Break-down of IBMs preliminary release of Q2'26 earnings.
IBM — Q2 2026 and Q2/Q3 2025 Earnings Analysis
Key Points
- Q2 2026 revenue was $17.2B, up +1% YoY; Software +5%, Consulting flat, Infrastructure -7%.
- Q2 2026 GAAP gross margin declined 100 bps YoY to 57.7%; operating (non-GAAP) gross margin down 70 bps to 59.4%.
- Q2 2026 diluted EPS (GAAP) was $2.27 (-2% YoY); operating (non-GAAP) EPS $2.93 (+5% YoY).
- Distributed Infrastructure delivered record growth (+37% YoY); Red Hat revenue growth accelerated to +11% YoY.
- Mainframe (Z) and Transaction Processing saw sharp declines as the z17 cycle ended.
- Year-to-date net cash from operations was $7.8B; free cash flow $4.8B.
- No updated full-year guidance in Q2 2026; prior guide for >5% cc revenue growth and +$1B YoY FCF increase remains.
Core Results — Quarterly Financials
Consolidated Income Statement — Quarterly
| Quarter | Revenue ($B) | YoY Growth | Gross Profit ($B) | Gross Margin (%) | Pre-tax Income ($B) | Pre-tax Margin (%) | Net Income ($B) | Diluted EPS ($) | Free Cash Flow ($B) | Adj. EBITDA ($B) |
|---|---|---|---|---|---|---|---|---|---|---|
| Q2 2026 | 17.2 | +1% | 9.91 | 57.7 | 2.48 | 14.4 | - | 2.27 | - | - |
| Q2 2025 | 16.98 | +8% | 9.98 | 58.8 | 2.60 | 15.3 | 2.19 | 2.31 | 2.85 | 4.7 |
| Q3 2025 | 16.33 | +9% | 9.36 | 57.3 | 2.43 | 14.9 | 1.74 | 1.84 | 2.37 | 4.6 |
Notes: Q2 2026 figures are preliminary. Q2 2025 figures used for YoY comparables per user instruction.
Operating (Non-GAAP) Results — Quarterly
| Quarter | Operating Gross Profit ($B) | Operating Gross Margin (%) | Operating Pre-tax Income ($B) | Operating Pre-tax Margin (%) | Operating Net Income ($B) | Operating Diluted EPS ($) |
|---|---|---|---|---|---|---|
| Q2 2026 | 10.19 | 59.4 | 3.29 | 19.2 | - | 2.93 |
| Q2 2025 | 10.20 | 60.1 | 3.20 | 18.8 | 2.65 | 2.80 |
| Q3 2025 | 9.59 | 58.7 | 3.03 | 18.6 | 2.52 | 2.65 |
Segment Revenue Growth — Q2 2026 vs. Q2 2025
| Segment | Q2 2026 YoY Growth | Notes |
|---|---|---|
| Software | +5% | Red Hat +11% YoY, sequential acceleration |
| Consulting | Flat | +1% at constant currency |
| Infrastructure | -7% | Distributed Infrastructure +37% YoY, best on record; Z mainframe down sharply |
| Distributed Infra | +37% | Power and Storage strong, $500M backlog exiting Q2 |
| Red Hat | +11% | Sequential acceleration |
Segment Revenue and Profit — Q2 2025 and Q3 2025
Segment Revenue ($M)
| Quarter | Software | Consulting | Infrastructure | Financing | Other | Total Revenue |
|---|---|---|---|---|---|---|
| Q3 2025 | 7,209 | 5,324 | 3,559 | 200 | 38 | 16,331 |
| Q2 2025 | 7,387 | 5,314 | 4,142 | 166 | -31 | 16,977 |
Segment Profit ($M) and Margin (%)
| Quarter | Software Profit | Software Margin | Consulting Profit | Consulting Margin | Infrastructure Profit | Infrastructure Margin | Financing Profit | Financing Margin |
|---|---|---|---|---|---|---|---|---|
| Q3 2025 | 2,374 | 32.9 | 686 | 12.9 | 644 | 18.1 | 123 | 61.6 |
| Q2 2025 | 2,296 | 31.1 | 562 | 10.6 | 965 | 23.3 | 179 | 107.9 |
Cash Flow — YTD Q2 2026 and Quarterly 2025
YTD Q2 2026
| Metric | YTD Q2 2026 |
|---|---|
| Net Cash from Operating Activities ($B) | 7.8 |
| Free Cash Flow ($B) | 4.8 |
Quarterly 2025
| Quarter | Net Cash from Ops ($B) | Free Cash Flow ($B) | Capex, net ($M) | Dividends Paid ($B) | Acquisitions, net ($M) |
|---|---|---|---|---|---|
| Q3 2025 | 3.08 | 2.37 | -410 | 1.57 | -58 |
| Q2 2025 | 1.70 | 2.85 | -336 | 1.56 | -747 |
Balance Sheet — End of Period
| Date | Cash & Equivalents + Marketable Securities ($B) | Debt ($B) | IBM Financing Debt ($B) | Total Assets ($B) | Total Equity ($B) |
|---|---|---|---|---|---|
| 2025-09-30 | 14.9 | 63.1 | 11.3 | 146.3 | 28.0 |
| 2025-06-30 | 15.5 | 64.2 | 11.7 | 148.6 | 27.6 |
Guidance
Full-Year Guidance (as of Q1 2026, unchanged in Q2 2026)
| Metric | FY 2026 Guidance | Notes |
|---|---|---|
| Revenue Growth (cc) | >5% | Constant currency; currency tailwind 0.5–1 pt |
| Free Cash Flow ($B) | +$1B YoY increase |
Management Commentary
Mainframe and Infrastructure:
Management noted a sharper-than-expected decline in Z and Transaction Processing as the z17 mainframe cycle wrapped up. Distributed Infrastructure delivered its best quarter ever (+37% YoY), with Power and Storage particularly strong and a $500M backlog exiting Q2.Client Behavior:
Clients shifted capex toward servers, storage, and memory to secure supply-constrained infrastructure ahead of price increases, impacting Z and Transaction Processing demand. Cybersecurity concerns delayed large deals.Red Hat and Acquisitions:
Red Hat revenue growth accelerated to +11% YoY. Recent acquisitions (HashiCorp, Confluent) performed strongly.Productivity and Margins:
Productivity initiatives contributed to continued operating (non-GAAP) PTI margin expansion (+30 bps YoY).Quantum and AI Initiatives:
IBM announced a $5B Lightwell initiative for open source software security, with early adoption by major financial institutions. Quantum investments exceed $10B over five years, with a goal to deliver the first large-scale fault-tolerant quantum computer by 2029.
What Changed
- Mainframe (Z) and Transaction Processing saw sharper-than-expected declines post-z17 launch.
- Distributed Infrastructure delivered record performance (+37% YoY), with a $500M backlog.
- Red Hat revenue growth accelerated to +11% YoY.
- Clients reprioritized capex due to supply constraints and anticipated price hikes.
- Cybersecurity concerns delayed deal closures.
- IBM launched the $5B Lightwell initiative and expanded quantum investments.
- No updated full-year guidance in Q2 2026; previous guidance for >5% cc revenue growth and +$1B YoY FCF increase remains in effect.
Additional Notes
- All figures are as reported in IBM press releases between Jan 1, 2026 and 2026-07-14, and Q2/Q3 2025 releases.
- Q2 2026 results are preliminary and may be subject to minor adjustments upon final reporting.
- Q2 2025 figures are used for all YoY comparisons per user instruction.
- No Q1 2026 call or transcript content included per instructions.
