# IBM CEO admits to ‘execution’ short fall, but touts some rebound > Source: > Published: 2026-07-23 19:02:22+00:00 IBM management provided more color on a rough end to the second quarter of its fiscal 2026, tying a sudden and dramatic shift in customer spending from specific parts of its software portfolio to AI-focused hardware components outside of IBM’s traditional offerings, but added that the vendor has already started to see a shift back from that swerve. “Our second quarter software shortfall was limited to a capex sensitive area of the portfolio,” CEO Arvind Krishna told investors during IBM’s Q2 earnings call, before later adding that, “with the portfolio we have and the opportunities ahead, it comes down to execution. That is where we fell short in the second quarter.” Krishna warned of that shortfall in an “investor letter” [released earlier this month](https://www.sdxcentral.com/news/red-hat-adds-vm-migration-bait-to-openshifts-vmware-enticing-hook/). That letter warned about a big customer shift toward [supply chain constrained hardware](https://www.sdxcentral.com/resources/the-storage-supplement/) and [cybersecurity focused software](https://www.sdxcentral.com/analysis/openai-and-anthropic-will-the-cybersec-race-break-the-glass-on-the-ai-giants/), a shift that moves away from some of IBM’s core software and infrastructure competencies. CFO James Kavanaugh further explained to investors that IBM witnessed a “shift in client spending priorities” during the end of June, with that shift moving toward servers, storage, and memory purchases “to secure supply constrained infrastructure ahead of expected price increases.” This led to IBM failing to close a double-digit number of “large deals … on the timelines we expected, accounting for the majority of the shortfall.” “To understand these dynamics, it is important to recognize that many clients purchase mainframe and the associated software stack through our enterprise license agreements, which create a strong incumbency moat for IBM and are generally treated as capital investments,” Kavanaugh said. “These agreements typically contain a high concentration of transaction processing software, although they may also include data and automation products. As clients prioritize other capex investments, the timing of these deals shifted.” Krishna later said the number of those shifted deals was in the “low 10s” and that IBM “engaged with clients on the transactions that slipped, and we have a clear understanding of what needs to change. We are adapting to deliver greater business value to clients around our innovation, and greater economic value to better align with client priorities.” That out-reach seemed to work, with Krishna claiming “about” one-third of those shifted deals had since closed. “To give you a perspective, normally we would not expect all of them to close, but we would expect maybe two-thirds to three-fourths of them to close over the next six months,” Krishna added. “So the fact that a third have already closed in the first three weeks gives us an indication – not yet full evidence, but a good indication that this was deferral and not destruction.” Krishna continued that confidence in the face of investor questions. “Our conviction in the strength of our business and our ability to grow and drive shareholder value remains unchanged,” Krishna proffered in prepared remarks. “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 them realize value in a secure, cost-effective, and scalable way.” ## AI and software to the rescue Krishna also touted plans to increase the use of AI to help scale software development, bolster IBM’s sales and marketing efforts, and to help optimize its supply chain. “Together, these actions help enhance our margin and free cash flow commitments while improving our ability to capture the growth we see ahead,” Krishna said. “For this growth, we are also accelerating changes to our go-to-market model. The goal is to expand coverage across thousands of additional clients where our portfolio is highly relevant and where we see significant wallet share opportunities. While IBM has a strong presence within the Fortune 1000, there is a lot of opportunity beyond this.” Krishna specifically pointed to IBM’s recent software-focused acquisitions, including Red Hat, HashiCorp, and [Confluent](https://www.sdxcentral.com/news/ibm-ingests-confluent-in-11b-smart-data-streaming-play/). Kavanaugh added that those operations power a majority of IBM’s high-margin subscription-based recurring software revenues. Kavanaugh further highlighted that momentum, noting HashiCorp registered “record bookings” during the quarter; Confluent got off “to a strong start and on track with our expectations after its first full quarter post close;” and Red Hat posted an increase in revenue growth with its OpenShift platform hitting $2.2 billion in annual revenue run rate, “reflecting demand of our containerization and virtualization products where we now have about $680 million of contracts signed since early 2024.” Investors took a measured approach to that message, with IBM’s stock price remaining stable following the earnings release.