Red Hat posting revenue growth with its OpenShift platform hitting $2.2 billion in annual revenue run rate.