IBM Sees Rebound After Software Sales Shortfall Amid Shift to AI
IBM's second quarter of fiscal 2026 was marked by a sudden shift in customer spending from specific parts of its software portfolio to AI-focused hardware components, leading to a shortfall in software sales. According to CEO Arvind Krishna, the company saw a 'shift in client spending priorities' at the end of June, with clients moving towards servers, storage, and memory purchases due to supply chain constraints.
Krishna stated that this shift resulted in IBM failing to close a double-digit number of 'large deals' on time, accounting for the majority of the shortfall. CFO James Kavanaugh explained that these agreements typically contain high concentrations of transaction processing software, which are being prioritized less by clients due to other capex investments.
However, Krishna noted that about one-third of those shifted deals had since closed, indicating a possible rebound. He also highlighted IBM's plans to increase the use of AI to scale software development, bolster sales and marketing efforts, and optimize its supply chain.
Krishna pointed to IBM's recent software-focused acquisitions, including Red Hat, HashiCorp, and Confluent, which power a majority of the company's high-margin subscription-based recurring software revenues. Kavanaugh added that these operations have seen significant growth, with HashiCorp registering 'record bookings' during the quarter.