IBM (NYSE:IBM) revised its full-year revenue guidance downward on Wednesday, while keeping its free cash flow target unchanged, amplifying the pressure on its second-half performance. The technology giant now expects constant-currency revenue growth of 4% to 5% for 2026, down from its earlier projection of over 5%. The midpoint of the new range, 4.5%, falls below the average analyst estimate of 4.8%.
For the second quarter, IBM reported revenue of $17.16 billion, a 1% increase year-over-year but below the consensus range of $17.48 billion to $17.58 billion. Adjusted earnings per share came in at $2.93, missing the average estimate of $2.97. The revenue shortfall was largely anticipated, but the reaffirmed cash flow target introduces a new challenge for management.
IBM maintained its full-year free cash flow goal of approximately $15.73 billion. Based on company data, achieving this target requires free cash flow of nearly $10.97 billion in the second half—about $1.05 billion, or 10.6%, more than the same period last year. In the first half, free cash flow totaled $4.76 billion, a slight decline from $4.81 billion in the prior-year period. The company's earlier projection of a roughly $1 billion increase underpins the bridge analysis.
Software revenue rose 5% to $7.76 billion, with Red Hat posting 11% growth. However, transaction-processing sales declined 8%. Infrastructure revenue fell 7% to $3.84 billion, driven largely by a 42% drop in IBM Z revenue compared to the prior year's mainframe launch cycle. Distributed infrastructure revenue increased by 37%. Chief Financial Officer James Kavanaugh attributed the weakness to the mainframe stack, which he said impacted IBM's growth by over five points
—far above the company's prior expectation of only one or two points.
Margins provided some support. The adjusted pretax margin expanded by 30 basis points, even as gross margin contracted by 70 basis points. IBM raised its full-year outlook for pretax margin expansion. The company also allocated $10.5 billion to acquisitions this year, and as of June, cash, restricted cash, and marketable securities stood at $8.2 billion.
IBM shares dropped nearly 2% in regular trading before advancing about 3% in after-hours activity. The stock had plunged roughly 25% on July 14 following the company's revenue warning—the largest single-day decline in over a century. The earnings call is scheduled for 5 p.m. EDT, coinciding with ServiceNow's (NYSE:NOW) call, which will provide additional insight into enterprise software demand.
Looking ahead, investor focus will center on mainframe expectations and cash conversion. The initial cash flow bridge leaves limited room for further weak quarters. Execution remains a key risk: if the mainframe recovery is softer than anticipated or software margins face additional strain, meeting the cash goal could become more challenging. The revenue shortfall was widely expected; the new test is whether cost reductions can sustain the unchanged cash commitment.
