IBM misses Q2 estimates, trims full-year revenue growth outlook

International Business Machines Corp (NYSE:IBM) shares were set to open about 2% lower on Thursday after the technology company reported second-quarter revenue and adjusted earnings that missed Wall Street expectations while lowering its full-year constant currency revenue growth forecast.

For the quarter, IBM reported adjusted earnings per share of $2.93, below the $2.97 expected by analysts, while revenue rose 1% year-over-year to $17.16 billion, missing the LSEG consensus estimate of $17.58 billion.

The company now expects full-year constant currency revenue growth of 4% to 5%, down from its previous outlook, while maintaining its expectation for free cash flow to increase by about $1 billion year-over-year in 2026. IBM also said it aims to expand its full-year pre-tax margin by about one percentage point through productivity improvements.

Software revenue increased 5% to $7.8 billion, led by 11% growth in Hybrid Cloud, including Red Hat (NYSE:RHT), and a 19% increase in Data. Automation revenue rose 4%, while Transaction Processing declined 8%.

Consulting revenue was flat at $5.3 billion, or up 1% in constant currency, with both Strategy and Technology and Intelligent Operations posting flat reported growth.

Infrastructure revenue declined 7% to $3.8 billion, reflecting a 42% drop in IBM Z revenue and a 10% decline in Hybrid Infrastructure, partially offset by 37% growth in Distributed Infrastructure. Financing revenue increased 12% to $200 million.

"We are confident in IBM's strategy and portfolio, and in our ability to capture growth opportunities ahead," IBM CEO Arvind Krishna said in a statement.

"We fundamentally believe that we are in the early innings of a structural shift for business, and that our portfolio - across software, infrastructure, and consulting - is well-positioned to help our clients tap the value, and manage the challenges, of an AI-driven future."

Jefferies analysts wrote that the revenue miss was primarily driven by weaker-than-expected software performance, with software revenue growing 5% versus the firm's expectation for 10% growth. The analysts noted that consulting was broadly in line with expectations, while infrastructure revenue also came in weaker than anticipated.

The analysts said management attributed the software shortfall to customers accelerating spending on supply-constrained servers, storage and memory ahead of expected price increases, which reduced near-term software spending. They added that roughly one-third of the delayed mainframe deals had already closed during the first three weeks of the third quarter, supporting management's view that the weakness was largely a timing issue rather than a structural change in demand.

Jefferies also noted that IBM's updated guidance reflects a range of possible outcomes. The low end of the company's 4% to 5% constant currency revenue growth forecast assumes little recovery in delayed transactions during the second half of the year, while the high end assumes most of those deals are completed. The analysts said the burden now shifts to third-quarter execution, with investors looking for evidence that the delayed business materializes.

The firm added that IBM's recurring software revenue base and unchanged free cash flow guidance provide support for the investment case, but it would wait for more of the delayed transactions to appear in reported results before becoming more constructive. Jefferies maintained its $260 price target on the stock.