IBM Cuts Annual Revenue Growth Outlook

The Tip Desk · July 22, 2026 · 3 min read

The technology company forecast 4% to 5% constant-currency revenue growth for 2026 following shortfalls in mainframes and associated software.

International Business Machines Corporation (IBM) cut its annual revenue growth outlook after second-quarter sales growth slowed to 1% from 9% in the first quarter, both measured against a year earlier. Revenue was $17.2 billion, with infrastructure swinging into decline and software growth slowing after a stronger start to the year.

IBM now expects full-year constant-currency revenue growth of 4% to 5%, against its previous forecast of more than 5%. The company expects currency movements to have a neutral effect on annual growth at current exchange rates. Its revised sales outlook accompanied continued expectations for higher annual free cash flow.

Infrastructure provided the clearest reversal. The business generated $3.8 billion in quarterly revenue, declining 7% after growing 15% in the first quarter. IBM Z mainframe revenue fell 42%. IBM said it had expected infrastructure revenue to decline beginning in the second quarter, but mainframes and their associated software stack performed worse than expected. The decline extended beyond the hardware into Transaction Processing software.

Chief Executive Arvind Krishna said clients had shifted capital spending in the final weeks of June toward servers, storage and memory to secure constrained supplies ahead of expected price increases. The company had underestimated the scale of that reprioritization. Krishna also acknowledged execution failures: numerous large deals had missed their expected closing dates, accounting for most of the shortfall. He said rapidly evolving cybersecurity concerns had distracted clients during the quarter.

Software revenue was $7.8 billion, with growth slowing to 5% from 11% in the first quarter. Transaction Processing revenue fell 8%, putting the mainframe-related weakness inside IBM's largest business as well as its hardware division. IBM nevertheless described Red Hat, watsonx, HashiCorp and Confluent as strong performers among its offerings for managing, deploying and building AI-ready solutions. The results combined weakness in transaction processing with strength elsewhere in the portfolio.

Consulting contributed $5.3 billion in revenue and $647 million in segment profit. Its business encompassed Strategy and Technology and Intelligent Operations. Financing reported revenue of $186 million. Those businesses sat alongside the sharper movements in IBM's product divisions, where the infrastructure reversal and software slowdown marked the quarter's principal changes.

IBM earned $2.27 a share from continuing operations under generally accepted accounting principles. Operating earnings, its non-GAAP measure, were $2.93 a share. The operating pre-tax margin was 19.2%, against a GAAP pre-tax margin of 14.4%. IBM's operating measure excluded certain acquisition-related charges, acquired intangible amortization and retirement-related costs, among other adjustments. Chief Financial Officer James Kavanaugh said the company had continued focusing on productivity, its portfolio and cash generation despite late-quarter revenue headwinds.

Quarterly free cash flow fell to $2,540 million from $2,845 million a year earlier. IBM returned $1.6 billion to shareholders through dividends during the quarter. Its free cash flow measure excluded changes in Financing receivables and deducted net capital expenditures, including software investment, distinguishing it from reported cash generated by operating activities.

The hardware results also contained a pocket of expansion. IBM said Power and Storage grew at a record pace and accumulated an order backlog of nearly $500 million. The company was expanding sales coverage across thousands of additional clients to capture opportunities in Power and Storage. It was also investing in specialized technical and client-facing talent, including Forward Deployed Engineers.

For the full year, IBM expects improved pre-tax income margin expansion, citing its efforts to scale AI-assisted software development, improve sales and marketing effectiveness and optimize its supply chain. Even with the lower revenue growth forecast, the company continues to expect free cash flow to increase about $1 billion year over year.