IBM CEO Krishna: Q2 Weakness Due To Deal ‘Deferral, Not Destruction’

IBM CEO Arvind Krishna says he’s seen “not yet full evidence, but a good indication” that the vendor’s quarterly performance problems are short-lived.

IBM Chairman and CEO Arvind Krishna stood by the vendor’s innovation strategy while still taking down IBM’s expected full-year revenue growth for the year by more than $600 million in part due to some clients pushing out IBM infrastructure projects to pay for the growing cost of supply constrained memory, storage, servers and other data center infrastructure.

“This was deferral and not destruction,” the CEO said Wednesday during IBM’s latest quarterly earnings call with analysts. Krishna’s confidence comes in part from the fact that one-third of those largest infrastructure projects requiring a lot of customer CapEx have already closed.

Normally, he would expect two-thirds to three-quarters of those deals to close over the next six months—“not yet full evidence, but a good indication” that IBM’s problems are short-lived, Krishna said.

The Armonk, N.Y.-based technology company also saw multiple areas of double-digit growth in the quarter, including parts of the portfolio where clients pay per-consumption and not per-license or other methods, Krishna said.

“We are going to be doubling down on the demand there because the pipelines are strong, and the signals from our clients are strong,” Krishna said. “A lot of the demand is deferred, not destroyed, albeit it is sometimes hard to predict exact timing on a month-to-month basis.”

The disappointing quarter prompted an unusual public statement from the CEO last week that warned about the quarter’s performance ahead of Wednesday’s call, which covered IBM’s second fiscal quarter—the three months ended June 30. Krishna’s letter sent the company’s stock down about 25 percent at the time, one of the sharpest falls in the company’s 115-year history.

IBM Says Delayed Infrastructure Deals Drove Q2 Miss

Chris Bogan, vice president of sales at Houston-based IBM solution provider Mark III Systems, told CRN in an interview after Krishna’s letter published that the majority of his company’s IBM business is hardware and despite the results Mark III still expects “a banner year” in that business.

Mark III’s IBM hardware projects are funded more from line-of-business budgets than historical IT spend, with better customer experience, revenue generation and the products the customer makes. Selling into those parts of the business gives customers a tangible grasp of how the technology improved their business, Bogan said.

“Those mainframes, the Power systems, all of that—the entire world runs on them for a reason. We’ve got the skills to be able to pull those components together.”

IBM Cuts Revenue Growth Forecast For 2026

Krishna and his team took down expected full-year revenue growth ignoring foreign exchange to between 4 percent and 5 percent year over year. Previously, IBM projected greater than 5 percent growth for the year.

IBM CFO Jim Kavanaugh called the 4 percent “an anchor” and “not our aspiration.” The anchor shows “the investment community the level of productivity and operating leverage we have in this company that allows us to maintain earnings and maintain free cash flow at that low level.”

IBM also revised its software revenue expectations for the year to between 6 percent and 8 percent year on year. Previously, the company said to expect double-digit growth but provided the lower range in case IBM continues to see projects delayed, Kavanaugh said on the call.

Growth in IBM Power, IBM Storage and the z17 refresh has led the vendor to increase infrastructure revenue to the low single digits for the full year. “Demand across storage and power remains strong, and we continue to secure inventory and accelerate our supply chain to capitalize on the opportunities we see in front of us,” Kavanaugh said.

IBM expects its Consulting division—No. 8 on CRN’s 2026 Solution Provider 500—to grow in the low- to mid-single digits for the full year.

IBM still expects to increase its cash flow by about $1 billion year on year for the full year.

Adding some more details to what happened toward the end of the quarter to prompt Krishna’s letter, the IBM executives on the call said “tens” of large infrastructure deals failed to close on their expected timelines.

These deals usually work through enterprise license agreements for a mainframe and the associated software stack, with a high concentration of transaction processing software usually included as well as data and automation products, Kavanaugh said. IBM continued to see strong purchasing of OpEx, subscription- and consumption-based software sold outside those CapEx sales. Distributed infrastructure now has an order backlog of nearly $500 million, a record high, according to the vendor.

About 80 percent of IBM’s annual software revenue is recurring subscription and consumption-based. That revenue comes from Red Hat, Confluent, HashiCorp and other products. IBM’s annual recurring revenue was $24.6 billion, up 8 percent since last year.

Still, IBM likes enterprise license agreements associated with the other 20 percent of software sales “because they establish long-term strategic client commitments that expand adoption across our software products, creating a multiplier effect,” Kavanaugh said.

Krishna said that customers “had not really thought through that some of the alternate purchases they were doing were increasing 30 percent in dollar value quarter to quarter” and moved budget to those more expensive areas.

IBM, the CEO noted, has held prices in July. “Our teams are a bit more reluctant and less aggressive than others incorporating some of those increases in hardware that are coming into the market,” Krishna said. “As they [customers] become more aware that they cannot hold these prices for more than a few weeks, then that itself is going to make an impact where we play into that part as well, albeit we are nowhere near as aggressive as some of the alternate infrastructure providers.”

IBM Plans Sales, Automation, Go-To-Market Changes

As part of its plan to improve execution looking ahead, IBM plans to reduce third-party spending, leverage AI and automation for better software development cycles, improve sales and marketing, and take other actions to improve execution, the executives said on the call.

“That is where we fell short in the second quarter,” Krishna said. “We have engaged with clients on the transactions that slipped and have a clear understanding of what needs to change.”

IBM is also shifting its go-to-market model to expand coverage for thousands of additional clients, going beyond the Fortune 1000 and, perhaps, opening up new opportunities for solution providers working with that customer base. Parts of the IBM business especially geared for these customers include Red Hat, HashiCorp, Confluent, Watsonx and IBM Storage, Krishna said.

The vendor is also investing in forward-deployed engineers (FDEs)—a model popularized by Palantir that has vendor employees working with clients to adopt its technology. Multiple technology vendors have been investing in FDEs this year, with some including Microsoft and Salesforce explicitly calling these engineers a resource for channel partners.

Krishna told investors that he is keeping his eye on what could be the next major technological shift for society by investing in quantum computing, with a promised $10 billion in quantum over the next five years, expected delivery of the first large-scale, fault-tolerant quantum computer by 2029 plus the Anderon pure-play quantum wafer foundry the vendor plans to build with the U.S. Department of Commerce.

Krishna Doubles Down On IBM's AI Strategy

Throughout the call, IBM’s CEO expressed confidence in where the vendor is investing in AI innovation. Massive AI infrastructure and model investment will increase pressure on enterprises to generate meaningful returns, shifting value over time toward orchestration and data layers to optimize outcomes, cost and governance across multiple models and agents, Krishna said. Clients will also want control of their proprietary data—all of which bodes well for IBM’s neutrality and enterprise-grade operational control.

IBM products and services allow for AI agent orchestration across models, clouds and on-premises environments with built-in observability, evaluation, governance, identity management and security, the CEO said.

“Our AI strategy is the right one for IBM and aligns to what we are known for: hybrid, sovereignty and trust,” Krishna said on the call.

Red Hat, HashiCorp Deliver Growth

As Krishna said in his letter ahead of the earnings announcement, Red Hat proved a bright spot during the quarter, accelerating growth from 10 percent year on year last quarter to 11 percent.

Red Hat OpenShift annual recurring revenue is now $2.2 billion. The vendor’s containerization and virtualization products have seen about $680 million of contracts signed since early 2024—although the Red Hat Enterprise Linux business has been impacted by hardware constraints and availability this past quarter and the last one.

Krishna identified a multibillion-dollar total addressable market in discovering client security vulnerabilities through the recently released IBM and Red Hat capability Lightwell. Lightwell subscriptions cost $1 million per year. Even though Lightwell has only been available for weeks, the capability has made more than 7,500 open-source patches available for clients securing vulnerabilities.

That number doesn’t count the 30,000 packages done with Linux, HashiCorp, Confluent, Red Hat OpenShift and similar products in IBM’s portfolio. Users range from Bank of America and Morgan Stanley to Wells Fargo and Goldman Sachs, the CEO said.

The recently acquired HashiCorp business “had another record bookings quarter and accelerated revenue growth through the first half of the year,” Kavanaugh said. Confluent, meanwhile, “is off to a strong start and on track with our expectations after its first full quarter post close.”

IBM Hardware Demand Strong

The executives said the refresh to z17 is still at nearly 130 percent program to program, a record for the Z series and well ahead of where z16 stood at this point in its cycle. That reflects $1 billion more mainframe revenue with $3 billion-plus in the software stack, program to program.

“We see no evidence of clients moving off mainframe,” Kavanaugh said. “Clients continue to invest in IBM Z to modernize mission-critical workloads, with a focus on resiliency, security and increasingly enabling AI on the platform. AI is driving incremental capacity growth and new workloads as clients look to run AI closer to their most sensitive data.”

Nearly half of z17 customers are in AI capabilities with IBM’s Spyre Accelerator. Clients deploying the Watsonx Code Assistant for Z AI assistant are growing millions of instructions per second (MIPS) capacity three times faster than those who are not, the CFO said. Z users can realize a two to 15 times total cost of ownership benefit on the platform instead of moving workloads off.

IBM’s distributed infrastructure business—which includes its Power enterprise servers and Storage flash systems, tape drives and other data storage products—grew 37 percent year on year, a record quarter.

“We see this as an increasingly important growth vector for IBM, driven by AI adoption and the rapid growth of enterprise data,” Krishna said.

IBM Q2 Results By The Numbers

IBM brought in $17.2 billion for the quarter, growth of 1 percent year on year. Profit fell 1 percent to $9.9 billion using GAAP. Without GAAP, operating gross profit was $10.2 billion. Net income fell 1 percent to $2.2 billion using GAAP. Without GAAP, it was $2.8 billion.

IBM’s software business brought in $7.8 billion for the quarter, up 5 percent year on year. The automation business grew 3 percent ignoring foreign exchange. Data grew 18 percent. Transaction processing fell 9 percent.

The infrastructure division saw revenue fall 7 percent year on year to $3.8 billion for the quarter. Hybrid infrastructure fell 10 percent. Within that segment, IBM Z fell 42 percent. IBM’s CFO pointed out that the fall is off 70 percent growth last year in the launch quarter overall and that Z usually sees a fifth season down quarter. Infrastructure support fell 1 percent.

IBM generated net cash from operating activities of $2.6 billion during the quarter, up almost $1 billion. Free cash flow of $2.5 billion fell $300 million. IBM ended the quarter with $8.2 billion in cash, restricted cash and marketable securities, down $6.3 billion from 2025’s year end. So far, IBM has invested $10.5 billion in acquisitions this year.

During the quarter, consulting signings grew 6 percent, a second consecutive quarter of growth. The business brought in $5.3 billion for the quarter, up 1 percent ignoring foreign exchange. The strategy and technology wing of Consulting and the intelligent operations grew at the same rate.

IBM's stock was about flat from Wednesday morning into after-hours trading, with the stock at about $206 a share. The stock was down about 29 percent since Krishna published his letter.