International Business Machines Corporation

What they do

IBM provides hybrid cloud platforms, AI solutions, consulting services, and mission-critical infrastructure. The company operates through segments including Software, Consulting, and Infrastructure, with offerings such as Red Hat, watsonx, and distributed infrastructure (Power and Storage). It competes in a highly competitive market against large multinationals and niche players.

Revenue drivers

• Software — Includes hybrid cloud and AI platforms, and AI-ready solutions like Red Hat, watsonx, HashiCorp, and Confluent. This is a key growth area, with management highlighting strong performance in the high-growth portfolio.
• Consulting — Integrates strategy, experience design, technology, and operations expertise to deliver transformation services. Competes with global firms like Accenture and Capgemini.
• Infrastructure — Includes distributed infrastructure, particularly Power and Storage, which management says grew at a record pace in Q2 2026, with an order backlog of nearly $500 million.

Recent performance

In Q2 2026, IBM reported revenue of $17,162 million, up 1.1% year-over-year. GAAP income from continuing operations was $2,166 million (12.6% margin), down 1.2% from the prior year. Operating (non-GAAP) net income was $2.8 billion with diluted EPS of $2.93, up 5% year-over-year. Gross profit margin declined 1.0 points to 57.7% on a GAAP basis.

Strategy

IBM's strategy centers on hybrid cloud and AI, with investments in high-growth portfolio areas like Red Hat, watsonx, and quantum computing. Management is accelerating go-to-market changes, expanding sales coverage, and investing in specialized talent such as Forward Deployed Engineers. The company is also driving productivity through AI and automation across software development, sales, and supply chain. IBM plans to invest more than $10 billion in quantum over the next five years and is on track to deliver a fault-tolerant quantum computer by 2029.

Risks

• Economic downturn — A decrease in client spending budgets due to economic conditions could reduce demand for IBM's products and services.
• Innovation failure — If IBM fails to commercialize and scale innovations in hybrid cloud, AI, and quantum quickly enough, it could lose market share and margins.
• Reputation damage — Events like product defects, cybersecurity incidents, or legal disputes could tarnish IBM's brand and affect client, talent, and partner retention.
• Investment risk in growth areas — High investment in AI and other strategic areas may not yield expected adoption rates or viable economic models, impacting profitability.

Outlook

For full-year 2026, management expects constant currency revenue growth of 4-5%, with currency neutral to growth. Free cash flow is expected to increase by about $1 billion year-over-year, and pre-tax income margin expansion is expected to improve. The company remains confident in its portfolio to capture AI-driven growth opportunities.