IBM Sees Rebound After Q2 Execution Shortfall Amid Shift to AI-Focused Spending

IBM CEO Arvind Krishna admitted to a 'short fall' in execution during its second quarter of fiscal 2026, citing a sudden shift in customer spending towards AI-focused hardware components. He attributed the shortfall to a limited area of the portfolio and emphasized that IBM has already started to see a rebound.

The company experienced a significant drop-off in large deals at the end of June due to clients prioritizing supply chain-constrained infrastructure and cybersecurity software over traditional core offerings. CFO James Kavanaugh explained that this shift was driven by customers securing supply-constrained hardware ahead of expected price increases, resulting in delayed enterprise license agreements.

Krishna stated that about one-third of the shifted deals have since closed, with a low 10s number affected overall. He expressed confidence that this was a deferral rather than destruction and attributed it to clients prioritizing other capex investments.

IBM is adapting its approach by increasing AI usage for software development, bolstering sales and marketing efforts, and optimizing supply chains. The company's recent acquisitions, including Red Hat, HashiCorp, and Confluent, are expected to drive growth through high-margin subscription-based recurring software revenues.