3 Numbers That Will Matter Most in IBM’s Upcoming Q2 Earnings

Legacy tech giants like International Business Machines (IBM) rarely generate any dramatic market reactions. However, its preliminary Q2 results triggered a sharp selloff, with IBM shares down roughly 26% in the last five days and 28% year-to-date (YTD), underperforming the overall market.

IBM traces its roots back to 1911. As a tech dinosaur, IBM has spent decades not going extinct. The company has worked hard to reshape itself from a legacy hardware company into one driven by software, consulting, and AI-powered enterprise solutions. So, it is natural for investors to react negatively when software growth slows down, as reported in its preliminary Q2 results on July 14.

But that is not the whole story. The company will report its Q2 earnings on July 22. These three numbers in the Q2 print will determine whether the recent selloff was justified or whether investors simply panicked too soon.

1. Software Revenue Growth: Can IBM's AI Strategy Get It Back on Track?

IBM's business is defined by its software. So when growth slows in this segment, it gets everyone’s attention. In the preliminary Q2 results, the company announced software revenue increased 5% year-over-year (YoY). If revenue increased, then why did the stock fall? The problem was the noticeable slowdown from the previous quarter. Notably, in Q1, software revenue increased by 11%, while it rose by 10% and 14% in the third and fourth quarters of 2025. Furthermore, it fell short of both Wall Street's and management’s expectations.

Over the past several years, IBM has intentionally transformed itself around hybrid cloud, automation, cybersecurity, AI software, and Red Hat. Software has become the engine investors expect to drive its long-term growth. So the slowdown in this segment caught the market off guard. However, management made it clear that the delay was not due to weaker customer demand. It was mostly due to execution issues. 

During the final weeks of June, many enterprise clients redirected technology budgets toward AI infrastructure, which are becoming increasingly scarce ahead of anticipated price increases. What IBM failed to do was to close numerous large software deals within the expected timeframe, resulting in this revenue slipping into future quarters. Investors need to watch out for clarification on whether these transactions are indeed delayed transactions rather than canceled ones. It will mean that these deals should eventually contribute to future revenue, which is a positive sign. 

2. Infrastructure Revenue: Was This a Temporary Setback or a Bigger Problem?

Infrastructure became the biggest disappointment in IBM's preliminary results. Management stated that infrastructure revenue is expected to decline 7% YoY. This segment revenue climbed 15% in Q1, 21% in Q4, and 17% in Q3 of 2025, respectively. Once again, management didn’t blame weakness in demand for this performance. Instead, the company described an unusually rapid shift in enterprise spending priorities during the final weeks of the quarter, which also explained the decline in software revenue.

According to management, enterprise customers unexpectedly and aggressively reprioritized spending towards AI infrastructure, such as servers, storage systems, and memory components, which would otherwise become unavailable due to supply constraints. IBM just did not adapt quickly enough as customer buying patterns changed. Therefore, investors need to watch IBM Z mainframe business performance closely to check whether customers are embracing the new IBM z17 systems or delaying upgrades. Strong adoption would imply demand remains strong. The main thing to watch in the Q2 earnings call is if this is merely a temporary spending shift or if it represents a longer-term challenge for IBM's hardware business.

3. Free Cash Flow: The Number That Could Matter Most to Long-Term Investors

For many long-term investors, especially dividend investors, the one number that will matter most is free cash flow. For years, IBM has had a reputation for generating strong free cash flow to be able to pay dividends to shareholders. The company even has a reputation for increasing dividends over the past 31 consecutive years and being a Dividend Aristocrat. It also offers an appealing dividend yield of 3.1%, higher than the tech sector average.

Based on the preliminary results, IBM generated $4.8 billion in free cash flow. The number remains strong enough to sustain the company’s forward payout ratio of 55.6%. However, investors will want reassurance that cash generation accelerates during the second half of the year, as the company’s free cash flow generation remained strong at $14.7 billion in 2025.

Besides dividends, strong cash flows are also important as IBM continues to invest aggressively for future growth instead of pulling back during a difficult quarter. It recently introduced Lightwell, a new AI-powered platform backed by a $5 billion commitment and supported by more than 20,000 engineers across IBM and Red Hat. Beyond AI, IBM is making an equally ambitious push into quantum computing. It has plans to build Anderon, which it describes as the "world's first pure-play quantum wafer foundry." Its long-term goal is to invest more than $10 billion in quantum computing over the next five years.

Should Investors Panic or Stay Patient?

Naturally, a 26% stock dip in just five days will grab attention. But market reactions aren’t always the best judge of a company’s long-term potential. A detailed earnings discussion will reveal much more in-depth insights about the business. If software growth rebounds, infrastructure revenue stabilizes, and IBM maintains its free cash flow outlook, the recent selloff could ultimately look like an emotional overreaction. If not, investors will then have stronger reasons to question whether IBM's transformation is losing momentum.

In any case, long-term investors may be better off waiting for the full picture rather than reacting to preliminary headlines. The upcoming Q2 earnings report should make it much clearer whether the recent selloff is a buying opportunity or a sign of deeper challenges ahead.

On Wall Street, IBM stock is an overall “Moderate Buy.” Out of the 22 analysts covering shares, 10 have a “Strong Buy,” two have a “Moderate Buy” recommendation, nine have a “Hold” rating, and one says it is a “Strong Sell.” IBM’s average price target of $293.95 implies the stock can bounce back by 39% from current levels. Plus, the high target price of $365 implies a potential upside of 66.6%.