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International Business Machines Corporation (IBM - Free Report) experienced slower momentum in its Software business in the second quarter of 2026. Software revenues increased 5% year over year to $7.8 billion, but organic revenue growth was flat. The weakness was primarily in the Transaction Processing business. Revenues from this business declined 8% year over year.
The company attributed the shortfall primarily to customers shifting capital spending toward servers, storage and memory to secure supply-constrained infrastructure ahead of anticipated price increases. As a result, several large software deals didn’t close within the expected timeframe.
However, despite the slowdown, it is to be noted that approximately 80% of annual Software revenues is recurring. Red Hat remains a key growth engine for IBM. Hybrid Cloud revenues increased 11% in the second quarter, while OpenShift ARR reached $2.2 billion. IBM’s Data business was another growth engine. Revenues increased 19% year over year.
The acquisitions of HashiCorp and Confluent have strengthened IBM's capabilities in automation, data and hybrid-cloud environments. Despite the revenue shortfall, IBM managed to expand Software segment profit. Software segment profit rose 9% to $2.5 billion, while the segment margin increased 110 basis points to 32.2%. Strong focus on productivity is helping to offset the pressure coming from slower revenue growth.
How Are Competitors Faring?
IBM faces competition from Microsoft Corporation (MSFT - Free Report) and Oracle Corporation (ORCL - Free Report) . In the June quarter, Microsoft’s Productivity & Business Processes segment generated $37.8 billion in revenues, which grew 14% year over year. Microsoft 365 Commercial cloud revenues increased 14% on a reported basis, or 16% when adjusted for a prior-year comparable that had benefited from two points of in-period revenue recognition.
Oracle’s cloud revenues (SaaS plus IaaS) surged 47% in USD and 46% in cc to $9.9 billion, demonstrating that cloud remains the primary driver of Oracle's growth trajectory. However, Software revenues were down 2% to $6.8 billion, reflecting customers' continuing migration from on-premises software to the Cloud.
IBM’s Price Performance, Valuation & Estimates
IBM shares have lost 10.3% over the past year against the industry’s growth of 171.2%.
Image Source: Zacks Investment Research
From a valuation standpoint, IBM trades at a forward price-to-sales ratio of 3.09, below the industry average of 4.6.
Image Source: Zacks Investment Research
Earnings estimates for 2026 have increased 0.7% to $12.33 over the past 60 days, while the same for 2027 have decreased 0.6% to $13.22.
View the Zacks #1 Rank List
Image: Bigstock
IBM Software Growth Slows: Will Recurring Revenue Support Recovery?
Key Takeaways
International Business Machines Corporation (IBM - Free Report) experienced slower momentum in its Software business in the second quarter of 2026. Software revenues increased 5% year over year to $7.8 billion, but organic revenue growth was flat. The weakness was primarily in the Transaction Processing business. Revenues from this business declined 8% year over year.
The company attributed the shortfall primarily to customers shifting capital spending toward servers, storage and memory to secure supply-constrained infrastructure ahead of anticipated price increases. As a result, several large software deals didn’t close within the expected timeframe.
However, despite the slowdown, it is to be noted that approximately 80% of annual Software revenues is recurring. Red Hat remains a key growth engine for IBM. Hybrid Cloud revenues increased 11% in the second quarter, while OpenShift ARR reached $2.2 billion. IBM’s Data business was another growth engine. Revenues increased 19% year over year.
The acquisitions of HashiCorp and Confluent have strengthened IBM's capabilities in automation, data and hybrid-cloud environments. Despite the revenue shortfall, IBM managed to expand Software segment profit. Software segment profit rose 9% to $2.5 billion, while the segment margin increased 110 basis points to 32.2%. Strong focus on productivity is helping to offset the pressure coming from slower revenue growth.
How Are Competitors Faring?
IBM faces competition from Microsoft Corporation (MSFT - Free Report) and Oracle Corporation (ORCL - Free Report) . In the June quarter, Microsoft’s Productivity & Business Processes segment generated $37.8 billion in revenues, which grew 14% year over year. Microsoft 365 Commercial cloud revenues increased 14% on a reported basis, or 16% when adjusted for a prior-year comparable that had benefited from two points of in-period revenue recognition.
Oracle’s cloud revenues (SaaS plus IaaS) surged 47% in USD and 46% in cc to $9.9 billion, demonstrating that cloud remains the primary driver of Oracle's growth trajectory. However, Software revenues were down 2% to $6.8 billion, reflecting customers' continuing migration from on-premises software to the Cloud.
IBM’s Price Performance, Valuation & Estimates
IBM shares have lost 10.3% over the past year against the industry’s growth of 171.2%.
Image Source: Zacks Investment Research
From a valuation standpoint, IBM trades at a forward price-to-sales ratio of 3.09, below the industry average of 4.6.
Image Source: Zacks Investment Research
Earnings estimates for 2026 have increased 0.7% to $12.33 over the past 60 days, while the same for 2027 have decreased 0.6% to $13.22.
Image Source: Zacks Investment Research
IBM currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.