IBM cuts 2026 outlook as mainframe sales tumble 42%
IBM trimmed its full-year revenue growth target after a 42% plunge in mainframe sales dragged quarterly results below analyst expectations, capping a brutal stretch for the stock.
IBM reported second-quarter adjusted earnings of $2.93 per share on $17.16 billion in revenue, missing consensus estimates compiled by LSEG. The technology group also reduced its 2026 constant-currency revenue growth guidance to a range of 4% to 5%, down from an April projection of more than 5%.
The shortfall stems from a severe contraction in IBM's infrastructure division, where revenue fell 7% to $3.84 billion. Z mainframe sales alone plummeted 42% as the timing of hardware purchases shifted. In a letter to investors, CEO Arvind Krishna attributed the weakness to worse-than-planned sales of mainframe computers and transaction processing software, a dynamic triggered by organizations rushing to buy hardware ahead of anticipated price increases.
The hardware weakness contrasted with steadier performance in IBM's higher-margin businesses, which remain critical to profitability. Software revenue grew 5% to $7.76 billion, while consulting revenue held steady at $5.33 billion. Overall, IBM's total revenue grew just 1% year over year, and net income slipped to $2.17 billion, or $2.30 per share, down from $2.19 billion, or $2.36 per share, a year earlier.
Investors had already priced in much of the damage after the company issued a rare preliminary earnings warning last week, a move that triggered a record 25% single-day drop in the share price. The stock rebounded 4% in extended trading on Wednesday following the full report. Even with the after-hours gain, IBM shares have lost 30% of their value in 2026 as of Wednesday's close, sharply underperforming the S&P 500, which is up roughly 10% over the same period.
Despite the top-line pressure, management maintained its outlook for $1 billion in higher free cash flow for the year. The company is looking to artificial intelligence to drive internal efficiency and offset the hardware cycle. IBM announced the "Bob" AI coding tool, which has been adopted by over 80,000 employees, and signed a letter of intent to build a U.S. quantum chip foundry. "IBM is accelerating productivity by scaling software development leveraging AI, increasing the effectiveness of its sales and marketing organization, and optimizing its supply chain," the company said. "These efforts help enhance margin and free cash flow, and strengthen the company's ability to capture significant growth opportunities."
