IBM Corp. · 10-Q · Item 2 MD&A

Item 2.

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:

Revenue (1)

$

$

%

Gross profit margin

%

%

pts.

Total expense and other (income)

$

$

%

Income from continuing operations before income taxes

$

$

%

Provision for/(benefit from) income taxes from continuing operations

$

$

%

Income from continuing operations

$

$

%

Income from continuing operations margin

%

%

pts.

Income/(loss) from discontinued operations, net of tax

$

(1)

$

1

nm

Net income

$

$

%

Earnings per share from continuing operations - assuming dilution

$

$

%

Consolidated earnings per share - assuming dilution

$

$

%

Weighted-average shares outstanding - assuming dilution

%

(1)Year-to-year revenue growth of 1 percent adjusted for currency.

nm - not meaningful

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:

Net income as reported

$

$

%

Income/(loss) from discontinued operations, net of tax

(1)

1

nm

Income from continuing operations

$

$

%

Non-operating adjustments (net of tax):

Acquisition-related charges

Non-operating retirement-related costs/(income)

nm

U.S. tax reform impacts

2

—

nm

Operating (non-GAAP) earnings (1)

$

$

%

Diluted operating (non-GAAP) earnings per share (1)

$

$

%

(1)Refer to the quarter-to-date "GAAP Reconciliation" on page 65 for additional information.

nm - not meaningful

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, T1the 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. T2Many 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. T3Total 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:

Revenue (1)

$

$

%

Gross profit margin

%

%

pts.

Total expense and other (income)

$

$

%

Income from continuing operations before income taxes

$

$

%

Provision for/(benefit from) income taxes from continuing operations

$

$

%

Income from continuing operations

$

$

%

Income from continuing operations margin

%

%

pts.

Income/(loss) from discontinued operations, net of tax

$

(1)

$

1

nm

Net income

$

$

%

Earnings per share from continuing operations - assuming dilution

$

$

%

Consolidated earnings per share - assuming dilution

$

$

%

Weighted-average shares outstanding - assuming dilution

%

Assets

$

$

%

Liabilities

$

$

%

Equity

$

$

%

(1)Year-to-year revenue growth of 3 percent adjusted for currency.

nm - not meaningful

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:

Net income as reported

$

$

%

Income/(loss) from discontinued operations, net of tax

(1)

1

nm

Income from continuing operations

$

$

%

Non-operating adjustments (net of tax):

Acquisition-related charges

Non-operating retirement-related costs/(income)

U.S. tax reform impacts

6

(2)

nm

Operating (non-GAAP) earnings (1)

$

$

%

Diluted operating (non-GAAP) earnings per share (1)

$

$

%

(1)Refer to the year-to-date "GAAP Reconciliation" on page 66 for additional information.

nm - not meaningful

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:

Revenue:

Software

$

$

%

%

Gross margin

%

%

pts.

Consulting

%

%

Gross margin

%

%

pts.

Infrastructure

%

%

Gross margin

%

%

pts.

Financing

%

%

Gross margin

%

%

pts.

Other (1)

nm

nm

Gross margin

nm

nm

nm

Total revenue

$

$

%

Total gross profit

$

$

%

Total gross margin

%

%

pts.

Non-operating adjustments:

Amortization of acquired intangible assets

Operating (non-GAAP) gross profit

$

$

%

Operating (non-GAAP) gross margin

%

%

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.

nm - not meaningful

Table of Contents

Management Discussion – (continued)

($ in millions)

Yr.-to-Yr.

Percent/Margin

Change

Yr.-to-Yr.

Percent

Change

Adjusted For

Currency

For the six months ended June 30:

Revenue:

Software

$

$

%

%

Gross margin

%

%

pts.

Consulting

%

%

Gross margin

%

%

pts.

Infrastructure

%

%

Gross margin

%

%

pts.

Financing

%

%

Gross margin

%

%

pts.

Other (1)

%

%

Gross margin

nm

nm

nm

Total revenue

$

$

%

%

Total gross profit

$

$

%

Total gross margin

%

%

pts.

Non-operating adjustments:

Amortization of acquired intangible assets

%

Operating (non-GAAP) gross profit

$

$

%

Operating (non-GAAP) gross margin

%

%

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.

nm - not meaningful

Software

($ in millions)

Yr.-to-Yr.

Percent

Change

Yr.-to-Yr.

Percent

Change

Adjusted For

Currency

For the three months ended June 30:

Software revenue:

$

$

%

%

Hybrid Cloud

$

$

%

%

Automation

Data

Transaction Processing

($ in millions)

Yr.-to-Yr.

Percent

Change

Yr.-to-Yr.

Percent

Change

Adjusted For

Currency

For the six months ended June 30:

Software revenue:

$

$

%

%

Hybrid Cloud

$

$

%

%

Automation

Data

Transaction Processing

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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:

T4Hybrid 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). T5Data 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:

Software:

Gross profit

$

$

%

Gross profit margin

%

%

pts.

Segment profit

$

$

%

Segment profit margin

%

%

pts.

($ in millions)

Yr.-to-Yr.

Percent/

Margin

Change

For the six months ended June 30:

Software:

Gross profit

$

$

%

Gross profit margin

%

%

pts.

Segment profit

$

$

%

Segment profit margin

%

%

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:

Consulting revenue:

$

$

%

%

Strategy and Technology

$

$

%

%

Intelligent Operations

($ in millions)

Yr.-to-Yr.

Percent

Change

Yr.-to-Yr.

Percent

Change

Adjusted For

Currency

For the six months ended June 30:

Consulting revenue:

$

$

%

%

Strategy and Technology

$

$

%

%

Intelligent Operations

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:

Consulting:

Gross profit

$

$

%

Gross profit margin

%

%

pts.

Segment profit

$

$

%

Segment profit margin

%

%

pts.

Table of Contents

Management Discussion – (continued)

($ in millions)

Yr.-to-Yr.

Percent/

Margin

Change

For the six months ended June 30:

Consulting:

Gross profit

$

$

%

Gross profit margin

%

%

pts.

Segment profit

$

$

%

Segment profit margin

%

%

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:

Total Consulting signings

$

$

%

%

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:

Total Consulting signings

$

$

%

%

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

Table of Contents

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:

Infrastructure revenue:

$

$

%

%

Hybrid Infrastructure

$

$

%

%

IBM Z

Distributed Infrastructure

Infrastructure Support

($ in millions)

Yr.-to-Yr.

Percent

Change

Yr.-to-Yr.

Percent

Change

Adjusted For

Currency

For the six months ended June 30:

Infrastructure revenue:

$

$

%

%

Hybrid Infrastructure

$

$

%

%

IBM Z

Distributed Infrastructure

Infrastructure Support

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:

Infrastructure:

Gross profit

$

$

%

Gross profit margin

%

%

pts.

Segment profit

$

$

%

Segment profit margin

%

%

pts.

Table of Contents

Management Discussion – (continued)

($ in millions)

Yr.-to-Yr.

Percent/

Margin

Change

For the six months ended June 30:

Infrastructure:

Gross profit

$

$

%

Gross profit margin

%

%

pts.

Segment profit

$

$

%

Segment profit margin

%

%

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:

Total Revenue

$

$

%

%

Americas

$

$

%

%

Europe/Middle East/Africa (EMEA)

Asia Pacific

($ in millions)

Yr.-to-Yr.

Percent

Change

Yr.-to-Yr.

Percent

Change

Adjusted For

Currency

For the six months ended June 30:

Total Revenue

$

$

%

%

Americas

$

$

%

%

Europe/Middle East/Africa (EMEA)

Asia Pacific

Table of Contents

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:

Total expense and other (income)

$

$

%

Non-operating adjustments:

Amortization of acquired intangible assets

$

$

%

Acquisition-related charges

Non-operating retirement-related (costs)/income

Operating (non-GAAP) expense and other (income)

$

$

%

Total expense-to-revenue ratio

%

%

pts.

Operating (non-GAAP) expense-to-revenue ratio

%

%

pts.

Table of Contents

Management Discussion – (continued)

($ in millions)

Yr.-to-Yr.

Percent

Change

For the six months ended June 30:

Total expense and other (income)

$

$

%

Non-operating adjustments:

Amortization of acquired intangible assets

$

$

%

Acquisition-related charges

Non-operating retirement-related (costs)/income

nm

Operating (non-GAAP) expense and other (income)

$

$

%

Total expense-to-revenue ratio

%

%

pts.

Operating (non-GAAP) expense-to-revenue ratio

%

%

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:

Selling, general and administrative expense:

Selling, general and administrative — other

$

$

%

Advertising and promotional expense

Workforce rebalancing charges

Amortization of acquired intangible assets

Stock-based compensation (1)

Provision for/(benefit from) expected credit loss expense

7

Total selling, general and administrative expense

$

$

%

Non-operating adjustments:

Amortization of acquired intangible assets

$

$

%

Acquisition-related charges (1)

Operating (non-GAAP) selling, general and administrative expense

$

$

%

(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).

Table of Contents

Management Discussion – (continued)

($ in millions)

Yr.-to-Yr.

Percent

Change

For the six months ended June 30:

Selling, general and administrative expense:

Selling, general and administrative — other

$

$

%

Advertising and promotional expense

Workforce rebalancing charges

Amortization of acquired intangible assets

Stock-based compensation (1)

Provision for/(benefit from) expected credit loss expense

5

Total selling, general and administrative expense

$

$

%

Non-operating adjustments:

Amortization of acquired intangible assets

$

$

%

Acquisition-related charges (1)

Operating (non-GAAP) selling, general and administrative expense

$

$

%

(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.

Table of Contents

Management Discussion – (continued)

Research and Development

($ in millions)

Yr.-to-Yr.

Percent

Change

For the three months ended June 30:

Research and development expense

$

$

%

($ in millions)

Yr.-to-Yr.

Percent

Change

For the six months ended June 30:

Research and development expense

$

$

%

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:

Intellectual property and custom development income:

Intellectual property income (1)

$

$

%

Custom development income

Total

$

$

%

($ in millions)

Yr.-to-Yr.

Percent

Change

For the six months ended June 30:

Intellectual property and custom development income:

Intellectual property income (1)

$

$

%

Custom development income

Total

$

$

%

(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.

Table of Contents

Management Discussion – (continued)

Other (Income) and Expense

($ in millions)

Yr.-to-Yr.

Percent

Change

For the three months ended June 30:

Other (income) and expense:

(Gains)/losses on foreign currency transactions

$

$

nm

(Gains)/losses on derivative instruments

nm

Interest income

Net (gains)/losses from securities and investment assets (1)

nm

Retirement-related costs/(income)

Other

Total other (income) and expense

$

$

nm

Non-operating adjustments:

Acquisition-related charges

$

1

$

(1)

nm

Non-operating retirement-related (costs)/income

Operating (non-GAAP) other (income) and expense

$

$

nm

($ in millions)

Yr.-to-Yr.

Percent

Change

For the six months ended June 30:

Other (income) and expense:

(Gains)/losses on foreign currency transactions

$

$

nm

(Gains)/losses on derivative instruments

nm

Interest income

Net (gains)/losses from securities and investment assets (1)

nm

Retirement-related costs/(income)

nm

Other

Total other (income) and expense

$

$

Non-operating adjustments:

Acquisition-related charges

$

1

$

(1)

nm

Non-operating retirement-related (costs)/income

nm

Operating (non-GAAP) other (income) and expense

$

$

(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.

Table of Contents

Management Discussion – (continued)

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:

Interest expense

$

$

%

($ in millions)

Yr.-to-Yr.

Percent

Change

For the six months ended June 30:

Interest expense

$

$

%

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:

Retirement-related plans — cost:

Service cost

$

$

%

Multi-employer plans

4

3

Cost of defined contribution plans

Total operating costs

$

$

%

Interest cost

$

$

%

Expected return on plan assets

Recognized actuarial losses

Amortization of prior service costs/(credits)

9

(2)

nm

Curtailments/settlements

3

5

Other costs

9

Total non-operating costs/(income)

$

$

%

Total retirement-related plans — cost

$

$

%

nm - not meaningful

Table of Contents

Management Discussion – (continued)

($ in millions)

Yr.-to-Yr.

Percent

Change

For the six months ended June 30:

Retirement-related plans — cost:

Service cost

$

$

%

Multi-employer plans

7

6

Cost of defined contribution plans

Total operating costs

$

$

%

Interest cost

$

$

%

Expected return on plan assets

Recognized actuarial losses

Amortization of prior service costs/(credits)

(4)

nm

Curtailments/settlements

4

7

Other costs

Total non-operating costs/(income)

$

$

nm

Total retirement-related plans — cost

$

$

%

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.

Table of Contents

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.

Table of Contents

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 Reform

Impacts

Operating

(non-GAAP)

For the three months ended June 30, 2026:

Gross profit

$

$

$

—

$

—

$

Gross profit margin

%

pts.

—

pts.

—

pts.

%

SG&A

$

$

$

—

$

—

$