IBM says buyers moved June capex to hardware, and its mainframe software stack paid for it

IBM released selected preliminary second-quarter 2026 results on July 14 alongside a letter from Arvind Krishna explaining what he called a Software and Infrastructure performance shortfall, and warned that final figures could be slightly different once reporting closes ^[1]. Revenue was $17.2 billion, up 1 percent, with software up 5 percent, consulting flat (up 1 percent at constant currency), and infrastructure down 7 percent ^[2][3][4][5].

The interesting part is the mechanism IBM describes. In the last few weeks of June, according to Krishna, clients shifted quarterly capex toward servers, storage and memory to secure supply-constrained infrastructure ahead of expected price increases, which changed buying patterns ^[6]. IBM expected some supply chain effect but not the magnitude of the reprioritization ^[7], and Krishna adds that clients were distracted by rapidly evolving, industry-wide cybersecurity concerns ^[8]. That is a vendor describing a fixed budget being resequenced rather than a budget being cut, and IBM was on both sides of it: Distributed Infrastructure posted what the letter calls its best performance in reported history, up 37 percent with growth in Power and Storage and roughly $500 million of backlog exiting the quarter ^[9], while the infrastructure segment overall fell 7 percent ^[5][14].

Where the money did not go was the mainframe and everything attached to it. Krishna attributes the miss to Z performance and the associated software stack, primarily Transaction Processing ^[10]. In April, IBM had told investors z17 would wrap in the second quarter and that infrastructure would decline low single digits for the year starting then, off what it described as the strongest start to a mainframe program in its history ^[11]; the reported quarterly decline was 7 percent ^[5][13]. IBM still says z17 is at nearly 130 percent program-to-program versus z16, with clients representing 85 percent of installed MIPs maintaining or growing capacity ^[12]. The growth inside software came from elsewhere: Red Hat accelerated sequentially to 11 percent, and HashiCorp and Confluent are cited as strong performers ^[15][16].

Krishna does not rest the explanation on buyer behaviour. He writes that the conditions required perfect execution and that IBM faltered, did not move quickly enough, and that numerous large deals failing to close on expected timelines drove the majority of the shortfall ^[17]. That is a timing claim, and it is testable in ninety days.

The cost line held up better than the top line. GAAP gross margin was 57.7 percent, down 100 basis points, and operating gross margin 59.4 percent, down 70 basis points ^[18]; GAAP pre-tax margin fell 90 basis points to 14.4 percent while operating pre-tax margin rose 30 basis points to 19.2 percent, helped by productivity initiatives ^[19][20]. GAAP EPS of $2.27 was down 2 percent against operating EPS of $2.93, up 5 percent, a seven-point spread ^[21][22]. Year to date, operating cash flow was $7.8 billion and free cash flow $4.8 billion, about 62 percent conversion ^[23][24].

The forward-looking items in the letter are commitments rather than revenue: Lightwell, a $5 billion program with more than 20,000 engineers acting as an enterprise clearinghouse for open source vulnerabilities, reached general availability on July 8 with early adopters including JPMorganChase, Citi, Goldman Sachs, Visa and Mastercard ^[25], and IBM announced a letter of intent with the U.S. Department of Commerce to build a quantum system called Anderon ^[26].

Watch three things next quarter: whether the deferred large deals close and Transaction Processing recovers, whether the roughly $500 million Distributed Infrastructure backlog converts ^[9], and whether the June rush into supply-constrained hardware repeats once the expected price increases land ^[6].