IBM cuts 2026 forecast as AI capex squeezes software, mainframe sales
IBM lowered its annual revenue growth target and missed second-quarter expectations, signaling that the corporate rush to secure AI infrastructure is temporarily cannibalizing legacy software and hardware budgets.
IBM trimmed its 2026 revenue growth forecast to between 4 per cent and 5 per cent, down from a prior target of more than 5 per cent. The midpoint of this new range sits below the average analyst estimate of 4.8 per cent, which had pegged full-year revenue at $70.77 billion. The downward revision followed a second quarter where total revenue rose just 1 per cent to $17.16 billion, falling short of the $17.58 billion consensus.
The results provide concrete evidence of how the scramble for AI servers and networking gear is diverting capital away from traditional enterprise technology. However, investors appear to be distinguishing between IBM's unique hardware exposure and the broader software market. "For the broader software sector, this should be treated as a positive print, with IBM's software woes more likely to reflect specific IBM-related hardware issues, as management outlined in its investor letter last week," said CFRA analyst Brooks Idlet.
The most severe damage in the quarter was concentrated in IBM's legacy infrastructure division. Revenue from the Z mainframe, which handles high-volume transactions for banks and airlines, plummeted 42 per cent. This dragged total infrastructure revenue down 7 per cent to $3.84 billion.
Chief Financial Officer James Kavanaugh said the mainframe cycle hurt company-wide growth by "over five points in the quarter," compared to an anticipated hit of "a point or two." He insisted there is "no evidence of clients moving off a mainframe" and projected "significant outperformance in the program to continue through the second half."
Chief Executive Arvind Krishna attributed the shortfall to shifting corporate budget priorities rather than structural defection. "A majority of what didn't happen in the second quarter was large capex deals at large clients," he said, noting that about one-third of those delayed contracts have already closed in the current third quarter. "A lot of the demand is deferred, not destroyed," Krishna added.
Software revenue did manage to grow 5 per cent to $7.76 billion, though this still missed the average estimate of $7.88 billion. Net profit fell year-over-year to $2.17 billion, while adjusted earnings of $2.93 per share came in four cents below the $2.97 estimate.
IBM's shares dipped slightly in extended trading on Wednesday after gaining 2 per cent during the regular session. The stock is still reeling from a 25 per cent plunge last week—its steepest single-day drop in over a century—after Krishna warned that IBM had "faltered" in adapting to the current spending environment.
