Why Is IBM (IBM) Up 13.1% Since Last Earnings Report?

It has been about a month since the last earnings report for IBM (IBM). Shares have added about 13.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is IBM due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the latest earnings report in order to get a better handle on the important drivers.

IBM Q2 Earnings Meet Estimates, Revenue Misses on Deal Delays

IBM reported relatively modest second-quarter 2026 results with adjusted earnings of $2.93 per share, up 5% year over year and in line with the Zacks Consensus Estimate. Revenues rose 1.1% to $17.16 billion but missed the consensus mark of $17.32 billion by 0.9%. 

The top-line miss reflected delayed large, capital-expenditure-sensitive software transactions and weaker IBM Z revenues. Software annual recurring revenue reached $24.6 billion, up 8% year over year, supported by continued strength in Red Hat, HashiCorp and Confluent. 

Software Growth Slows on Transaction Timing

Software revenues increased 5.1% year over year to $7.76 billion. Hybrid Cloud revenues rose 11%, while Data advanced 19%, or 18% at constant currency. Automation grew 4%, or 3% at constant currency.

Transaction Processing revenues fell 8%, or 9% at constant currency, as clients redirected spending toward servers, storage and memory amid supply constraints and expected price increases. Management observed that several large deals did not close on schedule, accounting for most of the quarterly shortfall. 

About 80% of annual software revenues are recurring, comprising subscription, consumption and support streams. This portion delivered healthy growth, while OpenShift annual recurring revenue reached $2.2 billion.

HashiCorp posted another record-bookings quarter, while Confluent remained on track after its first full quarter since the acquisition. Software segment profit rose 9% to $2.50 billion, lifting margin 110 basis points (bps) to 32.2%.

Consulting Gains from AI Transformation Demand

Consulting revenues were nearly flat at $5.33 billion, up 1% in constant currency. Strategy and Technology and Intelligent Operations each increased 1% on a constant-currency basis. Signings grew 6% to $5.0 billion, marking a second consecutive quarter of growth. Generative AI represented about 50% of signings and more than 30% of backlog. Segment profit increased 15.1% to $647 million, while margin expanded 160 bps to 12.1%. 

Infrastructure Segment Mix Weighs

Infrastructure revenues declined 7.4% to $3.84 billion. Hybrid Infrastructure fell 10%, reflecting a 42% plunge in IBM Z revenues, while Infrastructure Support slipped 1%. Distributed Infrastructure surged 37% and delivered its strongest quarterly growth on record. Power and Storage exited the quarter with nearly $500 million of backlog. Infrastructure segment profit declined 13% to $835 million, and margin contracted 150 bps to 21.8%.

IBM Expands Operating Profit Despite Gross Margin Pressure

Non-GAAP gross profit was $10.19 billion, essentially flat year over year, while non-GAAP gross margin declined 70 bps to 59.4%. The pressure mainly reflected the revenue shortfall and business mix.

Non-GAAP pre-tax income rose 3% to $3.29 billion, with margin expanding 30 bps to 19.2%. Adjusted EBITDA increased 2% to $4.8 billion, and margin improved about 20 bps to 27.8%, aided by productivity initiatives.

IBM Maintains Cash Flow Discipline

IBM generated $2.6 billion in operating cash flow during the quarter, up $0.9 billion year over year. Free cash flow was $2.5 billion, down $0.3 billion, while first-half free cash flow remained flat at $4.8 billion.

The company ended June with $8.20 billion in cash, restricted cash and marketable securities. Total debt was $62 billion, including $13 billion of IBM Financing debt. IBM returned $1.59 billion to shareholders through quarterly dividends. 

IBM Trims Revenue View but Raises Margin Target

For 2026, IBM now expects constant-currency revenue growth of 4% to 5%, down from its prior expectation of more than 5%. The company continues to expect free cash flow to increase by about $1 billion year over year.

Software growth is projected at 6% to 8%, while Infrastructure is expected to grow in the low single digits. Consulting growth is forecast to accelerate to the low-to-mid-single-digit range. IBM now expects 100 bps of operating pre-tax margin expansion for the year. 

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

VGM Scores

At this time, IBM has a average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a score of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Interestingly, IBM has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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This article originally published on Zacks Investment Research (zacks.com).

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