IBM CEO Arvind Krishna acknowledged execution shortcomings during the company's fiscal 2026 second-quarter earnings call, attributing a software shortfall to shifting customer spending priorities. Krishna explained that the issue stemmed from a sudden shift in client spending toward supply chain-constrained hardware components, such as servers, storage, and memory, rather than IBM's traditional software offerings. This shift led to the deferral of a double-digit number of large deals, accounting for the majority of the shortfall.
CFO James Kavanaugh elaborated that clients prioritized capital expenditures on infrastructure ahead of expected price increases, delaying transactions under IBM's enterprise license agreements. Krishna noted that about one-third of the deferred deals had since closed, indicating that the issue was likely a deferral rather than a permanent loss. He expressed confidence in IBM's ability to recover, stating that the company's portfolio is well-positioned to help clients deploy AI securely and cost-effectively.
Krishna also highlighted IBM's plans to leverage AI to scale software development, enhance sales and marketing, and optimize its supply chain. He pointed to recent software-focused acquisitions, including Red Hat, HashiCorp, and Confluent, which contribute significantly to IBM's high-margin subscription-based recurring software revenues. Kavanaugh reported strong performance from these acquisitions, with HashiCorp achieving record bookings and Red Hat's OpenShift platform reaching $2.2 billion in annual revenue run rate.
Despite the challenges, IBM's stock price remained stable following the earnings release, reflecting investors' measured response to the company's strategic adjustments and growth prospects.