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Item 2 — Management's Discussion and Analysis
International Business Machines Corp · 10-Q · Q2 FY2026 · Period ended Jun 30, 2026
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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2026
Snapshot
Organization of Information:
The Management Discussion is designed to provide readers with an overview of the business and a narrative on our financial results and certain factors that may affect our future prospects from the perspective of management.
Within the tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior-period amounts have been reclassified to conform to the current-period presentation. This is annotated where applicable.
Currency:
The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. When we refer to growth rates at constant currency or adjust such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior-year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. Refer to “Currency Rate Fluctuations” on page 70 for additional information.
Operating (non-GAAP) Earnings:
In an effort to provide better transparency into the operational results of the business, supplementally, management separates business results into operating and non-operating categories. Operating earnings from continuing operations is a non-GAAP measure that excludes the effects of certain acquisition-related charges and intangible asset amortization, expense resulting from basis differences on equity method investments, retirement-related costs and their related tax impacts. Due to the unique, non-recurring nature of the enactment of the U.S. Tax Cuts and Jobs Act (TCJA or U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of 2017, and adjustments to that charge, as non-operating. Adjustments include the tax effect of true-ups, audit adjustments, accounting elections and new regulations, or laws (e.g., H.R. 1 in July of 2025) that impact the TCJA provisions which resulted in the one-time provisional charge. For acquisitions, operating (non-GAAP) earnings exclude the amortization of acquired intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable retention, restructuring and related expenses, tax charges related to acquisition integration, and pre-closing charges, such as financing costs. These charges are excluded as they may be inconsistent in amount and timing from period to period and are significantly impacted by the size, type and frequency of our acquisitions. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance, and we consider these costs to be outside of the operational performance of the business.
Overall, management believes that supplementally providing investors with a view of operating earnings as described above provides increased transparency and clarity into both the operational results of the business and the performance of our pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows us to provide a long-term strategic view of the business going forward. In addition, these non-GAAP measures provide a perspective consistent with areas of interest we routinely receive from investors and analysts.
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Management Discussion – (continued)
Financial Results Summary — Three Months Ended June 30:
($ and shares in millions, except per share amounts) Yr.-to-Yr. Percent/ Margin Change
For the three months ended June 30: 2026 2025
Revenue (1) $ 17,162 $ 16,977 1.1 %
Gross profit margin 57.7 % 58.8 % (1.0) pts.
Total expense and other (income) $ 7,428 $ 7,380 0.7 %
Income from continuing operations before income taxes $ 2,479 $ 2,597 (4.5) %
Provision for/(benefit from) income taxes from continuing operations $ 313 $ 404 (22.5) %
Income from continuing operations $ 2,166 $ 2,193 (1.2) %
Income from continuing operations margin 12.6 % 12.9 % (0.3) pts.
Income/(loss) from discontinued operations, net of tax $ (1) $ 1 nm
Net income $ 2,165 $ 2,194 (1.3) %
Earnings per share from continuing operations - assuming dilution $ 2.27 $ 2.31 (1.7) %
Consolidated earnings per share - assuming dilution $ 2.27 $ 2.31 (1.7) %
Weighted-average shares outstanding - assuming dilution 953.3 948.0 0.6 %
(1)Year-to-year revenue growth of 1 percent adjusted for currency.
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The following table provides the company’s operating (non-GAAP) earnings for the second quarter of 2026 and 2025.
($ in millions, except per share amounts) Yr.-to-Yr. Percent Change
For the three months ended June 30: 2026 2025
Net income as reported $ 2,165 $ 2,194 (1.3) %
Income/(loss) from discontinued operations, net of tax (1) 1 nm
Income from continuing operations $ 2,166 $ 2,193 (1.2) %
Non-operating adjustments (net of tax):
Acquisition-related charges 548 443 23.8
Non-operating retirement-related costs/(income) 76 17 nm
U.S. tax reform impacts 2 — nm
Operating (non-GAAP) earnings (1) $ 2,792 $ 2,652 5.3 %
Diluted operating (non-GAAP) earnings per share (1) $ 2.93 $ 2.80 4.6 %
(1)Refer to the quarter-to-date "GAAP Reconciliation" on page 65 for additional information.
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Financial Performance Summary — Three Months Ended June 30:
In the second quarter of 2026, we reported $17.2 billion in revenue, income from continuing operations of $2.2 billion, and operating (non-GAAP) earnings of $2.8 billion. Diluted earnings per share from continuing operations was $2.27 as reported and $2.93 on an operating (non-GAAP) basis. We generated $2.6 billion in cash from operations and $2.5 billion in free cash flow, and returned $1.6 billion to shareholders in dividends. While our second-quarter performance was below our expectations, we have conviction in the strength of our portfolio and the strategic direction of our business. We believe our strategic investments over the past several years continue to strengthen IBM's position as a software-led Hybrid Cloud and AI platform company and we continue to build leadership in quantum.
Total revenue grew 1.1 percent both as reported and adjusted for currency compared to the prior-year period. Software and Infrastructure revenue results were below our expectations, while Consulting was in-line. The Software shortfall was limited to a capital-sensitive area of the portfolio. While we are navigating near-term client buying dynamics that we will work through, about 80 percent of our software revenue is recurring in nature and delivered healthy growth in the quarter,
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Management Discussion – (continued)
reflecting the demand for our offerings and giving us confidence in our growth opportunity. Since the z17 was introduced in June 2025, this has been the strongest start to a mainframe program in our history, and we expected declines year to year in revenue. However, the results in the quarter were worse than our expectations, driven by a shortfall in our IBM Z performance and the associated software stack, primarily in Transaction Processing. In the final weeks of June, we saw a shift in client spending priorities that resulted in numerous large deals failing to close within the expected timelines, driving the majority of the shortfall. Many clients redirected spending toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases. We saw this dynamic firsthand, with Distributed Infrastructure revenue increasing 37 percent, our strongest quarter on record.
Software delivered revenue growth of 5.1 percent as reported (4.6 percent adjusted for currency). Consulting revenue was flat as reported and increased 1.1 percent adjusted for currency. Infrastructure revenue decreased 7.4 percent both as reported and adjusted for currency.
From a geographic perspective, Americas revenue decreased 0.5 percent as reported (1.0 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased 4.1 percent as reported (2.1 percent adjusted for currency). Asia Pacific increased 0.3 percent as reported (5.2 percent adjusted for currency).
Gross margin of 57.7 percent decreased 1.0 point year to year driven by our revenue shortfall and mix, partially offset by productivity actions. Operating (non-GAAP) gross margin of 59.4 percent decreased 0.7 points compared to the prior-year period due to the same dynamics.
Total expense and other (income) increased 0.7 percent in the second quarter of 2026 compared to the second quarter of 2025 driven by our investments in portfolio innovation, and higher amortization of acquired intangible assets and acquisition-related charges, partially offset by savings from productivity actions and the effects of currency. Total operating (non-GAAP) expense and other (income) decreased 1.5 percent year to year, driven by savings from productivity actions and the effects of currency, partially offset by our investments in portfolio innovations.
Pre-tax income from continuing operations of $2.5 billion decreased 4.5 percent compared to the prior-year period and pre-tax margin declined 0.9 points year to year to 14.4 percent. Software and Consulting segment profit margins improved year to year, while Infrastructure profit margin was impacted by the IBM Z shortfall and cycle dynamics. The continuing operations provision for income taxes was $0.3 billion in the second quarter of 2026, compared to $0.4 billion in the second quarter of 2025. Net income from continuing operations was essentially flat year to year. Net income from continuing operations margin of 12.6 percent, was down 0.3 points year to year.
Operating (non-GAAP) pre-tax income from continuing operations of $3.3 billion increased 2.9 percent compared to the second quarter of 2025 and the operating (non-GAAP) pre-tax margin from continuing operations increased 0.3 points to 19.2 percent. The operating (non-GAAP) provision for income taxes was $0.5 billion in both the second quarter of 2026 and the second quarter of 2025. Operating (non-GAAP) net income from continuing operations of $2.8 billion increased 5.3 percent and the operating (non-GAAP) net income margin from continuing operations of 16.3 percent increased 0.6 point year to year.
Diluted earnings per share from continuing operations of $2.27 decreased 1.7 percent and operating (non-GAAP) diluted earnings per share of $2.93 increased 4.6 percent compared to the second quarter of 2025.
Cash provided by operating activities was $2.6 billion in the second quarter of 2026, an increase of $0.9 billion compared to the second quarter of 2025, which includes a decrease in cash used by financing receivables of $1.2 billion. Free cash flow was $2.5 billion, a decrease of $0.3 billion versus the prior-year period. Net cash used in investing activities was $0.5 billion, compared with net cash provided by investing activities of $1.7 billion in the prior-year period. Net cash used in financing activities of $5.7 billion increased $2.9 billion compared to the second quarter of 2025.
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Management Discussion – (continued)
Financial Results Summary — Six Months Ended June 30:
($ and shares in millions, except per share amounts) Yr.-to-Yr. Percent/ Margin Change
For the six months ended June 30: 2026 2025
Revenue (1) $ 33,079 $ 31,519 5.0 %
Gross profit margin 57.0 % 57.1 % (0.1) pts.
Total expense and other (income) $ 14,991 $ 14,253 5.2 %
Income from continuing operations before income taxes $ 3,866 $ 3,755 3.0 %
Provision for/(benefit from) income taxes from continuing operations $ 484 $ 507 (4.5) %
Income from continuing operations $ 3,382 $ 3,248 4.1 %
Income from continuing operations margin 10.2 % 10.3 % (0.1) pts.
Income/(loss) from discontinued operations, net of tax $ (1) $ 1 nm
Net income $ 3,381 $ 3,249 4.1 %
Earnings per share from continuing operations - assuming dilution $ 3.55 $ 3.43 3.5 %
Consolidated earnings per share - assuming dilution $ 3.55 $ 3.43 3.5 %
Weighted-average shares outstanding - assuming dilution 952.7 946.7 0.6 %
At 6/30/2026 At 12/31/2025
Assets $ 152,099 $ 151,880 0.1 %
Liabilities $ 117,558 $ 119,139 (1.3) %
Equity $ 34,541 $ 32,740 5.5 %
(1)Year-to-year revenue growth of 3 percent adjusted for currency.
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The following table provides the company’s operating (non-GAAP) earnings for the first six months of 2026 and 2025.
($ in millions, except per share amounts) Yr.-to-Yr. Percent Change
For the six months ended June 30: 2026 2025
Net income as reported $ 3,381 $ 3,249 4.1 %
Income/(loss) from discontinued operations, net of tax (1) 1 nm
Income from continuing operations $ 3,382 $ 3,248 4.1 %
Non-operating adjustments (net of tax):
Acquisition-related charges 1,056 872 21.1
Non-operating retirement-related costs/(income) 169 51 229.9
U.S. tax reform impacts 6 (2) nm
Operating (non-GAAP) earnings (1) $ 4,613 $ 4,169 10.7 %
Diluted operating (non-GAAP) earnings per share (1) $ 4.84 $ 4.40 10.0 %
(1)Refer to the year-to-date "GAAP Reconciliation" on page 66 for additional information.
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Financial Performance Summary —Six Months Ended June 30:
In the first six months of 2026, we reported $33.1 billion in revenue, net income from continuing operations of $3.4 billion, and operating (non-GAAP) earnings of $4.6 billion. Diluted earnings per share from continuing operations was $3.55 as reported and $4.84 on an operating (non-GAAP) basis. We generated $7.8 billion in cash from operations and $4.8 billion in free cash flow, and delivered shareholder returns of $3.2 billion in dividends. Our year-to-date performance was impacted by the dynamics we faced in the second quarter of 2026; however, it also reflects a focus on business fundamentals as we accelerate our productivity initiatives while continuing to invest in growth. We continue to maintain a
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Management Discussion – (continued)
strong liquidity position and a solid investment grade balance sheet which enables us to invest in our business and return value to shareholders through dividends.
Total revenue grew 5.0 percent as reported and 3.4 percent adjusted for currency compared to the prior-year period. Software grew 7.9 percent as reported (6.1 percent adjusted for currency). Consulting revenue increased 2.1 percent as reported (1.0 percent adjusted for currency). Infrastructure revenue increased 1.9 percent as reported (0.5 percent adjusted for currency).
From a geographic perspective, Americas revenue increased 3.9 percent year to year as reported (3.2 percent adjusted for currency). EMEA increased 9.1 percent (3.6 percent adjusted for currency). Asia Pacific increased 0.7 percent (3.6 percent adjusted for currency).
Gross margin of 57.0 percent and operating (non-GAAP) gross margin of 58.6 percent were essentially flat compared to the prior-year period and were impacted by the second quarter 2026 revenue shortfall and mix dynamics.
Total expense and other (income) increased 5.2 percent in the first six months of 2026 versus the prior-year period primarily driven by our investments in portfolio innovation, and higher amortization of acquired intangible assets and acquisition-related charges, partially offset by savings from productivity actions. Total operating (non-GAAP) expense and other (income) increased 3.4 percent year to year, driven primarily by the same factors excluding the higher amortization of acquired intangible assets and acquisition-related charges.
Pre-tax income from continuing operations of $3.9 billion increased 3.0 percent and pre-tax margin was 11.7 percent, a decline of 0.2 points as compared to the first six months of 2025. The continuing operations provision for income taxes in the first six months of 2026 and the first six months of 2025 was $0.5 billion. Net income from continuing operations of $3.4 billion increased 4.1 percent and the net income from continuing operations margin was 10.2 percent, down 0.1 points year to year. The year-to-year performance was primarily driven by first-half revenue growth and increased productivity, partially offset by our investments in portfolio innovation.
Operating (non-GAAP) pre-tax income from continuing operations of $5.4 billion increased 9.8 percent compared to the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations increased 0.7 points to 16.4 percent. The operating (non-GAAP) provision for income taxes in the first six months of 2026 and the first six months of 2025 was $0.8 billion. Operating (non-GAAP) income from continuing operations of $4.6 billion increased 10.7 percent and the operating (non-GAAP) income margin from continuing operations of 13.9 percent increased 0.7 points year to year. The year-to-year performance is primarily driven by the same factors as described above.
Diluted earnings per share from continuing operations of $3.55 in the first six months of 2025 increased 3.5 percent and operating (non-GAAP) diluted earnings per share of $4.84 increased 10.0 percent compared to the first six months of 2025.
At June 30, 2026, the balance sheet remained strong with financial flexibility to support and invest in the business. Cash and cash equivalents, restricted cash and marketable securities at June 30, 2026 of $8.2 billion decreased $6.3 billion from December 31, 2025 and debt of $62.0 billion at June 30, 2026 increased $0.7 billion. The company continues to make investments in innovation both organically and through acquisitions, including the Confluent acquisition in first-quarter 2026.
Total assets increased $0.2 billion ($1.3 billion adjusted for currency) from December 31, 2025. Total liabilities decreased $1.6 billion ($0.5 billion adjusted for currency) from December 31, 2025. Total equity of $34.5 billion increased $1.8 billion from December 31, 2025.
Cash provided by operating activities was $7.8 billion in the first six months of 2026, an increase of $1.7 billion compared to the first six months of 2025, which includes an increase in cash provided by financing receivables of $1.7 billion. Free cash flow of $4.8 billion was essentially flat versus the prior-year period. Refer to page 72 for additional information on free cash flow. Net cash used in investing activities of $11.0 billion, which includes our investment in the acquisition of Confluent, decreased $0.3 billion compared to the prior-year period. Financing activities were a net use of cash of $3.0 billion in the first six months of 2026 compared to a net source of cash of $2.6 billion in the first six months of 2025.
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Management Discussion – (continued)
Second Quarter in Review
Results of Continuing Operations
Segment Details
The following tables present each reportable segment’s revenue and gross margin results, followed by an analysis of the second quarter and the first six months of 2026 versus the second quarter and first six months of 2025 reportable segments results.
($ in millions) Yr.-to-Yr. Percent/Margin Change Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended June 30: 2026 2025
Revenue:
Software $ 7,761 $ 7,387 5.1 % 4.6 %
Gross margin 82.6 % 83.9 % (1.3) pts.
Consulting 5,327 5,314 0.2 % 1.1 %
Gross margin 28.9 % 27.5 % 1.4 pts.
Infrastructure 3,835 4,142 (7.4) % (7.4) %
Gross margin 58.4 % 61.5 % (3.1) pts.
Financing 186 166 12.2 % 11.3 %
Gross margin 42.5 % 45.7 % (3.3) pts.
Other (1) 52 (31) nm nm
Gross margin nm nm nm
Total revenue $ 17,162 $ 16,977 1.1 % 1.1 %
Total gross profit $ 9,907 $ 9,977 (0.7) %
Total gross margin 57.7 % 58.8 % (1.0) pts.
Non-operating adjustments:
Amortization of acquired intangible assets 287 225 27.2 %
Operating (non-GAAP) gross profit $ 10,194 $ 10,202 (0.1) %
Operating (non-GAAP) gross margin 59.4 % 60.1 % (0.7) pts.
(1)Includes reductions in revenue for estimated residual value less related unearned income on sales-type leases, which reflects the z17 launch in June 2025. Refer to note A, "Significant Accounting Policies," in the company's 2025 Annual Report for additional information.
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($ in millions) Yr.-to-Yr. Percent/Margin Change Yr.-to-Yr. Percent Change Adjusted For Currency
For the six months ended June 30: 2026 2025
Revenue:
Software $ 14,813 $ 13,722 7.9 % 6.1 %
Gross margin 82.7 % 83.7 % (1.1) pts.
Consulting 10,599 10,382 2.1 % 1.0 %
Gross margin 28.2 % 27.4 % 0.8 pts.
Infrastructure 7,161 7,027 1.9 % 0.5 %
Gross margin 57.7 % 57.9 % (0.3) pts.
Financing 406 357 13.6 % 10.7 %
Gross margin 43.0 % 45.8 % (2.8) pts.
Other (1) 100 30 235.5 % 196.3 %
Gross margin nm nm nm
Total revenue $ 33,079 $ 31,519 5.0 % 3.4 %
Total gross profit $ 18,857 $ 18,008 4.7 %
Total gross margin 57.0 % 57.1 % (0.1) pts.
Non-operating adjustments:
Amortization of acquired intangible assets 524 426 23.0 %
Operating (non-GAAP) gross profit $ 19,380 $ 18,434 5.1 %
Operating (non-GAAP) gross margin 58.6 % 58.5 % 0.1 pts.
(1)Includes reductions in revenue for estimated residual value less related unearned income on sales-type leases, which reflects the z17 launch in June 2025. Refer to note A, "Significant Accounting Policies," in the company's 2025 Annual Report for additional information.
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Software
($ in millions) Yr.-to-Yr. Percent Change Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended June 30: 2026 2025
Software revenue: $ 7,761 $ 7,387 5.1 % 4.6 %
Hybrid Cloud $ 1,998 $ 1,796 11.2 % 10.9 %
Automation 1,951 1,883 3.6 3.1
Data 1,782 1,499 18.9 18.4
Transaction Processing 2,030 2,208 (8.1) (8.6)
($ in millions) Yr.-to-Yr. Percent Change Yr.-to-Yr. Percent Change Adjusted For Currency
For the six months ended June 30: 2026 2025
Software revenue: $ 14,813 $ 13,722 7.9 % 6.1 %
Hybrid Cloud $ 3,903 $ 3,483 12.1 % 10.4 %
Automation 3,692 3,467 6.5 4.7
Data 3,256 2,736 19.0 17.3
Transaction Processing 3,963 4,037 (1.8) (3.9)
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Management Discussion – (continued)
For the second quarter of 2026, Software revenue of $7,761 million increased 5.1 percent as reported (4.6 percent adjusted for currency) compared to the prior-year period. Although the revenue performance was below our expectations, recent acquisitions delivered a strong contribution to Software revenue growth. Our recurring revenue base, which is approximately 80 percent of Software revenue, delivered healthy growth, reflecting demand for our offerings. The remaining 20 percent of Software revenue is transactional in nature, and is predominantly related to the incumbency with IBM Z and the associated enterprise license agreements (ELAs) with Transaction Processing and other software products in Data and Automation. ELAs are highly valuable to IBM because they establish long-term, strategic client commitments that expand adoption across our software products, creating a multiplier effect. Transactional revenue declined in the period given the shift in customer buying patterns late in the quarter.
Revenue performance by line of business in the second quarter compared to the prior-year period was as follows:
Hybrid Cloud (Red Hat) revenue increased 11.2 percent as reported (10.9 percent adjusted for currency), driven by subscriptions and stabilization in consumption-based services. OpenShift annual recurring revenue is now over $2 billion. Automation revenue increased 3.6 percent as reported (3.1 percent adjusted for currency). Data revenue increased 18.9 percent as reported (18.4 percent adjusted for currency) reflecting the contribution from recent acquisitions, primarily Confluent. Transaction Processing revenue decreased 8.1 percent as reported (8.6 percent adjusted for currency), reflecting the shortfall in our IBM Z performance.
Across Software, our annual recurring revenue (ARR) was solid at $24.6 billion, which increased approximately $2 billion as reported year to year. This increase reflects the acquisition of Confluent and growth across other areas of our recurring revenue base. ARR is a key performance metric management uses to assess the health and growth trajectory of our Software segment, and is calculated by using the current quarter’s recurring revenue and then multiplying that value by four. This value includes the following consumption models: (1) software subscription agreements, including committed term licenses, (2) as-a-service arrangements such as SaaS and PaaS, and (3) maintenance and support contracts. ARR should be viewed independently of software revenue as this performance metric and its inputs may not represent revenue that will be recognized in future periods.
Revenue performance in the first six months of 2026 compared to the prior-year period was as follows:
Software revenue of $14,813 million increased 7.9 percent as reported (6.1 percent adjusted for currency). Hybrid Cloud and Data both grew at double-digit rates, Automation expanded at a mid-single digit rate and Transaction Processing declined. The revenue performance in Software for the first six months of 2026 reflects the contribution from Hybrid Cloud and recent acquisitions, including Confluent and HashiCorp, and the investment in innovating our organic software; partially offset by the transactional dynamics that occurred in the second-quarter 2026.
($ in millions) Yr.-to-Yr. Percent/ Margin Change
For the three months ended June 30: 2026 2025
Software:
Gross profit $ 6,411 $ 6,197 3.5 %
Gross profit margin 82.6 % 83.9 % (1.3) pts.
Segment profit $ 2,502 $ 2,296 8.9 %
Segment profit margin 32.2 % 31.1 % 1.1 pts.
($ in millions) Yr.-to-Yr. Percent/ Margin Change
For the six months ended June 30: 2026 2025
Software:
Gross profit $ 12,247 $ 11,490 6.6 %
Gross profit margin 82.7 % 83.7 % (1.1) pts.
Segment profit $ 4,601 $ 4,143 11.1 %
Segment profit margin 31.1 % 30.2 % 0.9 pts.
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Management Discussion – (continued)
For the second quarter of 2026, Software gross profit margin decreased 1.3 points to 82.6 percent, on a year-to-year basis. Segment profit of $2,502 million increased 8.9 percent and segment profit margin of 32.2 percent increased 1.1 points compared to the prior-year period.
For the first six months of 2026, Software gross profit margin decreased 1.1 points to 82.7 percent on a year-to-year basis. Segment profit of $4,601 million increased 11.1 percent and segment profit margin of 31.1 percent increased 0.9 points compared to the prior-year period.
The Software gross profit margin decline for the second quarter and the first six months of 2026 was primarily driven by investments in our portfolio innovation, and product mix. Segment profit and profit margin performance for both periods reflect the benefits of our productivity actions, partially offset by investments in the business.
Consulting
($ in millions) Yr.-to-Yr. Percent Change Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended June 30: 2026 2025
Consulting revenue: $ 5,327 $ 5,314 0.2 % 1.1 %
Strategy and Technology $ 2,933 $ 2,920 0.5 % 1.3 %
Intelligent Operations 2,394 2,395 0.0 0.8
($ in millions) Yr.-to-Yr. Percent Change Yr.-to-Yr. Percent Change Adjusted For Currency
For the six months ended June 30: 2026 2025
Consulting revenue: $ 10,599 $ 10,382 2.1 % 1.0 %
Strategy and Technology $ 5,829 $ 5,702 2.2 % 1.1 %
Intelligent Operations 4,770 4,680 1.9 0.8
For the second quarter of 2026, Consulting revenue of $5,327 million was essentially flat as reported (increased 1.1 percent adjusted for currency) on a year-to-year basis. Strategy and Technology revenue increased 0.5 percent as reported (1.3 percent adjusted for currency), and Intelligent Operations revenue was flat as reported (increased 0.8 percent adjusted for currency), compared to the prior-year period. The revenue performance in Consulting was driven by demand for application modernization, data transformation and cybersecurity services as clients balance the need to increase productivity through AI with the need to strengthen resiliency and manage risk.
For the first six months of 2026, Consulting revenue of $10,599 million increased 2.1 percent as reported (1.0 percent adjusted for currency) on a year-to-year basis. The revenue performance for Consulting and the lines of business was primarily driven by the same factors as described above for the second quarter.
($ in millions) Yr.-to-Yr. Percent/ Margin Change
For the three months ended June 30: 2026 2025
Consulting:
Gross profit $ 1,539 $ 1,461 5.4 %
Gross profit margin 28.9 % 27.5 % 1.4 pts.
Segment profit $ 647 $ 562 15.1 %
Segment profit margin 12.1 % 10.6 % 1.6 pts.
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Management Discussion – (continued)
($ in millions) Yr.-to-Yr. Percent/ Margin Change
For the six months ended June 30: 2026 2025
Consulting:
Gross profit $ 2,988 $ 2,842 5.1 %
Gross profit margin 28.2 % 27.4 % 0.8 pts.
Segment profit $ 1,205 $ 1,121 7.5 %
Segment profit margin 11.4 % 10.8 % 0.6 pts.
In the second quarter of 2026, Consulting gross profit margin of 28.9 percent increased 1.4 points on a year-to-year basis. Segment profit of $647 million increased 15.1 percent and segment profit margin of 12.1 percent increased 1.6 points compared to the prior-year period.
For the first six months of 2026, Consulting gross profit margin of 28.2 percent increased 0.8 points on a year-to-year basis. Segment profit of $1,205 million increased 7.5 percent and segment profit margin of 11.4 percent increased 0.6 points compared to the prior-year period.
Consulting gross profit, segment profit and respective margin performance in the second quarter and first six months of 2026 primarily reflect the benefits of the productivity actions we have taken, partially offset by investments in innovation.
($ in millions) Yr.-to-Yr. Percent Change Yr.-to-Yr. Percent Change Adjusted For Currency
For the six months ended June 30: 2026 2025
Total Consulting signings $ 10,388 $ 9,727 6.8 % 5.9 %
Consulting Signings, Book-to-Bill and Backlog
($ in millions) Yr.-to-Yr. Percent Change Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended June 30: 2026 2025
Total Consulting signings $ 5,034 $ 4,793 5.0 % 5.9 %
For the three and six months ended June 30, 2026, Consulting signings increased 5.0 percent as reported (5.9 percent adjusted for currency) and 6.8 percent as reported (5.9 percent adjusted for currency), respectively, compared to the prior-year period. This was the second consecutive quarter of solid signings growth reflecting continued client investment in business transformation initiatives. Our book-to-bill ratio for the trailing twelve-months was approximately 1.05. Book-to-bill represents the ratio of IBM Consulting signings to its revenue over the same period. The metric is a useful indicator of the demand of our business over time. At June 30, 2026, backlog was $30.8 billion.
Signings are management’s initial estimate of the value of a client’s commitment under a services contract within IBM Consulting. There are no third-party standards or requirements governing the calculation of signings. The calculation used by management involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs.
Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Total signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger contracts. Signings associated with an acquisition will be recognized on a prospective basis.
Management believes the estimated values of signings disclosed provide an indication of our forward-looking revenue. Signings are used to monitor the performance of the business and viewed as useful information for management and shareholders. The conversion of signings into revenue may vary based on the types of services and solutions, contract
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Management Discussion – (continued)
duration, customer decisions, and other factors, which may include, but are not limited to, the macroeconomic environment.
Infrastructure
($ in millions) Yr.-to-Yr. Percent Change Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended June 30: 2026 2025
Infrastructure revenue: $ 3,835 $ 4,142 (7.4) % (7.4) %
Hybrid Infrastructure $ 2,570 $ 2,866 (10.3) % (10.1) %
IBM Z (42.0) (41.8)
Distributed Infrastructure 37.3 37.5
Infrastructure Support 1,265 1,275 (0.8) (1.1)
($ in millions) Yr.-to-Yr. Percent Change Yr.-to-Yr. Percent Change Adjusted For Currency
For the six months ended June 30: 2026 2025
Infrastructure revenue: $ 7,161 $ 7,027 1.9 % 0.5 %
Hybrid Infrastructure $ 4,678 $ 4,512 3.7 % 2.6 %
IBM Z (19.5) (20.1)
Distributed Infrastructure 27.2 25.5
Infrastructure Support 2,483 2,515 (1.3) (3.4)
For the second quarter of 2026 as compared to the prior-year period, Infrastructure revenue of $3,835 million decreased 7.4 percent, with a decline in Hybrid Infrastructure of 10.3 percent as reported (10.1 percent adjusted for currency) and a decline in Infrastructure Support of 0.8 percent as reported (1.1 percent adjusted for currency). Within Hybrid Infrastructure, IBM Z decreased 42.0 percent as reported (41.8 percent adjusted for currency) reflecting performance below expectations in the current period, and also comparing to a historically strong prior-year z17 launch. Distributed Infrastructure revenue increased 37.3 percent as reported (37.5 percent adjusted for currency), with double-digit growth in both Storage and Power. Storage revenue growth reflects our differentiated offerings including those with AI-enabled capabilities that help clients scale and manage data for AI. Power revenue growth was driven by continued demand for Power11 with its value proposition of resiliency, performance and Linux modernization.
For the first six months of 2026, Infrastructure revenue of $7,161 million increased 1.9 percent as reported (0.5 percent adjusted for currency) compared to the prior-year period, reflecting growth in Distributed Infrastructure, led by double-digit growth in Power and Storage. IBM Z and Infrastructure Support revenue performance reflects product cycle dynamics. IBM Z revenue was impacted by the shortfall in the second quarter, but z17 remains our strongest program on record as clients continue to invest in the platform to modernize mission-critical workloads.
($ in millions) Yr.-to-Yr. Percent/ Margin Change
For the three months ended June 30: 2026 2025
Infrastructure:
Gross profit $ 2,239 $ 2,548 (12.1) %
Gross profit margin 58.4 % 61.5 % (3.1) pts.
Segment profit $ 835 $ 965 (13.4) %
Segment profit margin 21.8 % 23.3 % (1.5) pts.
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($ in millions) Yr.-to-Yr. Percent/ Margin Change
For the six months ended June 30: 2026 2025
Infrastructure:
Gross profit $ 4,130 $ 4,071 1.5 %
Gross profit margin 57.7 % 57.9 % (0.3) pts.
Segment profit $ 1,360 $ 1,213 12.1 %
Segment profit margin 19.0 % 17.3 % 1.7 pts.
For the second quarter of 2026, Infrastructure gross profit margin of 58.4 percent decreased 3.1 points on a year-to-year basis. Infrastructure segment profit of $835 million decreased 13.4 percent and segment profit margin of 21.8 percent decreased 1.5 points compared to the prior-year period.
Infrastructure gross profit, segment profit and respective margin performance in the second quarter of 2026 was driven by the IBM Z shortfall and associated product mix, partially offset by productivity actions we have taken.
For the first six months of 2026, gross profit margin of 57.7 percent was essentially flat on a year-to-year basis. Infrastructure segment profit of $1,360 million increased 12.1 percent and segment profit margin of 19.0 percent increased 1.7 points compared to the prior-year period.
Infrastructure gross profit, segment profit and respective margin performance in the first six months of 2026 primarily reflect productivity actions we have taken, partially offset by product mix.
Financing
Refer to pages 73 through 74 for a discussion of Financing’s segment results.
Geographic Revenue
In addition to the revenue presentation by reportable segment, we also measure revenue performance on a geographic basis.
($ in millions) Yr.-to-Yr. Percent Change Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended June 30: 2026 2025
Total Revenue $ 17,162 $ 16,977 1.1 % 1.1 %
Americas $ 8,417 $ 8,462 (0.5) % (1.0) %
Europe/Middle East/Africa (EMEA) 5,633 5,413 4.1 2.1
Asia Pacific 3,112 3,103 0.3 5.2
($ in millions) Yr.-to-Yr. Percent Change Yr.-to-Yr. Percent Change Adjusted For Currency
For the six months ended June 30: 2026 2025
Total Revenue $ 33,079 $ 31,519 5.0 % 3.4 %
Americas $ 16,278 $ 15,668 3.9 % 3.2 %
Europe/Middle East/Africa (EMEA) 10,876 9,965 9.1 3.6
Asia Pacific 5,925 5,886 0.7 3.6
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Management Discussion – (continued)
Geographic revenue performance for the three months ended June 30, 2026 compared to the prior-year period:
Americas revenue of $8,417 million decreased 0.5 percent as reported and 1.0 percent adjusted for currency. The U.S. decreased 2.4 percent as reported. Canada decreased 17.1 percent as reported and 16.9 percent adjusted for currency. Latin America increased 30.2 percent as reported and 24.9 percent adjusted for currency, with Brazil increasing 47.4 percent as reported and 39.8 percent adjusted for currency.
In EMEA, total revenue of $5,633 million increased 4.1 percent as reported and 2.1 percent adjusted for currency. The U.K. increased 14.3 percent as reported and 14.1 percent adjusted for currency. Germany, France and Italy decreased 5.5 percent, 6.0 percent, and 13.4 percent, respectively, as reported, and 7.5 percent, 8.0 percent, and 15.2 percent, respectively, adjusted for currency. The Middle East and Africa region increased 22.9 percent as reported and 20.9 percent adjusted for currency.
Asia Pacific revenue of $3,112 million increased 0.3 percent as reported and 5.2 percent adjusted for currency. India increased 12.8 percent as reported and 24.7 percent adjusted for currency. Australia increased 9.4 percent as reported, but decreased 0.5 percent adjusted for currency. Japan decreased 9.7 percent as reported and was flat adjusted for currency.
Geographic revenue performance for the six months ended June 30, 2026 compared to the prior-year period:
Americas revenue of $16,278 million increased 3.9 percent as reported and 3.2 percent adjusted for currency. The U.S. increased 2.2 percent as reported. Canada decreased 4.8 percent as reported and 6.6 percent adjusted for currency. Latin America increased 22.5 percent as reported and 17.2 percent adjusted for currency, with Brazil increasing 38.5 percent as reported and 31.2 percent adjusted for currency.
In EMEA, total revenue of $10,876 million increased 9.1 percent as reported and 3.6 percent adjusted for currency. The U.K. increased 15.6 percent as reported and 12.0 percent adjusted for currency. France increased 6.6 percent as reported and was flat adjusted for currency. Germany and Italy increased 4.8 percent and 3.3 percent, respectively, as reported, but decreased 1.2 percent and 2.8 percent, respectively, adjusted for currency. The Middle East and Africa region increased 19.6 percent as reported and 17.4 percent adjusted for currency and represents less than 3 percent of IBM total revenue.
Asia Pacific revenue of $5,925 million increased 0.7 percent as reported and 3.6 percent adjusted for currency. Australia and India increased 11.7 percent and 9.1 percent, respectively, as reported, and 1.2 percent and 18.3 percent, respectively, adjusted for currency. Japan decreased 6.9 percent as reported and 0.5 percent adjusted for currency.
Expense
Total Expense and Other (Income)
($ in millions) Yr.-to-Yr. Percent Change
For the three months ended June 30: 2026 2025
Total expense and other (income) $ 7,428 $ 7,380 0.7 %
Non-operating adjustments:
Amortization of acquired intangible assets $ (378) $ (324) 16.8 %
Acquisition-related charges (51) (26) 97.8
Non-operating retirement-related (costs)/income (96) (25) 277.9
Operating (non-GAAP) expense and other (income) $ 6,903 $ 7,005 (1.5) %
Total expense-to-revenue ratio 43.3 % 43.5 % (0.2) pts.
Operating (non-GAAP) expense-to-revenue ratio 40.2 % 41.3 % (1.0) pts.
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($ in millions) Yr.-to-Yr. Percent Change
For the six months ended June 30: 2026 2025
Total expense and other (income) $ 14,991 $ 14,253 5.2 %
Non-operating adjustments:
Amortization of acquired intangible assets $ (711) $ (618) 15.0 %
Acquisition-related charges (126) (88) 43.2
Non-operating retirement-related (costs)/income (192) (48) nm
Operating (non-GAAP) expense and other (income) $ 13,961 $ 13,499 3.4 %
Total expense-to-revenue ratio 45.3 % 45.2 % 0.1 pts.
Operating (non-GAAP) expense-to-revenue ratio 42.2 % 42.8 % (0.6) pts.
nm - not meaningful
For additional information regarding total expense and other (income) for both expense presentations, refer to the following analyses by category.
Selling, General and Administrative Expense
($ in millions) Yr.-to-Yr. Percent Change
For the three months ended June 30: 2026 2025
Selling, general and administrative expense:
Selling, general and administrative — other $ 3,920 $ 4,078 (3.9) %
Advertising and promotional expense 384 349 9.8
Workforce rebalancing charges 65 18 252.3
Amortization of acquired intangible assets 378 324 16.8
Stock-based compensation (1) 228 244 (6.7)
Provision for/(benefit from) expected credit loss expense 7 14 (50.8)
Total selling, general and administrative expense $ 4,981 $ 5,027 (0.9) %
Non-operating adjustments:
Amortization of acquired intangible assets $ (378) $ (324) 16.8 %
Acquisition-related charges (1) (43) (25) 75.5
Operating (non-GAAP) selling, general and administrative expense $ 4,560 $ 4,679 (2.5) %
(1)2026 includes $52 million for awards in connection with acquisitions (including a non-operating adjustment in acquisition related charges of $5 million). 2025 includes $41 million for awards in connection with acquisitions (including a non-operating adjustment in acquisition-related charges of $17 million).
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($ in millions) Yr.-to-Yr. Percent Change
For the six months ended June 30: 2026 2025
Selling, general and administrative expense:
Selling, general and administrative — other $ 7,820 $ 7,884 (0.8) %
Advertising and promotional expense 613 588 4.3
Workforce rebalancing charges 424 334 26.9
Amortization of acquired intangible assets 711 618 15.0
Stock-based compensation (1) 497 461 7.9
Provision for/(benefit from) expected credit loss expense 5 28 (81.5)
Total selling, general and administrative expense $ 10,071 $ 9,913 1.6 %
Non-operating adjustments:
Amortization of acquired intangible assets $ (711) $ (618) 15.0 %
Acquisition-related charges (1) (118) (83) 42.1
Operating (non-GAAP) selling, general and administrative expense $ 9,242 $ 9,212 0.3 %
(1)2026 includes $69 million for awards in connection with acquisitions (including a non-operating adjustment in acquisition related charges of $6 million). 2025 includes $45 million for awards in connection with acquisitions (including a non-operating adjustment in acquisition-related charges of $17 million).
Total selling, general and administrative (SG&A) expense decreased 0.9 percent in the second quarter of 2026 versus the prior-year period driven primarily by the following factors:
•Lower spending reflecting the benefits from productivity and the actions taken to transform our operations (7 points); partially offset by
•Higher operating expenses from acquired businesses, as a result of our continued investment to drive our hybrid cloud and AI strategy (4 points); and
•Higher amortization of acquired intangible assets and acquisition-related charges (2 points).
Operating (non-GAAP) SG&A expense decreased 2.5 percent year to year primarily driven by the same factors above, excluding the higher amortization of acquired intangible assets and acquisition-related charges.
Expected credit loss expense was a provision of $7 million in the second quarter of 2026 compared to $14 million in the prior-year period. The year-to-year change was primarily driven by lower specific reserve requirements in the current year. Refer to "Receivables and Allowances" section on page 67 for additional information.
Total SG&A expense increased 1.6 percent in the first six months of 2026 versus the prior-year period driven primarily by the following factors:
•Higher operating expenses from acquired businesses, as a result of our continued investment to drive our hybrid cloud and AI strategy (3 points);
•The effects of currency (2 points); and
•Higher amortization of acquired intangible assets and acquisition-related charges (1 point); partially offset by
•Benefits from productivity and the actions taken to transform our operations (5 points).
Operating (non-GAAP) SG&A expense increased 0.3 percent year to year primarily driven by the same factors above, excluding the higher amortization of acquired intangible assets and acquisition-related charges.
Expected credit loss expense was a provision of $5 million in the first six months of 2026 compared to $28 million in the prior-year period. The year-to-year change was primarily driven by lower specific reserve requirements in the current year. Refer to "Receivables and Allowances" section on page 67 for additional information.
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Management Discussion – (continued)
Research and Development
($ in millions) Yr.-to-Yr. Percent Change
For the three months ended June 30: 2026 2025
Research and development expense $ 2,311 $ 2,097 10.2 %
($ in millions) Yr.-to-Yr. Percent Change
For the six months ended June 30: 2026 2025
Research and development expense $ 4,485 $ 4,047 10.8 %
Research and development (R&D) expense increased 10.2 percent and 10.8 percent in the second quarter and the first six months of 2026, respectively, driven by continued organic and inorganic investments to drive innovation in AI, hybrid cloud and quantum.
Intellectual Property and Custom Development Income
($ in millions) Yr.-to-Yr. Percent Change
For the three months ended June 30: 2026 2025
Intellectual property and custom development income:
Intellectual property income (1) $ 56 $ 43 31.7 %
Custom development income 109 172 (36.4)
Total $ 166 $ 215 (22.8) %
($ in millions) Yr.-to-Yr. Percent Change
For the six months ended June 30: 2026 2025
Intellectual property and custom development income:
Intellectual property income (1) $ 101 $ 106 (4.2) %
Custom development income 236 362 (34.8)
Total $ 338 $ 468 (27.8) %
(1)Includes licensing, royalty-based fees and sales.
Total intellectual property and custom development income decreased 22.8 percent and 27.8 percent year to year in the second quarter and first six months of 2026, respectively. The timing and amount of licensing and sales of IP may vary significantly from period to period depending upon the timing of licensing agreements, economic conditions, industry consolidation and the timing of new patents and know-how development.
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Other (Income) and Expense
($ in millions) Yr.-to-Yr. Percent Change
For the three months ended June 30: 2026 2025
Other (income) and expense:
(Gains)/losses on foreign currency transactions $ (107) $ 773 nm
(Gains)/losses on derivative instruments 117 (601) nm
Interest income (86) (172) (50.0)%
Net (gains)/losses from securities and investment assets (1) (106) (19) nm
Retirement-related costs/(income) 96 25 277.9
Other (98) (45) 120.9
Total other (income) and expense $ (185) $ (39) nm
Non-operating adjustments:
Acquisition-related charges $ 1 $ (1) nm
Non-operating retirement-related (costs)/income (96) (25) 277.9 %
Operating (non-GAAP) other (income) and expense $ (280) $ (65) nm
($ in millions) Yr.-to-Yr. Percent Change
For the six months ended June 30: 2026 2025
Other (income) and expense:
(Gains)/losses on foreign currency transactions $ (435) $ 1,215 nm
(Gains)/losses on derivative instruments 540 (1,043) nm
Interest income (238) (363) (34.5)%
Net (gains)/losses from securities and investment assets (1) (115) 10 nm
Retirement-related costs/(income) 192 48 nm
Other (130) (71) 82.9
Total other (income) and expense $ (186) $ (204) (8.4)%
Non-operating adjustments:
Acquisition-related charges $ 1 $ (1) nm
Non-operating retirement-related (costs)/income (192) (48) nm
Operating (non-GAAP) other (income) and expense $ (378) $ (253) 49.5%
(1) Includes realized and unrealized net (gains)/losses from equity investments.
nm - not meaningful
Total other (income) and expense was income of $185 million in the second quarter of 2026, an increase of $146 million compared to the prior-year period. The year-to-year change was primarily driven by:
•Lower net exchange losses (including derivative instruments) of $161 million; and
•Higher net gains from equity investments of $107 million, which includes $56 million of unrealized gains; partially offset by
•Lower interest income of $86 million primarily driven by a lower average cash balance in the current year resulting from cash utilized for the Confluent acquisition, as well as lower average interest rates; and
•Higher non-operating retirement-related cost of $70 million. Refer to "Retirement-Related Plans" on page 62 for additional information.
Operating (non-GAAP) other (income) and expense was income of $280 million in the second quarter of 2026, an increase of $215 million compared to the prior-year period. The year-to-year change was primarily driven by the factors described above excluding higher non-operating retirement-related costs.
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Total other (income) and expense was income of $186 million in the first six months of 2026, a decrease of $17 million compared to the prior-year period. The year-to-year change was primarily driven by:
•Higher net gains from equity investments of $107 million, which includes $56 million of unrealized gains; and
•Lower net exchange losses (including derivative instruments) of $68 million; partially offset by
•Higher non-operating retirement-related cost of $144 million. Refer to "Retirement-Related Plans" on page 62 for additional information; and
•Lower interest income of $125 million primarily driven by lower average cash balances in the current year and lower average interest rates.
Operating (non-GAAP) other (income) and expense was income of $378 million in the first six months of 2026 and increased $125 million compared to the prior-year period. The year-to-year change was primarily driven by the factors described above excluding higher non-operating retirement-related costs.
Interest Expense
($ in millions) Yr.-to-Yr. Percent Change
For the three months ended June 30: 2026 2025
Interest expense $ 486 $ 510 (4.6) %
($ in millions) Yr.-to-Yr. Percent Change
For the six months ended June 30: 2026 2025
Interest expense $ 959 $ 965 (0.5) %
Interest expense decreased $23 million and $5 million year to year in the second quarter and first six months of 2026, respectively, driven by lower average interest rates partially offset by higher average debt balances. In addition, when external borrowings support the Financing business, interest expense is reported in cost of financing on the Consolidated Income Statement. For the second quarter and first six months of 2026, interest reported in cost of financing was $105 million and $216 million, with year-to-year increases of $19 million and $43 million, respectively.
Retirement-Related Plans
The following tables provide the total pre-tax cost for all retirement-related plans. The operating cost amounts are included in the Consolidated Income Statement within the caption (e.g., Cost, SG&A, R&D) relating to the job function of the plan participants. The non-operating cost amounts are included in other (income) and expense.
($ in millions) Yr.-to-Yr. Percent Change
For the three months ended June 30: 2026 2025
Retirement-related plans — cost:
Service cost $ 133 $ 133 0.3 %
Multi-employer plans 4 3 21.5
Cost of defined contribution plans 125 120 4.3
Total operating costs $ 261 $ 255 2.4 %
Interest cost $ 505 $ 493 2.4 %
Expected return on plan assets (627) (638) (1.7)
Recognized actuarial losses 197 157 25.1
Amortization of prior service costs/(credits) 9 (2) nm
Curtailments/settlements 3 5 (36.1)
Other costs 9 10 (2.8)
Total non-operating costs/(income) $ 96 $ 25 277.9 %
Total retirement-related plans — cost $ 357 $ 281 27.3 %
nm - not meaningful
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($ in millions) Yr.-to-Yr. Percent Change
For the six months ended June 30: 2026 2025
Retirement-related plans — cost:
Service cost $ 264 $ 263 0.4 %
Multi-employer plans 7 6 3.2
Cost of defined contribution plans 242 229 5.7
Total operating costs $ 513 $ 499 2.9 %
Interest cost $ 1,011 $ 969 4.3 %
Expected return on plan assets (1,256) (1,252) 0.4
Recognized actuarial losses 395 309 27.8
Amortization of prior service costs/(credits) 18 (4) nm
Curtailments/settlements 4 7 (31.6)
Other costs 20 18 10.2
Total non-operating costs/(income) $ 192 $ 48 nm
Total retirement-related plans — cost $ 705 $ 546 29.0 %
nm - not meaningful
Total pre-tax retirement-related plan cost in the second quarter of 2026 increased by $76 million compared to the second quarter of 2025, primarily driven by an increase in recognized actuarial losses ($40 million), interest cost ($12 million), and lower expected return on plan assets ($11 million). Total cost for the first six months of 2026 increased by $159 million compared to the first six months of 2025, primarily driven by an increase in recognized actuarial losses ($86 million), interest cost ($42 million), and amortization of prior service costs/(credits) ($21 million).
As described in the “Operating (non-GAAP) Earnings” section on page 45, management characterizes certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in the second quarter of 2026 were $261 million, an increase of $6 million compared to the second quarter of 2025. For the first six months of 2026, operating retirement-related costs were $513 million, an increase of $14 million compared to the prior-year period. Non-operating costs were $96 million in the second quarter of 2026 compared to $25 million in the prior-year period and $192 million for the first six months of 2026 compared to $48 million in the prior-year period. The year-to-year increases in non-operating costs for the periods presented were driven by the same factors as described in the total pre-tax retirement plan cost above.
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Management Discussion – (continued)
Taxes
The continuing operations provision for income taxes was $313 million in the second quarter of 2026, compared to $404 million in the second quarter of 2025. The operating (non-GAAP) provision for income taxes was $498 million in the second quarter of 2026, compared to $545 million in the second quarter of 2025.
The continuing operations provision for income taxes for the first six months of 2026 was $484 million, compared to $507 million for the first six months of 2025. The operating (non-GAAP) provision for income taxes in the first six months of 2026 was $806 million, compared to $766 million in the first six months of 2025.
IBM’s tax provision and effective tax rate are impacted by recurring and discrete factors including the geographical mix of income before taxes, changes in business operations, incentives, specific transactions, changes in unrecognized tax benefits, settlement of income tax audits, and changes in tax laws or regulations. The GAAP tax provision and effective tax rate could also be affected by adjustments to the previously recorded charges for U.S. tax reform attributable to any changes in law, new regulations and guidance, and audit adjustments, among others.
The U.S. Internal Revenue Service (IRS) has proposed adjustments related to certain cross-border transactions with respect to the company’s 2013-2014 and 2015-2016 U.S. income tax returns. The company strongly disagrees with the IRS’ proposed adjustments, has filed IRS Appeals protests, and will pursue resolution at court, if necessary. In the fourth quarter of 2025, the IRS concluded its audit of the company’s 2017-2018 U.S. income tax returns. The company strongly disagrees with certain adjustments proposed by the IRS and continues to evaluate its options to contest them. With respect to major U.S. state and foreign taxing jurisdictions, the company is generally no longer subject to tax examinations for years prior to 2016. The company is no longer subject to income tax examination of its U.S. federal tax return for years prior to 2013. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.
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Management Discussion – (continued)
GAAP Reconciliation
The tables below provide a reconciliation of our income statement results as reported under GAAP to our operating earnings presentation which is a non-GAAP measure. Management’s calculation of operating (non-GAAP) earnings, as presented, may differ from similarly titled measures reported by other companies. Refer to the “Operating (non-GAAP) Earnings” section on page 45 for management’s rationale for presenting operating earnings information.
($ in millions, except per share amounts) GAAP Acquisition- Related Adjustments Retirement- Related Adjustments U.S. Tax ReformImpacts Operating (non-GAAP)
For the three months ended June 30, 2026:
Gross profit $ 9,907 $ 287 $ — $ — $ 10,194
Gross profit margin 57.7 % 1.7 pts. — pts. — pts. 59.4 %
SG&A $ 4,981 $ (421) $ — $ — $ 4,560
Other (income) and expense (185) 1 (96) — (280)
Total expense and other (income) 7,428 (429) (96) — 6,903
Pre-tax income from continuing operations 2,479 716 96 — 3,290
Pre-tax margin from continuing operations 14.4 % 4.2 pts. 0.6 pts. — pts. 19.2 %
Provision for/(benefit from) income taxes (1) $ 313 $ 167 $ 20 $ (2) $ 498
Effective tax rate 12.6 % 2.3 pts. 0.2 pts. (0.1) pts. 15.1 %
Income from continuing operations $ 2,166 $ 548 $ 76 $ 2 $ 2,792
Income margin from continuing operations 12.6 % 3.2 pts. 0.4 pts. 0.0 pts. 16.3 %
Diluted earnings per share from continuing operations $ 2.27 $ 0.58 $ 0.08 $ 0.00 $ 2.93
($ in millions, except per share amounts) GAAP Acquisition- Related Adjustments Retirement-RelatedAdjustments U.S. Tax ReformImpacts Operating (non-GAAP)
For the three months ended June 30, 2025:
Gross profit $ 9,977 $ 225 $ — $ — $ 10,202
Gross profit margin 58.8 % 1.3 pts. — pts. — pts. 60.1 %
SG&A $ 5,027 $ (348) $ — $ — $ 4,679
Other (income) and expense (39) (1) (25) — (65)
Total expense and other (income) 7,380 (350) (25) — 7,005
Pre-tax income from continuing operations 2,597 575 25 — 3,197
Pre-tax margin from continuing operations 15.3 % 3.4 pts. 0.1 pts. — pts. 18.8 %
Provision for/(benefit from) income taxes (1) $ 404 $ 132 $ 9 $ — $ 545
Effective tax rate 15.5 % 1.3 pts. 0.2 pts. — pts. 17.0 %
Income from continuing operations $ 2,193 $ 443 $ 17 $ — $ 2,652
Income margin from continuing operations 12.9 % 2.6 pts. 0.1 pts. — pts. 15.6 %
Diluted earnings per share from continuing operations $ 2.31 $ 0.47 $ 0.02 $ — $ 2.80
(1)The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income.
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($ in millions, except per share amounts) GAAP Acquisition- Related Adjustments Retirement-RelatedAdjustments U.S. Tax Reform Impacts Operating (non-GAAP)
For the six months ended June 30, 2026:
Gross profit $ 18,857 $ 524 $ — $ — $ 19,380
Gross profit margin 57.0 % 1.6 pts. — pts. — pts. 58.6 %
SG&A $ 10,071 $ (829) $ — $ — $ 9,242
Other (income) and expense (186) 1 (192) — (378)
Total expense and other (income) 14,991 (838) (192) — 13,961
Pre-tax income from continuing operations 3,866 1,361 192 — 5,419
Pre-tax margin from continuing operations 11.7 % 4.1 pts. 0.6 pts. — pts. 16.4 %
Provision for/(benefit from) income taxes (1) $ 484 $ 305 $ 23 $ (6) $ 806
Effective tax rate 12.5 % 2.5 pts. 0.0 pts. (0.1) pts. 14.9 %
Income from continuing operations $ 3,382 $ 1,056 $ 169 $ 6 $ 4,613
Income margin from continuing operations 10.2 % 3.2 pts. 0.5 pts. 0.0 pts. 13.9 %
Diluted earnings per share from continuing operations $ 3.55 $ 1.11 $ 0.18 $ 0.01 $ 4.84
($ in millions, except per share amounts) GAAP Acquisition- Related Adjustments Retirement- Related Adjustments U.S. Tax Reform Impacts Operating (non-GAAP)
For the six months ended June 30, 2025:
Gross profit $ 18,008 $ 426 $ — $ — $ 18,434
Gross profit margin 57.1 % 1.4 pts. — pts. — pts. 58.5 %
SG&A $ 9,913 $ (701) $ — $ — $ 9,212
Other (income) and expense (204) (1) (48) — (253)
Total expense and other (income) 14,253 (706) (48) — 13,499
Pre-tax income from continuing operations 3,755 1,132 48 — 4,935
Pre-tax margin from continuing operations 11.9 % 3.6 pts. 0.2 pts. — pts. 15.7 %
Provision for/(benefit from) income taxes (1) $ 507 $ 260 $ (3) $ 2 $ 766
Effective tax rate 13.5 % 2.2 pts. (0.2) pts. 0.0 pts. 15.5 %
Income from continuing operations $ 3,248 $ 872 $ 51 $ (2) $ 4,169
Income margin from continuing operations 10.3 % 2.8 pts. 0.2 pts. 0.0 pts. 13.2 %
Diluted earnings per share from continuing operations $ 3.43 $ 0.92 $ 0.05 $ 0.00 $ 4.40
(1)The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income.
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Financial Position
Dynamics
Our balance sheet at June 30, 2026 continues to provide us with financial flexibility to support and invest in the business.
Cash and cash equivalents, restricted cash and marketable securities at June 30, 2026 were $8,178 million, a decrease of $6,293 million compared to December 31, 2025. Total debt of $61,987 million at June 30, 2026 increased $727 million compared to December 31, 2025. We continue to manage our debt levels while being acquisitive and without sacrificing investments in our business.
In the first six months of 2026, we generated $7,766 million in cash from operating activities, an increase of $1,695 million compared to the first six months of 2025. Our free cash flow for the six months ended June 30, 2026 was $4,760 million, essentially flat versus the prior-year period. Refer to pages 71 through 72 for additional information on free cash flow. We returned $3,166 million to shareholders through dividends in the first six months of 2026 and invested in the acquisition of Confluent which completed in the first quarter.
Our pension plans were well funded at the end of 2025, with worldwide qualified plans funded at 116 percent. Overall pension funded status as of the end of June 2026 was fairly consistent with year-end 2025. Refer to “Retirement-Related Plans” on page 30 in our 2025 Annual Report for additional information.
IBM Working Capital
($ in millions) At June 30, 2026 At December 31, 2025
Current assets $ 28,398 $ 36,944
Current liabilities 35,912 38,658
Working capital $ (7,514) $ (1,714)
Current ratio 0.79:1 0.96:1
Working capital decreased $5,799 million from the year-end 2025 position. Current assets decreased $8,546 million ($8,123 million adjusted for currency) primarily due to the decline in cash and cash equivalents, restricted cash and marketable securities, which included the reductions for the acquisition of Confluent in the first quarter, along with decreases in receivables related to collections of seasonally higher year-end balances. Current liabilities decreased $2,746 million ($2,466 million adjusted for currency) primarily driven by decreases in compensation and benefits liabilities and short-term debt.
Receivables and Allowances
Roll Forward of Total IBM Receivables Allowance for Credit Losses
($ in millions)
January 1, 2026 Additions / (Releases) (1) Write-offs (2) Foreign currency and other June 30, 2026
$276 $7 $(27) $5 $261
(1)Additions/(Releases) for allowance for credit losses are recorded in expense.
(2)Refer to note A, “Significant Accounting Policies,” in our 2025 Annual Report for additional information regarding allowance for credit loss write-offs.
Excluding receivables classified as held for sale, the total IBM receivables provision coverage was 1.2 percent at June 30, 2026, an increase of 10 basis points compared to December 31, 2025. The increase in coverage is primarily driven by a decrease in total receivables. The majority of the write-offs during the six months ended June 30, 2026 were related to receivables which had been previously reserved. Refer to Financing's “Balance Sheet and Return on Equity Highlights” on page 73 for additional details regarding the Financing segment receivables and allowances.
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Noncurrent Assets and Liabilities
($ in millions) At June 30, 2026 At December 31, 2025
Noncurrent assets $ 123,701 $ 114,936
Long-term debt $ 56,212 $ 54,836
Noncurrent liabilities (excluding debt) $ 25,434 $ 25,645
Noncurrent assets increased $8,765 million ($9,437 million adjusted for currency) primarily due to an increase in goodwill and intangible assets from the Confluent acquisition.
Long-term debt increased $1,377 million ($1,826 million adjusted for currency) primarily driven by our first-quarter 2026 debt issuances, partially offset by reclassifications to short-term debt to reflect upcoming maturities within the next twelve months.
Noncurrent liabilities (excluding debt) decreased $212 million (increased $126 million adjusted for currency) primarily driven by currency.
Debt
Our funding requirements are continually monitored as we execute our strategies to manage the overall asset and liability profile. Additionally, we maintain sufficient flexibility to access global funding sources as needed.
($ in millions) At June 30, 2026 At December 31, 2025
Total debt $ 61,987 $ 61,260
Financing segment debt (1) $ 13,047 $ 15,093
Non-Financing debt $ 48,940 $ 46,167
(1)Refer to Financing’s “Balance Sheet and Return on Equity Highlights” on page 73 for additional details.
Total debt of $61,987 million increased $727 million ($1,173 million adjusted for currency) from December 31, 2025, primarily driven by proceeds from issuances of $7,437 million, partially offset by maturities of $7,141 million.
Non-Financing debt of $48,940 million increased $2,773 million ($3,131 million adjusted for currency) from December 31, 2025, primarily driven by the same dynamics as described above.
Financing segment debt of $13,047 million decreased $2,046 million ($1,958 million adjusted for currency) from December 31, 2025, primarily due to lower funding requirements associated with financing receivables.
Financing provides financing solutions predominantly for IBM’s external client assets, and the debt used to fund Financing assets is primarily comprised of intercompany loans. Total debt changes generally correspond with the level of client and commercial financing receivables, the level of cash and cash equivalents, the change in intercompany and external payables, and the change in intercompany investment from IBM. The terms of the intercompany loans are set by the company to substantially match the term, currency and interest rate variability underlying the financing receivable. The Financing debt-to-equity ratio remained at 9.0 to 1 at June 30, 2026.
In the Consolidated Income Statement, when external borrowings support the Financing business, interest expense is presented in cost of financing. Refer to note 12, “Borrowings,” for additional information.
Equity
Total equity increased $1,801 million from December 31, 2025, primarily driven by net income of $3,381 million and an increase in common stock issuances of $1,284 million, partially offset by dividends paid of $3,166 million.
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Cash Flow
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 7, are summarized in the table below. These amounts also include the cash flows associated with the Financing business.
($ in millions)
For the six months ended June 30: 2026 2025
Net cash provided by/(used in):
Operating activities $ 7,766 $ 6,071
Investing activities (10,970) (11,281)
Financing activities (3,008) 2,589
Effect of exchange rate changes on cash, cash equivalents and restricted cash (211) 487
Net change in cash, cash equivalents and restricted cash $ (6,423) $ (2,134)
Net cash provided by operating activities increased $1,695 million as compared to the first six months of 2025. This was due to an increase in cash provided by total receivables primarily driven by financing receivables, and an increase in performance-related improvements within net income, partially offset by higher inventory levels to support anticipated customer demand, higher cash taxes and net interest expense.
Net cash used in investing activities decreased $312 million primarily due to lower cash used in purchases of marketable securities and other investments, as well as proceeds from the sale of marketable securities acquired in the Confluent acquisition. This decrease was partially offset by higher cash used for acquisitions, reflecting the impact of the Confluent acquisition compared with the HashiCorp acquisition in the prior‑year period.
Financing activities were a net use of cash of $3,008 million in the first six months of 2026 compared to a net source of cash of $2,589 million in the first six months of 2025 driven by a higher level of maturities and lower level of debt issuances year to year.
Looking Forward
Hybrid cloud and AI remain the two most consequential technologies for enterprise performance. These technologies are no longer viewed as incremental tools, but as platforms that are fundamentally transforming how businesses scale, compete, and operate.
AI is changing the economics of enterprise operations. To capture this opportunity and build a competitive advantage, businesses must go beyond just adding AI; they must become AI-first. The portfolio of AI offerings we have built, including cost efficient, fit-for-purpose open-source models deployed in hybrid environments, is focused on helping businesses scale AI and generate return through productivity improvements and automation. In Software, IBM watsonx provides a robust portfolio of AI products for developing AI apps, managing data, and governing the entire lifecycle of AI models and AI agents, allowing clients to move from pilots to production with full control over cost, security, sovereignty, and performance. Our watsonx platform and watsonx Orchestrate help enterprises deploy AI by connecting agents, models, and workflows with governance and security. We continue to see Infrastructure play a critical role with IBM Z delivering enhanced AI acceleration through multi-model AI capabilities, low unit cost architecture at scale for workloads that require end-to-end encryption, continued availability, and ultra-high throughput. In July, we introduced a smaller LinuxONE system that allows clients to address data center space and costs constraints while offering the security, resiliency and real time inferencing the IBM Z platform can deliver. In Consulting, AI is both a growth driver and a productivity engine. Our experts are helping clients design and execute AI strategies by leveraging the IBM Consulting Advantage platform, an AI delivery platform designed to implement solutions at scale, transforming how our consultants work. As agents take on more work, delivery becomes faster, more software driven, and more scalable.
AI is a powerful productivity driver for our clients and for IBM. We are transforming our enterprise operations, driving efficiency and cost savings with our Client Zero approach, leveraging technology and embedding AI in our own workflows. Our developer workforce is using IBM Bob, our AI-based software development system that automates the full software lifecycle, driving developer productivity and predictable enterprise costs. IBM Bob, which became generally
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available in March, is helping clients build enterprise-ready AI applications and agents while creating a natural pathway to adoption of watsonx Orchestrate and IBM's broader AI platform.
We remain focused on accelerating the speed and scale of our innovation. In the second quarter, we launched Lightwell, an investment to establish a trusted enterprise clearinghouse, combined with a global workforce of engineers, to address open-source software vulnerabilities at scale, which became generally available in July. We also continue to invest in emerging technologies, including quantum. This quarter, we announced with the U.S. Department of Commerce (DoC), a letter of intent to build Anderon, a pure-play quantum wafer foundry supported by $1 billion in CHIPS Act incentives provided by the DoC and a $1 billion cash contribution by IBM. In addition, we disclosed our plans to invest more than $10 billion in quantum over the next five years, spanning R&D, capital expenditures, manufacturing scaling, M&A and ecosystem expansion.
To complement our portfolio, in mid-March we completed the acquisition of Confluent, which enables enterprises to deploy generative and agentic AI better and faster by providing trusted communication and data flow between environments, applications and APIs.
Our conviction in the strength of our business and our ability to grow and drive shareholder value remains unchanged. We recognize that the technology spending environment remains dynamic, and we must continue to evolve how we engage clients, bringing the full breadth of IBM's innovation to bear on their most important priorities. As clients determine how and where to deploy AI, we believe our portfolio is well positioned to help clients realize value in a secure, cost-effective, and scalable way.
Although our second-quarter 2026 results fell short of our expectations, we continue to focus on the fundamentals of our business by enhancing our go-to-market model, advancing our high-growth portfolio, and accelerating our innovation and productivity actions which span both spend reduction initiatives and actions designed to drive growth. We are a leader in hybrid cloud, we are investing to capitalize on the AI opportunity that plays directly to IBM's strengths in data, orchestration, and enterprise trust, and we continue to build leadership in quantum. We remain confident in the growth opportunities ahead of us and our ability to capture them.
While the economic and geopolitical environment continues to remain dynamic, we believe our durable, high value portfolio and the resiliency of our business model, underpinned by our software-led hybrid cloud and AI strategy, position us well to navigate the current climate.
Currency Rate Fluctuations
Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our financial results and financial position. Movements in currency, and the fact that we do not hedge 100 percent of our currency exposures, will result in a currency impact to our revenues, profit and cash flows throughout 2026. We execute a hedging program which defers, versus eliminates, the volatility of currency impacts on our financial results. During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates over time.
References to “adjusted for currency” or “constant currency” reflect adjustments based upon a simple mathematical formula. However, this constant currency methodology that we utilize to disclose this information does not incorporate any operational actions that management could take to mitigate fluctuating currency rates. Based on the currency rate movements in the second quarter of 2026, revenue from continuing operations increased 1.1 percent both as reported and adjusted for currency compared to the prior year.
At June 30, 2026, currency changes resulted in assets and liabilities denominated in most local currencies being translated into fewer U.S. dollars than at year-end 2025. We use financial hedging instruments to limit specific currency risks related to foreign currency-based transactions.
We translate revenue, cost and expense in our non-U.S. operations at current exchange rates in the reported period. In the second quarter and first six months of 2026, the impacts from currency translation and hedging to year-to-year pre-tax income, operating (non-GAAP) pre-tax income and segments profit margins were not material. Hedging and certain underlying foreign currency transaction gains and losses are allocated to our segment results. Considering the operational responses mentioned above, movements of exchange rates, and the nature and timing of hedging instruments, it is difficult to predict future currency impacts in any particular period.
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For non-U.S. subsidiaries and branches that operate in U.S. dollars or whose economic environment is highly inflationary, translation adjustments are reflected in results of operations. Generally, we manage currency risk in these entities by linking prices and contracts to U.S. dollars.
Liquidity and Capital Resources
In our 2025 Annual Report, on pages 31 to 33, there is a discussion of our liquidity including two tables that present three years of data. The table presented on page 31 includes net cash from operating activities, cash and cash equivalents, restricted cash and short-term marketable securities, and the size of our global credit facilities for each of the past three years. For the six months ended, or at, as applicable, June 30, 2026, those amounts are $7.8 billion of net cash from operating activities, $8.2 billion of cash and cash equivalents, restricted cash and short-term marketable securities and $10.0 billion in global credit facilities, respectively. While we have no current plans to draw on these credit facilities, they are available as back-up liquidity. On June 22, 2026, we amended our $2.5 billion Three-Year Credit Agreement and $7.5 billion Five-Year Credit Agreement (the Credit Agreements) to extend the maturity dates. Refer to note 12, “Borrowings,” for additional details on these credit facilities.
The major rating agencies' ratings on our debt securities at June 30, 2026 appear in the following table and remain unchanged from March 31, 2026.
IBM Ratings: Standard and Poor's Moody’s Investors Service Fitch Ratings
Senior long-term debt A- A3 A-
Commercial paper A-2 Prime-2 F1
We have financial flexibility, supported by our strong liquidity position and cash flows, to operate at a single A credit rating. Debt levels have increased $0.7 billion ($1.2 billion adjusted for currency) from December 31, 2025. In the first quarter of 2026, we issued $7.4 billion of debt for general corporate purposes. Refer to note 12, “Borrowings,” for additional information.
We do not have “ratings trigger” provisions in our debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating. Our debt covenants are well within the required levels. Our contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if our credit rating were to fall below investment grade. At June 30, 2026, the fair value of those instruments that were in a liability position was $595 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of our outstanding instruments and market conditions. We have no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on our financial position or liquidity.
We prepare our Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 7 of this Form 10-Q and highlight causes and events underlying sources and uses of cash in that format on page 69. For the purpose of running its business, IBM manages, monitors and analyzes cash flows in a different manner.
Management uses free cash flow as a measure to evaluate its operating results, strategic investments, plan shareholder return levels and assess its ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary expenditures. We define free cash flow as net cash from operating activities less the change in Financing receivables and net capital expenditures, including the investment in software and other asset sales. A key objective of the Financing business is to generate strong returns on equity, and our Financing receivables are the basis for that growth. Accordingly, management considers Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations of both free cash flow and net cash from operating activities that exclude the effect of Financing receivables.
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The following is management’s view of cash flows for the first six months of 2026 and 2025 prepared in a manner consistent with the description above.
($ in millions)
For the six months ended June 30: 2026 2025
Net cash from operating activities per GAAP $ 7,766 $ 6,071
Less: change in Financing receivables 2,264 606
Net cash from operating activities, excluding Financing receivables $ 5,503 $ 5,465
Capital expenditures, net (743) (657)
Free cash flow $ 4,760 $ 4,808
Change in Financing receivables 2,264 606
Acquisitions (10,480) (7,845)
Divestitures 1 (1)
Dividends (3,166) (3,112)
Change in total debt 296 5,791
Other 244 (9)
Effect of exchange rate changes on cash, cash equivalents and restricted cash (211) 487
Change in cash, cash equivalents, restricted cash and short-term marketable securities $ (6,293) $ 726
In the first six months of 2026, we generated $4.8 billion in free cash flow, essentially flat versus the prior-year period driven by performance-related improvements within net income offset by inventory, higher cash taxes and net interest expense. Given the constrained infrastructure supply environment, we proactively took actions through the first half to strengthen our supply chain and support anticipated customer demand in the second half, resulting in higher inventory levels. In addition, we continued to return value to shareholders with $3.2 billion in dividends, and we invested in the Confluent acquisition.
Events that could temporarily change the historical cash flow dynamics discussed previously and in our 2025 Annual Report include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding requirements, periods of severe downturn in the capital markets, the timing of tax payments, or the timing of certain working capital activities related to collections and payments. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described in note 14, “Contingencies,” in this Form 10-Q.
With respect to pension funding, our pension plans remain well funded as of the end of June 2026. Our expected 2026 contributions and pre-tax retirement-related plan costs remain fairly consistent with the expectations disclosed in the 2025 Annual Report. Refer to “Retirement-Related Plans” on page 30 in our 2025 Annual Report for additional information. Financial market performance could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. We are not quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or changes in pension plan funding regulations. In 2026, we are not legally required to make any contributions to the U.S. defined benefit pension plans and our legally required contributions to certain non-U.S. defined benefit plans are not expected to be material.
Our cash flows are sufficient to fund our current operations and obligations, including investing and financing activities such as dividends and debt service. When additional requirements arise, we have several liquidity options available. These options may include the ability to borrow additional funds at reasonable interest rates and utilizing our committed global credit facilities. Our overall shareholder payout remains at a comfortable level and we remain fully committed to our long-standing dividend policy.
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Financing
Financing is a reportable segment that facilitates IBM clients’ acquisition of hardware, software and services by providing financing solutions, while generating solid returns on equity.
Results of Operations
($ in millions) Yr.-to-Yr.PercentChange/Margin Change Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended June 30: 2026 2025
Revenue $ 186 $ 166 12.2 % 11.3 %
Segment profit (1) $ 108 $ 179 (39.7) %
Segment profit margin 58.0 % 107.9 % (49.9) pts.
($ in millions) Yr.-to-Yr.PercentChange/Margin Change Yr.-to-Yr. Percent Change Adjusted For Currency
For the six months ended June 30: 2026 2025
Revenue $ 406 $ 357 13.6 % 10.7 %
Segment profit (1) $ 226 $ 248 (8.6) %
Segment profit margin 55.8 % 69.3 % (13.6) pts.
(1)Intercompany financing activities are reflected in segment profit and are eliminated in IBM’s consolidated financial results.
For the three months ended June 30, 2026, financing revenue increased 12.2 percent as reported (11.3 percent adjusted for currency) compared to the prior-year period. For the six months ended June 30, 2026, financing revenue increased 13.6 percent as reported (10.7 percent adjusted for currency) compared to the prior-year period. Revenue growth for both periods was primarily driven by an increase in client financing assets.
Segment profit decreased 39.7 percent to $108 million and segment profit margin decreased 49.9 points to 58.0 percent, respectively, in the second quarter of 2026 compared to the prior-year period. For the six months ended June 30, 2026, segment profit decreased 8.6 percent to $226 million and segment profit margin decreased 13.6 points to 55.8 percent, respectively, compared to the prior-year period. The decrease in segment profit was primarily driven by lower intercompany financing net other income for sales of returned leased equipment to Infrastructure, which is eliminated in IBM's consolidated financial results and reflects IBM Z product cycle dynamics partially offset by revenue growth as described above.
Balance Sheet and Return on Equity Highlights
($ in millions) At June 30, 2026 At December 31, 2025
Client financing receivables (1) $ 12,131 $ 13,192
Commercial financing receivables (1) (2) $ 1,651 $ 2,992
Financing Segment Debt (3) $ 13,047 $ 15,093
Equity $ 1,450 $ 1,678
(1)Refer to note 9, “Financing Receivables,” for additional information.
(2)Includes both held for investment and held for sale receivables.
(3)Financing segment debt is primarily comprised of intercompany loans.
Return on equity was 25.0 percent compared to 49.2 percent for the three months ended June 30, 2026 and 2025, respectively. The decrease was primarily driven by a decrease in net income consistent with the decline in segment profit described above. Return on equity was 24.8 percent compared to 32.8 percent for the six months ended June 30, 2026 and 2025, respectively. The decrease was primarily driven by higher average equity. For the three and six months ended June 30, 2026, return on equity is calculated as annualized after-tax segment profit divided by the average of the ending
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equity for Financing for the last two quarters and three quarters, respectively. Annualized after-tax segment profit is a function of IBM's provision for income taxes determined on a consolidated basis.
The following table presents Client financing and Commercial financing receivables excluding receivables classified as held for sale.
($ in millions) At June 30, 2026 At December 31, 2025
Amortized cost $ 13,029 $ 15,193
Specific allowance for credit losses 78 88
Unallocated allowance for credit losses 44 53
Total allowance for credit losses 122 141
Net financing receivables $ 12,907 $ 15,052
Allowance for credit losses coverage 0.9 % 0.9 %
The percentage of Financing segment receivables reserved was 0.9 percent at both June 30, 2026 and December 31, 2025.
We continue to apply our rigorous credit policies. Approximately 80 percent of the total external portfolio was with investment grade clients, an increase of 1 point as compared to December 31, 2025. This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects certain mitigating actions taken to reduce the risk to IBM. For additional information relating to the company's credit quality and mitigation actions, including sales of receivables, refer to note 9, “Financing Receivables.”
Forward-Looking and Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the following: a downturn in economic environment and client spending budgets; a failure of the company’s innovation initiatives; damage to the company’s reputation; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; the company’s ability to successfully manage acquisitions, alliances and divestitures, including integration challenges, failure to achieve objectives, the assumption or retention of liabilities and higher debt levels; fluctuations in financial results; impact of local legal, economic, political, health and other conditions; the company’s failure to meet growth and productivity objectives; ineffective internal controls; the company’s use of accounting estimates; impairment of the company’s goodwill or amortizable intangible assets; the company’s ability to attract and retain key employees and its reliance on critical skills; impacts of relationships with critical suppliers; product and service quality issues; the development and use of AI, including the company's increased AI solutions and use of AI technologies; impacts of business with government clients; reliance on third party distribution channels and ecosystems; cybersecurity and data protection considerations; adverse effects related to climate change and other environmental matters; tax matters; legal proceedings and investigatory risks; the company’s pension plans; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Qs, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission or in materials incorporated therein by reference. Any forward-looking statement in this Form 10-Q speaks only as of the date on which it is made. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements.