IBM (IBM) reported a solid Q1 2026 earnings beat after the close on Wednesday and still watched its stock fall about 6% in extended trading. Adjusted earnings per share came in at $1.91, above the $1.81 Wall Street expected.
Revenue hit $15.92 billion, up 9% year over year and ahead of the $15.62 billion consensus. Net income was $1.22 billion, up from $1.06 billion a year ago.
IBM held its full-year guidance steady, projecting 2026 revenue growth over 5% at constant currency plus a $1 billion increase in free cash flow. The market was looking for an upward revision on the back of the Q1 beat, and not getting one was enough to trigger selling.
There is also a lingering AI story hanging over the stock from earlier in the year. IBM shares dropped 13% in one day in February after Anthropic said Claude could help modernize the COBOL code that runs on IBM mainframes.
The pushback: IBM SVP Rob Thomas has repeatedly said "AI strengthens the mainframe case, it does not weaken it," but investors are not fully convinced yet.
Software revenue was $7.05 billion, up 11% and slightly above the $7.02 billion forecast. Consulting revenue hit $5.27 billion, up 4%, and came in just short of the $5.28 billion estimate.
Infrastructure was the standout at $3.33 billion, up 15%, with Z mainframe hardware revenue jumping 51%. The new z17 model is outperforming past mainframe cycles, which complicates the bear case that mainframes are slowly dying.
IBM closed its $11 billion acquisition of data streaming company Confluent in mid-March. The deal closed faster than expected, and IBM now sees operating pre-tax margin expanding about one percentage point because of it.
CEO Arvind Krishna said on the call that "Middle East developments didn't impact us in the first quarter," adding that IBM's diversity across businesses and geographies leaves it well positioned as uncertainty continues.
IBM's consulting business has been the soft spot for several quarters, growing slower than either software or infrastructure. Part of that is tied to customers pausing long-term digital transformation projects as they rethink budgets in a higher-rate environment.
Krishna said the pipeline remains strong but acknowledged deal cycles are longer than they were 18 months ago. A reacceleration in consulting would be the clearest signal that enterprise spending is finally loosening up.
The year-to-date picture is still ugly, with IBM shares down about 15% in 2026 while the S&P 500 is up 4%. That gap means every quarter from here on has to either beat or raise guidance, or the stock keeps drifting lower.
Watch the Q2 update for any lift to full-year numbers and for signs the Confluent integration is pulling software growth higher still.
