IBM Sees Recovery from Q2 Software Sales Shortfall

IBM CEO Arvind Krishna acknowledged that the company experienced a 'short fall in execution' during its second quarter of fiscal 2026, resulting in lower-than-expected software sales. This shortfall was attributed to a sudden shift in customer spending from IBM's traditional software portfolio to AI-focused hardware components outside their usual offerings.

Krishna stated that the company witnessed a 'shift in client spending priorities' at the end of June, with customers opting for servers, storage, and memory purchases 'to secure supply constrained infrastructure ahead of expected price increases.'

CFO James Kavanaugh explained that many clients purchase mainframe software through enterprise license agreements, which create a strong incumbency moat for IBM. However, as clients prioritize other capex investments, the timing of these deals shifted.

Krishna noted that about one-third of the delayed deals had since closed, with 'about' 10 deals impacted in total. He expressed confidence that this was due to deferral rather than destruction and highlighted IBM's plans to adapt and deliver greater business value to clients around its innovation and better align with client priorities.

Krishna emphasized the company's conviction in its strength of business and ability to grow and drive shareholder value, despite the challenging technology spending environment. He 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.