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SEC filingIBM reported preliminary Q2 2026 revenue of $17.2B (+1% YoY), with software up 5% but infrastructure down 7%, missing expectations due to deal execution issues and client spending shifts.
IBM's preliminary Q2 2026 results fell short of expectations, with revenue of $17.2B (+1% YoY) but a significant miss versus internal forecasts. The shortfall was concentrated in Infrastructure, which declined 7% (worse than expected low-single-digit drop), and the associated software stack, primarily Transaction Processing. CEO Arvind Krishna attributed the miss to execution failures: 'We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected.' Additionally, client spending patterns shifted in late June toward servers, storage, and memory purchases ahead of anticipated price increases, disrupting IBM's deal pipeline. Cybersecurity distractions also weighed. Despite the headline disappointment, there were bright spots: Software revenue grew 5%, led by Red Hat (acceleration to 11% growth) and recent acquisitions HashiCorp and Confluent. Consulting revenue was flat (up 1% constant currency) with strong GenAI signings. Distributed Infrastructure posted record growth of 37%, with a $500M backlog. Gross margins contracted (GAAP -100bps, Non-GAAP -70bps) due to mix shift, but operating pre-tax margin expanded 30bps to 19.2% on productivity gains. EPS showed divergence: GAAP down 2% to $2.27, Non-GAAP up 5% to $2.93. Cash flow remained robust with YTD operating cash flow of $7.8B and free cash flow of $4.8B, though certain items like IBM Financing receivables reduced operating cash flow by $2.3B. Management did not provide revised full-year guidance, deferring to the July 22 earnings call. Strategic initiatives such as the Lightwell AI platform and quantum investments (Anderon foundry, $10B commitment) underscore long-term positioning but do not offset near-term operational stumbles. The disappointing quarter raises questions about execution discipline, particularly in large deal conversion and navigating client capex shifts. Investors will focus on the upcoming call for clarity on remediation plans and full-year outlook.