Arvind Krishna's Letter to IBM Investors

Rhea-AI Summary

IBM (NYSE: IBM) released selected preliminary second-quarter 2026 results, noting final figures may change slightly. Revenue was $17.2 billion, up 1%, with Software revenue up 5%, Consulting flat (up 1% at constant currency) and Infrastructure down 7%. Year-to-date net cash from operating activities was $7.8 billion and free cash flow $4.8 billion. GAAP gross margin was 57.7% (down 100 bps) and operating gross margin 59.4% (down 70 bps). GAAP diluted EPS was $2.27, down 2%, while operating EPS was $2.93, up 5%.

According to IBM, Infrastructure and certain Software areas underperformed expectations due to weaker z17 and associated Transaction Processing demand, client capex shifts to supply-constrained infrastructure, and cybersecurity distractions that delayed large deals. Offsetting strengths included Red Hat revenue growth accelerating to 11%, Distributed Infrastructure up 37% with a backlog of about $500 million, and z17 at nearly 130% program-to-program versus z16. IBM highlighted the new $5 billion Lightwell initiative with over 20,000 engineers focused on open source security, and quantum plans including a letter of intent for the Anderon wafer foundry supported by $1 billion in CHIPS incentives and $1 billion of IBM cash, plus more than $10 billion of quantum investment over five years. IBM will discuss full results on July 22, 2026 at 5 p.m. ET.

AI-generated analysis. How Rhea-AI works. Not financial advice.

Positive

• Revenue $17.2B, up 1% year over year in Q2 2026
• Software revenue up 5% in the second quarter
• Operating (non-GAAP) EPS $2.93, up 5% year over year
• Operating pre-tax income margin 19.2%, up 30 basis points
• Free cash flow $4.8B year to date, with $7.8B operating cash
• Red Hat revenue growth accelerated sequentially to 11%
• Distributed Infrastructure revenue up 37% with ~$500M backlog
• z17 program nearly 130% program-to-program versus z16
• Lightwell launched as a $5B AI-driven security commitment
• Quantum roadmap: >$10B planned investment over five years

Negative

• Infrastructure revenue declined 7% in the quarter
• GAAP gross margin 57.7%, down 100 basis points year over year
• GAAP pre-tax margin 14.4%, down 90 basis points
• GAAP diluted EPS $2.27, down 2% year over year
• Shortfall in Z and Transaction Processing software versus expectations
• Numerous large deals failed to close within the expected quarter

Market Reaction – IBM

-22.30% $225.34

15m delay

-22.30% Since News

$225.34 Last Price

$218.26 $297.50 Day Range

-$78.29B Valuation Impact

$272.78B Market Cap

0.3x Rel. Volume

Following this news, IBM has declined 22.30%, reflecting a significant negative market reaction. Our momentum scanner has triggered 93 alerts so far, indicating high trading interest and price volatility. The stock is currently trading at $225.34. This price movement has removed approximately $78.29B from the company's valuation.

Data tracked by StockTitan Argus (15 min delayed). Upgrade to Gold for real-time data.

Market Context

The stock is dropping -12.6% following this news. A sharp decline could reflect concern over the Inf...

Analysis

The stock is dropping -12.6% following this news. A sharp decline could reflect concern over the Infrastructure shortfall and lower GAAP gross margin at 57.7%, consistent with past selling on IBM news. Given the low reported short positioning, extended downside would not hinge on a short squeeze.

Key Figures

Revenue: $17.2 billion GAAP gross profit margin: 57.7 percent Operating PTI margin (non-GAAP): 19.2 percent +5 more

8 metrics

Revenue $17.2 billion Preliminary Q2 2026 revenue, up 1 percent year over year

GAAP gross profit margin 57.7 percent Preliminary Q2 2026, down 100 basis points

Operating PTI margin (non-GAAP) 19.2 percent Preliminary Q2 2026, up 30 basis points

Net cash from operations $7.8 billion Year-to-date 2026 net cash from operating activities

Free cash flow $4.8 billion Year-to-date 2026 free cash flow

GAAP diluted EPS $2.27 Preliminary Q2 2026, down 2 percent year over year

Operating EPS (non-GAAP) $2.93 Preliminary Q2 2026, up 5 percent year over year

Distributed Infrastructure growth 37 percent Distributed Infrastructure performance in Q2 2026, best reported history

Historical Context

5 past events · Latest: Jul 09 (Positive)

Pattern 5 events

Date	Event	Sentiment	24h Move	Catalyst
Jul 09	AI platform update	Positive	-2.2%	Upgrades to IBM Bob agentic AI platform and new cost analytics tools.
Jul 08	Earnings call notice	Neutral	-1.3%	Scheduling announcement for Q2 2026 financial results conference call.
Jul 08	AI security launch	Positive	-1.3%	Launch of Lightwell AI-powered open source risk remediation platform.
Jul 07	Systems product launch	Positive	+2.2%	Introduction of compact z17 and LinuxONE 5 systems with higher core counts.
Jul 06	Quantum research news	Positive	+3.5%	Reported first-known quantum computations on fusion material FLiBe with partners.

24h Move is the share-price change in the day after each event; other market factors may also have contributed.

Pattern Detected

Recent IBM headlines, especially around AI and product launches, have often seen share moves that diverge from the seemingly positive news tone.

Key Terms

gross profit margin, operating (non-gaap), free cash flow, diluted earnings per share, +2 more

6 terms

gross profit margin financial

"Gross Profit Margin: GAAP: 57.7 percent, down 100 basis points;"

Gross profit margin shows how much money a company keeps from sales after paying for the goods or services it sold. It’s like checking how much profit is left over from each dollar earned before covering other costs. A higher margin indicates the company makes more money from its sales, which helps assess its profitability and efficiency.

operating (non-gaap) financial

"Operating (Non-GAAP): 59.4 percent, down 70 basis points"

An "operating (non‑GAAP)" figure is a company‑reported measure of operating performance that management adjusts from the standard GAAP operating results by removing certain items such as one‑time charges, restructuring costs, stock‑based compensation, or other specified gains or losses. It is meant to show what management considers the underlying day‑to‑day business performance, like cleaning away unusual or timing items to see recurring results; investors use it to compare core operations across periods or peers, while noting the adjustments are chosen by the company.

free cash flow financial

"free cash flow of $4.8 billionEPS:Diluted Earnings Per Share"

Free cash flow is the amount of money a company has left over after paying all its expenses and investing in its business, like buying equipment or updating facilities. It shows how much cash is available to reward shareholders, pay down debt, or save for future growth. This helps investors understand if a company is financially healthy and able to grow.

View in glossary

diluted earnings per share financial

"EPS:Diluted Earnings Per Share: GAAP: $2.27, down 2 percent;"

Diluted earnings per share is a measure of a company's profit allocated to each share of stock, taking into account all possible shares that could be created through stock options, convertible bonds, or other securities. It shows the lowest possible earnings per share if all these potential shares were issued, helping investors understand the worst-case scenario for their ownership. This figure matters because it provides a more conservative view of a company's profitability per share.

capex financial

"clients shift their quarterly capex spend toward servers, storage, and memory"

Capex, short for capital expenditures, refers to the money a company spends to buy, upgrade, or maintain physical assets such as buildings, equipment, or technology. It matters to investors because these investments can help a company grow and improve its long-term performance, but they also represent significant costs that can impact profitability and cash flow.

quantum wafer foundry technical

"letter of intent to build Anderon, the world's first pure-play quantum wafer foundry"

A quantum wafer foundry is a specialized factory that fabricates the thin, precisely structured silicon or superconducting wafers used to build quantum processors and related components. Think of it as a bakery that makes delicate, high-precision cake layers that other chefs will turn into finished desserts; the foundry supplies the repeatable, high-quality building blocks needed for scaling quantum devices. Investors care because the ability to produce wafers at scale and with low defect rates determines how quickly quantum technologies can be commercialized, affects capital needs, and creates potential competitive advantages or supply risks.

AI-generated analysis. How Rhea-AI works. Not financial advice.

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ARMONK, N.Y., July 14, 2026 /PRNewswire/ --

IBM Investors –

This morning we are releasing selected preliminary second-quarter 2026 financial results. We are still working to close our financial reporting for the quarter and our final results could be slightly different.

For the second quarter:

Revenue:

• Revenue of $17.2 billion, up 1 percent
• Software revenue up 5 percent
• Consulting revenue flat, up 1 percent at constant currency
• Infrastructure revenue down 7 percent

Profit:

• Gross Profit Margin: GAAP: 57.7 percent, down 100 basis points; Operating (Non-GAAP): 59.4 percent, down 70 basis points
• Pre-Tax Income Margin: GAAP: 14.4 percent, down 90 basis points; Operating (Non-GAAP): 19.2 percent, up 30 basis points

Cash Flow:

• Year to date, net cash from operating activities of $7.8 billion; free cash flow of $4.8 billion

EPS:

• Diluted Earnings Per Share: GAAP: $2.27, down 2 percent; Operating (Non-GAAP): $2.93, up 5 percent

I want to spend some time explaining what we experienced in the quarter that led to the Software and Infrastructure performance shortfall you see above.

When we discussed our expectations with you in April, we noted that we would be wrapping on the launch of z17 in the second quarter. Given this was the strongest start to a mainframe program in our history, we expected Infrastructure revenue to decline low-single digits for the year, beginning this quarter. What played out was worse than our expectations, driven by a shortfall in our Z performance and the associated software stack, primarily in Transaction Processing. In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases. This dynamic impacted client buying patterns. While we anticipated some supply chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization. In addition, clients were distracted with rapidly-evolving, industry-wide cybersecurity concerns in the quarter.

These conditions require our teams to execute perfectly, and this quarter we faltered. We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected, driving the majority of our shortfall.

These are not excuses, but they are realities. Our job is to help our clients through uncertainty, to find paths forward to grow their businesses no matter what is happening in the external environment.

While our second-quarter results are disappointing, our performance in many areas showed strength, reinforcing the conviction we have in our portfolio and strategy.

• Within Software, Red Hat revenue growth accelerated sequentially to 11 percent
• Recent acquisitions including both HashiCorp and Confluent delivered strong performance
• With clients prioritizing infrastructure investments, Distributed Infrastructure had its best performance in reported history, up 37 percent with strong growth in Power and Storage, and a backlog of approximately $500 million exiting the quarter
• Despite challenges this quarter, z17 remains at nearly 130 percent program-to-program, well ahead of z16 which was our strongest program on record, with clients representing 85% of installed MIPs maintaining or growing capacity
• Continued growth in Consulting signings led by strong GenAI contribution
• Productivity initiatives contributed to continued operating (non-GAAP) PTI Margin expansion in the quarter

Importantly, we continue to innovate at speed and scale. After the introduction of Mythos, our teams across IBM and Red Hat quickly mobilized to take advantage of an unprecedented opportunity, launching Lightwell. Lightwell is a $5 billion commitment backed by new frontier AI capabilities and a global force of more than 20,000 engineers creating a trusted enterprise clearinghouse to address open source software vulnerabilities. Early adopters include organizations like Bank of America, BNY, Citi, Goldman Sachs, JPMorganChase, Mastercard, Morgan Stanley, Royal Bank of Canada, State Street, Visa, Wells Fargo and more. General availability of Lightwell was announced on July 8.

Finally, quantum computing is no longer decades away, it is upon us, and we are investing aggressively. Recently, with the U.S. Department of Commerce, we announced a letter of intent to build Anderon, the world's first pure-play quantum wafer foundry supported by $1 billion in CHIPS incentives provided by the DoC and a $1 billion cash contribution by IBM. Shortly after that, we disclosed plans to invest more than $10 billion in quantum over the next five years, spanning R&D, capex, manufacturing scaling, M&A and ecosystem expansion. We remain on track to deliver the first large-scale fault-tolerant quantum computer by 2029.

While performance in the quarter was below our expectations, we have conviction in the strength of our portfolio and the strategic transformation of our business. To remedy challenges this quarter, we are undertaking new initiatives and accelerating others, all to improve our results going forward. We will hold our regularly scheduled conference call with you all on July 22, 2026, at 5PM ET to go into deeper detail and discuss our full-year expectations.

Arvind Krishna
Chairman, President and Chief Executive Officer, IBM
(NYSE: IBM)

Forward-Looking and Cautionary Statements

Except for the historical information and discussions contained herein, statements contained in this letter may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company's current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the following: a downturn in economic environment and client spending budgets; a failure of the company's innovation initiatives; damage to the company's reputation; risks from investing in growth opportunities; failure of the company's intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; the company's ability to successfully manage acquisitions, alliances and divestitures, including integration challenges, failure to achieve objectives, the assumption or retention of liabilities and higher debt levels; fluctuations in financial results; impact of local legal, economic, political, health and other conditions; the company's failure to meet growth and productivity objectives; ineffective internal controls; the company's use of accounting estimates; impairment of the company's goodwill or amortizable intangible assets; the company's ability to attract and retain key employees and its reliance on critical skills; impacts of relationships with critical suppliers; product and service quality issues; the development and use of AI, including the company's increased  AI solutions and use of AI technologies; impacts of business with government clients; reliance on third party distribution channels and ecosystems; cybersecurity and data protection considerations; adverse effects related to climate change and other environmental matters; tax matters; legal proceedings and investigatory risks; the company's pension plans; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company's Form 10-Qs, Form 10-K and in the company's other filings with the U.S. Securities and Exchange Commission or in materials incorporated therein by reference.

Any forward-looking statement in this letter speaks only as of the date on which it is made. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements.

Presentation of Information in this Letter

In an effort to provide investors with additional information regarding the company's results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this letter the following non-GAAP information, which management believes provides useful information to investors:

• adjusting for currency (i.e., at constant currency);
• presenting operating (non-GAAP) earnings per share amounts and related income statement items;
• free cash flow;
• net cash from operating activities excluding IBM Financing receivables.

The rationale for management's use of these non-GAAP measures is included in Exhibit 99.2 in the Form 8-K that includes this letter and is being submitted today to the SEC.

Conference Call and Webcast

IBM's regular quarterly earnings conference call is scheduled for Wednesday, July 22, 2026 at 5:00 p.m. ET. The Webcast may be accessed via a link at https://www.ibm.com/investor/events/earnings-2q26. Presentation charts will be available shortly before the Webcast.

Selected Financial Information Below (certain amounts may not add due to use of rounded numbers; percentages presented are calculated from the underlying whole-dollar amounts).

Contact:

IBM
Sarah Meron, 347-891-1770
sarah.meron@ibm.com 

Tim Davidson, 914-844-7847
tfdavids@us.ibm.com 

 

INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION (Unaudited; $ in millions except per share amounts)
	Three Months Ended June 30, 2026
	Continuing Operations
	GAAP			Acquisition- Related Adjustments (1)			Retirement- Related Adjustments (2)			Operating (Non-GAAP)
Gross profit	$         9,907			$              287			$                —			$        10,194
Gross profit margin	57.7	%		1.7	pts		—	pts		59.4	%
Pre-tax income from continuing operations	2,479			716			96			3,290
Pre-tax income margin from continuing operations	14.4	%		4.2	pts		0.6	pts		19.2	%
Diluted earnings per share: continuing operations	$           2.27			$             0.58			$             0.08			$           2.93
	Three Months Ended June 30, 2025
	Continuing Operations
	GAAP			Acquisition- Related Adjustments (1)			Retirement- Related Adjustments (2)			Operating (Non-GAAP)
Gross profit	$         9,977			$              225			$                —			$        10,202
Gross profit margin	58.8	%		1.3	pts		—	pts		60.1	%
Pre-tax income from continuing operations	2,597			575			25			3,197
Pre-tax income margin from continuing operations	15.3	%		3.4	pts		0.1	pts		18.8	%
Diluted earnings per share: continuing operations	$           2.31			$             0.47			$             0.02			$           2.80

(1)	Includes amortization of acquired intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable retention, restructuring and related expenses, tax charges related to acquisition integration, and pre-closing charges, such as financing costs.
(2)	Includes amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs.

 

INTERNATIONAL BUSINESS MACHINES CORPORATION GAAP OPERATING CASH FLOW TO FREE CASH FLOW RECONCILIATION (Unaudited)
($ in millions)		Six Months Ended June 30, 2026
Net cash provided by operating activities per GAAP		$                7,766
Less: change in IBM Financing receivables		2,264
Net cash from operating activities excl. IBM Financing receivables		5,503
Capital expenditures, net		(743)
Free cash flow		$                4,760

 

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SOURCE IBM

FAQ

What were IBM (NYSE: IBM) preliminary Q2 2026 financial results?

IBM reported preliminary Q2 2026 revenue of $17.2 billion, up 1%. According to IBM, Software rose 5%, Consulting was flat, Infrastructure fell 7%, GAAP EPS was $2.27 (down 2%) and operating EPS was $2.93 (up 5%).

How did IBM’s margins and cash flow look in Q2 2026 preliminary results?

IBM’s GAAP gross margin was 57.7%, with operating gross margin at 59.4%. According to IBM, year-to-date net cash from operating activities reached $7.8 billion and free cash flow was $4.8 billion, while operating pre-tax margin rose to 19.2%.

Why did IBM’s Infrastructure and z17 performance miss expectations in Q2 2026?

IBM cited weaker-than-expected z17 and Transaction Processing demand and delayed large deals. According to IBM, clients shifted capex toward servers, storage and memory amid supply concerns and evolving cybersecurity issues, creating a revenue shortfall versus earlier Infrastructure and Software expectations.

What is IBM’s Lightwell $5 billion commitment announced in 2026?

Lightwell is a $5 billion IBM commitment focused on open source software vulnerabilities. According to IBM, it uses new AI capabilities and over 20,000 engineers to create a trusted enterprise clearinghouse, with early adopters including major global financial institutions.

What are IBM’s 2026 quantum computing investment plans and the Anderon foundry?

IBM plans to invest more than $10 billion in quantum over five years. According to IBM, it signed a letter of intent with the U.S. Department of Commerce for the Anderon quantum wafer foundry, backed by $1 billion in CHIPS incentives and $1 billion of IBM cash.

How did Red Hat and Distributed Infrastructure perform in IBM’s Q2 2026 update?

Red Hat revenue growth accelerated sequentially to 11% in Q2 2026. According to IBM, Distributed Infrastructure posted its best reported performance, with revenue up 37% and an estimated $500 million backlog exiting the quarter, supported by strong Power and Storage demand.

When will IBM discuss full Q2 2026 earnings and guidance with investors?

IBM plans to hold its regular earnings conference call on July 22, 2026 at 5 p.m. ET. According to IBM, management will provide deeper detail on second-quarter results and discuss expectations for full-year 2026 performance during that call.