International Business Machines shares decline sharply following preliminary Q2 results shortfall

Shares in International Business Machines (IBM) Corp declined approximately 25% to $217 during Tuesday trading after the technology firm disclosed preliminary second quarter results for 2026 that fell short of analyst projections. The company also warned that an unanticipated shift in client spending patterns had adversely affected its software and infrastructure divisions.

The preliminary operating results showed non-GAAP earnings of $2.93 per share on turnover of $17.2 billion. Market analysts had forecast earnings of $3.01 per share on revenue of $17.86 billion. Total revenue advanced 1% compared with the corresponding period last year.

By segment, software revenue increased 5%, consulting revenue remained flat, whilst infrastructure revenue contracted 7%. The company reported a GAAP gross profit margin of 57.7%, representing a decline of 100 basis points year on year. Operating gross margin stood at 59.4%, down 70 basis points.

GAAP diluted earnings per share came in at $2.27, a decrease of 2%, whilst operating earnings per share rose 5% to $2.93. Year to date net cash from operating activities totalled $7.8 billion, with free cash flow reaching $4.8 billion.

In correspondence with investors, Chief Executive Arvind Krishna attributed the performance shortfall to customers reallocating capital expenditure towards hardware acquisitions during the latter stages of the quarter. He explained that clients shifted their quarterly capital spending towards servers, storage and memory purchases in order to secure supply-constrained infrastructure ahead of anticipated price increases during the final weeks of June.

Krishna acknowledged that whilst the company had anticipated some supply chain related impact within its expectations, the magnitude of the capital expenditure reprioritisation exceeded forecasts. The spending shift negatively impacted the Z mainframe business and associated software, particularly transaction processing capabilities. Rapidly evolving cybersecurity concerns also influenced customer purchasing decisions.

The Chief Executive conceded that the operating environment required flawless execution from IBM teams and that the company had faltered during the quarter. He stated that the organisation failed to adapt and respond with sufficient speed, resulting in numerous large transactions failing to close within expected timeframes, which drove the majority of the revenue shortfall.

Notwithstanding the weaker quarterly performance, Krishna identified several areas of business strength. Red Hat revenue growth accelerated to 11%, recent acquisitions including HashiCorp and Confluent delivered strong performances, and distributed infrastructure revenue rose 37%, supported by growth in Power and Storage systems. Consulting signings continued to expand, driven by generative artificial intelligence projects.

The Chief Executive emphasised that IBM remains committed to its long-term strategic direction, highlighting the recent launch of its AI-focused Lightwell platform and ongoing investment in quantum computing capabilities.

IBM noted that it is still finalising its financial results and the figures disclosed on Tuesday are preliminary in nature and subject to potential revision. The company is scheduled to release full second quarter results and provide updated full-year guidance on 22 July.