International Business Machines: Outlook Implies Near-Term Headwinds Rather Than Long-Term Disruption, Now We Need Execution

Research evidence excerpt

International Business Machines: Outlook Implies Near-Term Headwinds Rather Than Long-Term Disruption, Now We Need Execution

Brian Essex, CFA AC North America Equity Research

(1-212) 622-5990 23 July 2026 J P M O R G A N

brian.essex@jpmchase.com

recurring software business is largely considered an operating expenditure by customers

and was mostly unaffected by the CapEx spend dynamics in the quarter. In 2Q, Red Hat

accelerated to 11% y/y, while HashiCorp posted a record bookings quarter and Confluent

remained strong post-close. Management sees higher-growth pieces (watsonx and the

acquired assets, growing 15% to 20% y/y) lifting the recurring base above 10% y/y over

time. The company also sees AI value shifting to the orchestration and data layers,

supporting IBM's ability to operate as a control plane and Red Hat’s ability to offer clients

a foundation to run agents and applications on any infrastructure.

• Mainframe and distributed infrastructure strength support the higher FY26

infrastructure outlook. Z17 is running at nearly 130% program-to-program, which is

about $1bn more in mainframe revenue than z16 at the same point in time. The company

noted 85% of installed MIPS are stable or growing and reiterated no evidence of clients

migrating off the mainframe platform. Distributed Infrastructure grew 37% y/y, its best

quarter on record, exiting with $500mm of backlog. IBM built inventory to meet strong

power and storage demand and sees the inventory sell-through as a 2H tailwind to FCF.

IBM raised its FY26 infrastructure outlook given the anticipated 2H strength to low

single digit growth, up from the prior low- to mid-single-digit decline expectation.

What We Are Watching

• Transaction Processing recovery timing. TP declined 9% y/y as tens of large ELA-