IBM's Software Shortfall Linked to Execution, Not Business Model

IBM CEO Arvind Krishna acknowledged that his company experienced a software shortfall in its second quarter of fiscal 2026, but attributed it to 'execution' rather than a fundamental issue with their business model. Speaking during IBM's Q2 earnings call, Krishna stated that the shortfall was limited to capital expenditure-sensitive areas of their portfolio and not indicative of a broader problem.

The company witnessed a shift in client spending priorities towards supply-constrained hardware and cybersecurity-focused software, which moved away from some of IBM's core software and infrastructure competencies. This led to a delay in closing large deals, with Krishna revealing that the number was in the 'low 10s'. However, he claimed that about one-third of these deals have since closed.

IBM's CFO James Kavanaugh further explained that this shift in client spending priorities was driven by concerns over supply chain constraints and expected price increases. The company has been adapting to meet these changing needs, with Krishna highlighting the importance of AI in helping clients realize value in a secure, cost-effective, and scalable way.

IBM's software-focused acquisitions, including Red Hat, HashiCorp, and Confluent, have also contributed significantly to their high-margin subscription-based recurring software revenues. Krishna emphasized that these acquisitions power a majority of IBM's high-margin revenue streams, with momentum maintained through record bookings by HashiCorp and strong performances from Confluent and Red Hat.