IBM's Hybrid Cloud and AI Shift Shows Promise Amid Deal Timing Pressure

IBM's transformation into a software-focused company is yielding results. In Q2 2026, recurring software revenues accounted for 45.2% of its GAAP revenue, increasing by 5%. The company has set a target to grow software revenues by 6-8% in 2026 and expand operating pretax margin by 100 basis points.

The hybrid cloud strategy is also gaining traction, with Red Hat revenues up 11% and OpenShift annual recurring revenue reaching $2.2 billion. IBM's acquisition of HashiCorp and Confluent has added depth to its platform approach. However, the company still faces challenges related to deal timing and mainframe pressure.

The second quarter saw a shortfall in total revenues, which rose 1.1% to $17.16 billion but missed the Zacks Consensus Estimate of $17.32 billion by 0.9%. This was attributed to delayed capital-expenditure-sensitive software transactions and weakness in IBM Z revenues.

The company's consulting business showed growth, with signings rising 6% to $5 billion in Q2, driven by generative AI demand. However, revenue growth remained limited at 1% on a constant-currency basis.