Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Olympia McNerney, IBM's Global Head of Investor Relations. Olympia, you may begin.

Thank you. I'd like to welcome you to IBM's second quarter 2026 earnings presentation. I'm Olympia McNerney, and I'm here today with Arvind Krishna, IBM's Chairman, President, and Chief Executive Officer, and Jim Cavanaugh, IBM's Senior Vice President and Chief Financial Officer. We'll post today's prepared remarks and a replay of today's webcast on the IBM Investor website within a couple of hours. The earnings presentation is already available. To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation, which is posted to our investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filings. So with that, I'll turn the call over to Arvind.

Thank you for joining us today. As you saw in our pre-announcement, our second quarter performance fell short of expectations. Consistent with our commitment to transparency, we shared the results as soon as our financial close process was substantially complete. I won't revisit the details from the pre-announcement, as Jim will provide additional context. Instead, I will focus on the positioning of our business, the growth opportunities we see ahead, and actions we are taking to address execution in the quarter. 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 them realize value in a secure, cost-effective, and scalable way. Over the last five years, we have transformed our business, improved the durability of our revenue growth, and strengthened our operating model. Those fundamentals remain intact. Software is nearly 45% of our total revenue and has been repositioned to higher growth end markets across hybrid cloud, data, automation, and mission-critical transaction processing software running on mainframe. Our offerings help clients build and run applications and AI anywhere, unlock the value of their data, orchestrate and govern AI at scale, and operate more efficiently, securely, and resiliently. Our second quarter software shortfall was limited to a CapEx-sensitive area of the portfolio. The vast majority of our software business, about 80% of that revenue, is recurring in nature and deliver healthy growth in the quarter, reflecting the demand for our offerings and giving us confidence in our growth opportunity. Our AI strategy is the right one for IBM and aligns to what we are known for, hybrid, sovereignty, and trust. We have held the view for a while that the unprecedented investment in AI infrastructure and models will increase pressure on enterprises to generate meaningful returns from that spend. Value will increasingly shift towards the orchestration and data layers so that clients can optimize outcomes, cost, and governance across multiple models and agents and keep control of their proprietary data. IBM's differentiation lies in our neutrality and enterprise-grade operational control, the ability to orchestrate agents across models, clouds, and on-premises environments, while also providing built-in observability, evaluation, governance, identity management, and security. What's the next orchestrate is the control plane that helps clients build, manage, and govern agents, which combined with Red Hat gives clients a foundation to run inference and applications on any infrastructure. Bob is our entry point into the developer ecosystem, 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. Confluent delivers real-time governed data to models and agents across that control plane. CONSERT provides enterprises with a unified view of application health, security, compliance, and operational performance. Clients remain in the early stages of AI adoption, making our combination of consulting expertise and technology a key differentiator. We are helping move clients to deployment, and that's translating into growing demand across consulting, led by generative AI. In infrastructure, despite challenges this quarter, Z17 is having the best refresh cycle in reported history. Transaction volumes, cyber requirements, and resilience continue to drive growth for the mainframe. While clients continually evaluate workload placement, we see no evidence of clients moving off the mainframe. Z17 remains at nearly 130% program-to-program, well ahead of Z16, which was our strongest on record. IBM Z runs over 70% of the world's transaction volume in terms of value. To give you perspective on our reach, there are over 140 million installed MIPS running mission-critical transactions across every industry. Clients representing 85% of these installed MIPs are either maintaining or growing capacity. Earlier this month, we introduced a smaller Linux One system that allows clients to address data center space and cost constraints while offering the security, resiliency, and real-time inferencing the Z platform can deliver. This innovation expands our addressable market. Distributed infrastructure just delivered its best quarter of revenue growth on record, growing 37%. We see this as an increasingly important growth vector for IBM, driven by AI adoption and the rapid growth of enterprise data. We have been investing across power and storage AI infrastructure to position ourselves for this market opportunity. Power continues to gain momentum, as the value proposition of Power 11, resiliency, performance, and Linux modernization, resonates with clients. We are gaining share in storage through differentiated offerings across flash, fusel, and tape, including AI-enabled capabilities that help clients scale and manage data for AI. Demand remains strong, driving a robust pipeline and positioning us well for the second half of the year. We are acting decisively to capture new market opportunities as they arise. The Mythos release in early April has accelerated the discovery of security vulnerabilities for clients. This creates a multi-billion dollar TAM for IBM and Red Hat to help clients secure their open source software through our new capability, Lightwell. IBM offers a differentiated value proposition as a leader in open source through Red Hat and also recent acquisitions of Confluent and Hashi. Clients can subscribe to Lightwell for a million dollars per year to access open source packages that have been remediated or validated. In the first two weeks of availability, we have already made more than 7,500 package versions available. Early adopters of Lightwell include organizations like Bank of America, B&Y, Citi, Goldman Sachs, JPMorgan Chase, MasterCard, Morgan Stanley, Royal Bank of Canada, State Street, Visa, Wells Fargo, and more. Finally, quantum computing is no longer decades away. It is upon us, and we are investing aggressively. Recently, with the U.S. Department of Commerce, we announced a letter of intent to build Anderon, the world's first pure-play quantum foundry, supported by a billion dollars in chips incentives provided by the Department of Commerce and a billion-dollar cash contribution by IBM. Shortly after that, we disclosed plans to invest more than $10 billion in quantum over the next five years, spanning R&D, CapEx, manufacturing scale-up, M&A, and ecosystem expansion. This supports our roadmap to stalling in 2029, the world's first large-scale, fault-tolerant quantum computer. Recently, IDC evaluated 11 quantum computing vendors and ranked IBM first overall, citing our ecosystem readiness for quantum advantage, our track record of delivering the roadmap on time, and our quantum classical integration. With the portfolio we have and the opportunities ahead, it comes down to execution. That is where we fell short in the second quarter. We have engaged with clients on the transactions that slipped and 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. At the same time, we are accelerating productivity actions across the company, spanning both spend reduction initiatives and actions designed to drive growth. These include leveraging AI to improve software development productivity increasing the effectiveness of our sales and marketing organization, and accelerating our 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. 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. These changes are aligned with the areas of our business demonstrating strong momentum, including Red Hat, HashiCorp, Confluent, WatsonX, and Storage. As AI adoption moves from experimentation to enterprise-scale deployment, We are also investing in more specialized technical and client-facing talent, including forward-deployed engineers. Our conviction in the strength of our business and our ability to capture the growth opportunities ahead remains unchanged. We now expect revenue growth for the full year in a range of 4% to 5%. We continue to expect to grow free cash flow by about $1 billion this year as we accelerate our productivity initiatives. With that, let me hand it over to Jim to go through the financials.

Thanks, Arvind. In the second quarter, we delivered 1% revenue growth, 30 basis points of operating pre-tax margin expansion, and 5% diluted operating earnings per share growth. And through the first half, we generated $4.8 billion of free cash flow. Let me go through what played out in our segments in more detail. Software revenue grew 5% this quarter, with flat organic revenue growth. As Arvind discussed in our pre-announcement, in the final weeks of June, we saw a shift in client spending priorities. Many clients redirected spending towards servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases. As a result, tens of large deals failed to close 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. 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, resulting in transaction processing revenue declining 9%, while data grew 18% and automation grew 3%. In contrast, we continue to see strong underlying demand in our subscription and consumption-based software. Because these are generally purchased as operating expenditures, they were largely unaffected by the CapEx dynamics that impacted some of our ELA transactions during the quarter. Let me take a step back and discuss the composition of our software revenue. We offer customers flexible purchasing options that align technology investments with their business needs, making it easier to adopt and scale solutions across their businesses. About 80% of our annual software revenue is recurring and is made up of subscription and consumption-based revenue like our Red Hat, HashiCorp, and Confluent products. It also includes subscription and support revenue that provides customers with ongoing access to software enhancements and support. This revenue grew nicely in the quarter, and our ARR was $24.6 billion, up 8% since last year. The other 20% of software revenue is transactional in nature and is predominantly related to the incumbency with mainframe and the associated enterprise license agreements 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 was down high single digits in the quarter, given the shift in buying patterns we have discussed. On the subscription side of the business, HashiCorp had another record bookings quarter and accelerated revenue growth through the first half of the year. And Confluent is off to a strong start and on track with our expectations after its first full quarter post-close. Red Hat growth accelerated one point sequentially to 11%, driven by improvement in the subscription piece of the business and stable growth in consumption-based services. OpenShift ARR is now $2.2 billion with strong growth, reflecting demand of our containerization and virtualization products. where we now have about $680 million of contracts signed since early 2024. In RHEL, performance continued to be impacted by constrained hardware availability, similar to last quarter. Infrastructure revenue declined 7% this quarter. While Z performance was below our expectations, through the first five quarters of Z17 availability, Revenue is well ahead of the prior cycles at nearly 130% program-to-program. As Arvind said, we see no evidence of clients moving off mainframe. Clients continue to invest in IBM Z to modernize mission-critical workloads with a focus on resiliency, security, and increasingly enabling AI on the platform. AI is driving incremental capacity growth and new workloads as clients look to run AI closer to their most sensitive data. We are seeing strong early adoption of our AI innovations, with nearly 50% of Z17 customers investing in AI capabilities with Spire Accelerator, And clients deploying Watson X code assistant for Z are growing MIPS capacity three times faster than those who are not. In a world where infrastructure costs are rising and efficiency matters more than ever, IBM Z offers a compelling economic advantage. Depending on the size and complexity of workloads, clients can realize a 2 to 15x total cost of ownership benefit versus moving these workloads off the platform. Reinforcing why the platform remains central to their operations and positioning us to capture additional value as AI workloads grow. And adding to Arvind's comments on the strength in distributed infrastructure, we exited the quarter with approximately $500 million of backlog, our highest on record supporting continued momentum. In consulting, signings grew 6%, marking our second consecutive quarter of growth and reflecting continued client investment in business transformation initiatives. Revenue grew 1%, driven by demand for application modernization, data transformation, and cybersecurity services, as clients balanced the needs to increase productivity through AI with the need to strengthen resiliency and manage risk. Revenue growth was balanced, with both strategy and technology and intelligent operations up 1%. Generative AI represented about 50% of our signings in the quarter, and now makes up over 30% of our backlog, underscoring the demand for AI-powered transformations that extend beyond technology modernization into core business operations. As clients move from pilots to enterprise-wide deployment, they are increasingly turning to consulting to re-engineer business processes and unlock productivity and new business value through AI, automation, and digital labor. Let me now discuss profitability. Operating gross profit margins were down 70 basis points, largely driven by our revenue shortfall and mix. Despite this shortfall, productivity actions were ahead of plan, providing the flexibility to absorb confluent-related dilution, continued investing for growth, and expanded adjusted EBITDA and operating pre-tax margins by 20 and 30 basis points, respectively. Segment profit margin expanded by 160 basis points in consulting and 110 basis points in software, driven by ongoing productivity actions. Infrastructure segment profit margin declined, 150 basis points, reflecting the IBM Z mix headwind mitigated somewhat by strong distributed infrastructure margins. Through the first half of the year, we generated $4.8 billion of free cash flow, flat year-over-year, driven by about $700 million increase in adjusted EBITDA, 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, reflecting the strength we see in our infrastructure business. We exited the second quarter with a strong liquidity position and a solid investment-grade balance sheet with cash of $8.2 billion. We returned $3.2 billion to shareholders in the form of dividends through the first half of the year. Our debt balance ending the quarter was $62 billion, including debt of $13 billion for our financing business, with a receivables portfolio that is 80% investment grade. Over the last five years, we have repositioned our business to higher growth end markets, improve the durability of our revenue, and expanded operating pre-tax margins and free cash flow through discipline execution and laser focus on productivity. As Arvin mentioned, we are confident in our portfolio and strategy, and the growth opportunities we see ahead. Let me now address our expectations for the remainder of the year. We now expect revenue growth for 2026 in the range of 4% to 5% and are maintaining our expectation to grow free cash flow by about $1 billion. We believe the low end of the revenue range appropriately reflects the current environment and is our base case. Given the second quarter shortfall, we are revising our software growth expectation to a range of 6% to 8% for the full year. While several of the deals that slipped from the second quarter have already closed in the first few weeks of the third quarter, the low end of the software range assumes that recent spending dynamics persist through the second half. The high end assumes a more typical conversion of our pipeline. In light of the strong demand environment in power and storage, we now expect infrastructure to grow low single digits in 2026, driven by growth in distributed infrastructure and continued strong program-to-program performance in IBM Z through the second half of the year. Demand across storage and power remains strong, and we continue to secure inventory and accelerate our supply chain to capitalize on the opportunities we see in front of us. In consulting, the quality of our backlog and momentum in Gen.AI continue to support an acceleration in revenue growth to low to mid-single digits for the year. We continue to see strong fundamentals of our business play out in the second half of the year as we accelerate our productivity initiatives to help enhance our margin and free cash flow commitments while continuing to invest in growth. These actions include deploying AI and automation at greater scale across the company, reducing third-party spend, improving sales and marketing efficiency, using AI to drive more efficient software development, optimizing our supply chain, and enhancing services delivery. While revenue dynamics are creating margin pressure for the year, the pace of our productivity actions have exceeded our expectations. As a result, we now expect to deliver 100 basis points of operating pre-tax margin expansion, with productivity more than offsetting the revenue-related headwinds. Our operating tax rate for the year should be in the mid-teens, and the timing of discrete items can cause the rate to vary within the year. For the full year, we continue to expect to grow free cash flow by about $1 billion. The primary driver of this growth will be adjusted EBITDA, offset by cash tax headwinds, higher CapEx, and higher net interest expense, the majority of which is behind us. Looking to the third quarter, we expect constant currency revenue growth consistent with the full year. Given the strengthening of the dollar, we now expect currency to be a one-and-a-half-point headwind to revenue growth in the quarter. And for operating pre-tax margin, we expect similar performance to the second quarter. Our third quarter operating tax rate should be in the mid-teens. Let me close by saying that our strategy has not changed. We are a leader in hybrid cloud. We are investing behind an AI opportunity that plays directly to IBM's strengths in data, orchestration, and enterprise trust. And we continue to build leadership in quantum. them. We remain confident in the growth opportunities ahead of us and our ability to capture them. Arvin and I are now happy to take your questions. Olympia, let's get started.

Thank you, Jim. Before we begin Q&A, I'd like to mention a couple of items. First, supplemental information is provided at the end of the presentation. And second, as always, I'd ask you to refrain from asking multi-part questions. Operator, let's please open it up.

Thank you. At this time, we will begin the question-and-answer session of the conference. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And our first question comes from Amit Daryanani with Evercore ISI. Please stay your question.

Thanks for taking my question. Good afternoon, everyone. I guess, Arvind, your commentary strongly suggests that the headwinds we saw in June quarter were a result of customers just reallocating spend towards AI infrastructure rather than reducing overall IT budgets. And I think the biggest debate everyone's had since the pre-announcement has been, is this demand deferred or destroyed for IBM? So I'd love to understand, you know, what gives you the confidence that this is more a timing issue versus a structural shift in enterprise spending? And, you know, what milestones should we all be watching for over the next couple of quarters to gauge if demand truly starts to normalize for you folks? That would be really helpful. And, Jim, I have to acknowledge the very impressive free cash flow guide from you folks despite the June quarter blip. Maybe just unpack a little bit on the building box behind your ability to maintain the free cash flow target as well. Thank you very much.

Amit, thanks for the question. Well, given that you used the word impressive, I'm going to ask Jim to address the impressive part first, and then I will address your question on the priorities.

Thanks, Arvin, and thanks, Amit, for the question. I think it's a great place to start this call here tonight. Pre-cash flow, as you all know, has been one of the two key leading indicators of our financial investment thesis and our shareholder value creation model inside IBM. And I appreciate the word impressive because the team has worked extremely hard over the last four years. Put this in perspective. Over the last four years, we have grown our free cash flow over $6.5 billion in this company and grown free cash flow margin 700 basis points. That gives us a lot of confidence here within the company. But when you look at first half, we produced roughly about $5 billion of free cash flow. That was flat year to year. The underpinnings really are driven by the fundamentals, the productivity mindset in this company, and the ability to generate operating leverage is extremely strong overall. Adjusted EBITDA was up high single digit. And as I said in the prepared remarks, it was offset by higher inventory, cash taxes, in net interest, which, by the way, the latter two I've been talking about all year long. Let's take a step back. We entered this year with extreme momentum and confidence in what we guided. We guided free cash flow up about a billion dollars year to year with record free cash flow margins. And we said that was going to be entirely driven by the quality and sustainability of the fundamentals of our business, adjusted EBITDA, with some headwinds on cash tax, CapEx to invest in our business and net interest. Through the first half, there are some unique dynamics that drive that free cash flow flat, which by the way, attainment wise, we're in a very similar position that we were during the last similar point in time of Z16 mainframe cycle, right about 30% attained overall, albeit our free cash flow margins are up 300 basis points from that period of time. But the first thing, as I said in prepared remarks, given the infrastructure supply dislocation that's happening in the market, we took very conscious and proactive actions to strengthen our supply chain and address the explosive demand growth we see happening in our business around our distributed infrastructure power and storage, which we exited the quarter with $500 million of backlog. This was done at economically prudent prices with buy-aheads. Our inventory exiting the first half is up $600 million year to year. Given the confidence we have in our guidance in the second half, we will flush through a major portion of that inventory headwind. So that will become a tailwind in the second half. Second, the headwinds I've been talking about all year long, CapEx and cash taxes, they were front-end loaded. so they're predominantly behind us. So where does that leave us? It leaves us with a position to have the conviction and confidence to maintain growing free cash flow, at least $1 billion, expanding record free cash flow margins with free cash flow realization, important point, free cash flow realization consistent to where we were in January and throughout the year. That is going to be driven by the fundamentals of the adjusted EBITDA, that productivity, that operating leverage in the company. So we believe with the focus portfolio that we have, with a very disciplined capital allocation, the diversity of our business model, as you see in our guide, with a relentless focus on productivity, we drive the durability of that free cash flow engine that, by the way, enables that flywheel to invest for growth.

Thanks, Jim. So, Amit, let me address the first part of your question. I have to start by first describing the nature of what it was that didn't happen. The majority of what didn't happen in the second quarter was large capex deals at large clients. So I had said previously that the volume or the number of those deals was in the low 10s. We have been very pleased to see that about a third of those have already 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. 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. The second part that is really important, there was a lot of points, as both Jim and I pointed out in prepared remarks, where there was a lot of double-digit growth strength also. A lot of that is in the consumption part of the portfolio, and we are going to be doubling down on the demand there because the pipelines are strong and the signals from our clients are strong about where that is happening. So when I couple that together, those, I'll call them factoids, together with what we are seeing in our pipelines, together with what we are seeing in terms of signals from clients, in terms of what they're purchasing and putting in, then I come to the conclusion that a lot of the demand is deferred, not destroyed, albeit it's sometimes hard to predict exact timing on a month-to-month basis. But the fact that a third of those deals closed is a strong signal. In terms of what are the milestones that we expect of the KPIs, I'm going to ask Jim to comment on that.

Yeah, I think it's plain and simple. Arvin's been running this company for the last six years around two key components of KPIs. We just talked about one, free cash flow, because that's the engine that provides the financial flexibility for growth. The first is revenue growth. We've taken this company from a no-growth company to a low single-digit company to a mid-single-digit company, and our future aspirations have always been to continue to increase. So the first thing is we just posted 1% revenue growth in 2Q. The first indicator, we have to show acceleration as we get into the second half of the year. Our guidance range, 4% to 5%, should be noted right up front. That low end of the range we put in as an anchor, an anchor so that we can show the investment community the level of productivity and operating leverage we have in this company that allows us to maintain earnings and maintain free cash flow at that low level. That low level says we take a business that just produced 1% up to mid-single digits, give or take, in the second half. That's not our aspiration. But that is an anchor as a range on how we put this in place. The high end, that 5%, that says we accelerate growth into the second half overall. Now, two key components, KPIs underneath that, I would venture to say getting right back at the core of second quarter. Number one, the strength and confidence we have in our mainframe platform cycle, if we can maintain this at a high 120% plus program to program, that is a tremendous indicator that will lead us to the high end of that guide range. The second is our software. And that software, when you look at it, at the high end of the range at 8%, that is the second half that's approaching double digits. Based on what Arvin said, the strength of our 80% high-value recurring revenue accelerating and a return to some normal level of closure rates of a strong pipeline in the second half. So those are two KPIs.

Great. Operator, let's take the next question.

Your next question comes from Wamsi Mohan with Bank of America. Please state your question. Wamsi Mohan, your line is open. Please go ahead and unmute yourself. We'll move on to the next question. The next question comes from Brent Phil with Jefferies. Please state your question.

Thanks. Jim, I just want to go through the guidance for the rest of the year. So your prior guide was 5-plus percent. You're guiding now 4 to 5. If you take a one-point guide, the cut to the guide, I think it's like $650 million. You know, you missed Q1 by approximately $675. So that just assumes that, you know, some of the slip deals aren't coming back yet. Arvin said that some of those deals have closed. Can you just kind of square up the guide to what this means?

Absolutely, Brenton. Thanks for the question. Let me just frame the components about the guide overall. One, we said revenue guide now four to five. On the low end, it's about a point-plus takedown. On the high end, give or take, it's pretty damn close to where we were at. I talked about maintaining free cash flow in either case because we have built this around prudently, the low end of the range, to show the operating leverage and productivity, and by the way, the investment capacity we have in the company to drive that level of profit, that level of cash, which by the way, both will be in high single digit level overall with record margins. And that basically says we're taking up our operating P-TEX margins by a hundred basis points. Well, let's unpack the four to 5%. Number one, underneath it, we see tremendous momentum playing out in infrastructure overall. That infrastructure guide 90 days ago, we said was going to be down low to mid-single digit. Coming out of first half, given the mainframe, albeit fell short, the mainframe is still at 129, 130% of the prior program. It assumes the confidence that we see in all the demand indicators, and we can get into that later, that we maintain that level and that we continue to see the tremendous growth opportunity that we have prudently protected the supply chain to optimize on distributed infrastructure. So guide to guide, you know, we're up about two points there. In software, 6% to 8% for the year. The lower end was an anchor. That says nothing changes, and I'll get into that in a minute. The high end says that we basically are approaching double digits in the second half. So let me break down those two, because we can get into consulting later, but there's basically no change there. When you take a look at the scenarios that we ran on software, one, as I talked about in prepared remarks, we, and we think this is a competitive differentiation, we have a software portfolio that plays at the heart of infrastructure software that we allow our clients flexibility in how they want to buy. They could buy perpetual license models, they can buy subscription models, They could buy consumption models, and albeit, although it's a very small percentage, we offer SaaS-based components, right? Underneath that, we have our business is roughly 80-20, 80% high-value recurring revenue, and that is, think of our portfolio, Red Hat, subscriptions, our acquisitions that are mostly subscription consumption-based, our Gen AI portfolio on Watson X, and parts of our data automation portfolio that operate on consumption models. Our remaining 20%, that's the piece, transactional revenue that leverages perpetual license sales, enterprise license agreements, that that is our mainframe moat and incumbency. Provides tremendous value to IBM because it creates that multiplier effect I always talk about with every dollar of hardware revenue we land, we get $3 plus a software with long-term commitments. Now, how do we construct the ranges? On the high end at 8%, we said that that 80% revenue, we see continue and accelerate. We accelerated from 7% in first quarter, 8% in second quarter, and we see this going to about 10% in the second half. That is good acceleration. and that talks to the value and innovation we bring to clients in that part of the portfolio. In the transactional piece of the business, make it very clear. The second quarter slip deals we have, by the way, typically we only close about 75%. Arvin stated already in three weeks, we're about a third, 40% already closed of those deals. Our high-end range says we close all of them, which, by the way, we haven't really lost maybe one of the deals, maybe two, but we close all those deals. Then we've taken a look at all of our demand indicators, propensity to buy models, our pipeline closure rates. We enter the second half with a relatively robust net new business pipeline that's grown double digits. We have, Brent, to your question, we've taken a discount off of our traditional historical rates. That's why we're sitting at eight. I think that's prudent, but back to Amit's question, the KPIs will tell how we finish third quarter, how we get in the fourth. The low end of the range, like I said, I can't stress it, it's the anchor to get profit and cash stable to our last guide and maintain that level of profitability. That basically assumes we get modest acceleration in our high value recurring revenue and our 20% transactional, we see similar buying behavior in yields, right? That's not what we're saying here, but we're basing our framework of our business model so we can drive the right management actions, the right level of productivity to create incremental financial flexibility to go invest to capture that growth opportunity. Hopefully that helps you.

Great. Operator, Let's take the next question.

Your next question comes from Ben Reitzes with Mellius Research. Please state your question.

Yeah, thanks. I first just wanted to see if you guys could clarify, you know, there's two lines that are really bothering folks in the guidance. It's TPP and then the mainframe and how, you know, you're going to improve from negative nine and negative 42. You know, I think if you could explain that, that'll make us feel a lot better about the four to five. And then, Arvind, this is a question for you. Are you still looking for double-digit growth in software long-term? Do you still think you have this kind of portfolio, or does the transactional stuff keep you from having like a 10% long-term guide for software and what you saw in the quarter? Thanks.

Yeah. Ben, thanks for the question. Let me actually address your question first. We and I have complete conviction in the double digit long term software growth. Let me be clear about that. As you heard Jim describe, 80% of our business is already, I'll use the word annuity or in some sense subscription based. That piece, we have grown from extremely low numbers. I would say it was low single digit seven years ago to eight and approaching 10%. We already got that there. We have a few different paths on how to get to 10%, not just one. We can keep growing that part faster, and that can approach not just 10%, but above 10%. That means that the other 20% has to grow smaller. By the way, every single year, that mix of 80-20 used to be 60-40. So as we go over time, that mix is going to climb up and more and more is annuity as opposed to transactional. And both organically and inorganically, we are investing in capabilities that are much higher growth than this mix. We are investing in capabilities that grow more at 15% to 20%, so that helps that overall growth rate. As an example, we brought Hashi in, and we accelerated it. We brought Confluent in, and we accelerated it. Our organic Watson X portfolio is also growing at much higher rates than the aggregate. So that is the point that we are going to, and we are not going to back off from our commitment of long-term double-digit for software, despite the 2Q hiccup. And I'll let Jim comment on the TP and mainframe growth rates, including the cycles that we see there.

Yeah, the questions kind of go together, right? Because we run this as a mainframe stack platform economic multiplier, as we talk about. Every dollar we land on mainframe, we get $3 plus a software. Mainframe overall, yeah, down 42%. It's off a 70% growth last year in the launch quarter overall. all. You look at the historical seasonality of mainframe, it's always down in the fifth quarter as we wrap around the launch. Now, with that said, I think we were very open, transparent. It was below our expectations. But with that said, let me put this in perspective. One, we're still at nearly 130%. The record across the history of IBM of a program, the program, put that in dollar figures. From our most successful program, P-16, to now P-17, five quarters in, we're at nearly 130%. That is a billion dollars more of mainframe revenue. That is three plus billion more of software stack on top of that versus where we were at a similar point in time in the Z-16 cycle. And I would tell you that's the value that we bring around innovation in mainframe, unmatched in terms of reliability, security, resiliency, scalability, AI on the chip. That's why the mainframe handles over 70% of the world's transaction volumes in terms of value, 140 million MIPS in the marketplace that we run core mission-critical systems across every industry, 45 of the top 50 banks, four to five top airlines, seven of the top 10 retailers, over 70% of the Fortune 100 run on mainframe. Now, Ben, to your question, how do we get confidence? Because our guide says we stay at that high 120 plus percent throughout 2026 overall. We have looked at key indicators, install base, upgrade cycles, propensity models, but what drives demand and purchasing requirement in mainframe? I would boil it down to three areas. One, capacity workload is the most important determinant. 85% of the install MIPS capacity out there in the marketplace today, running all those core mission-critical workloads, are either stable or growing. Clients are adding capacity and workload to mainframe, the viability. And by the way, that's coming in new AI workloads, analytics workloads, Linux-based workloads, and those MIPS are growing program to date over 15% to 20% installed capacity. So that's number one. Two, economic factors. We don't talk a lot about this, but I think it's important for our investors to understand. things like TCO, total cost of ownership, consolidation, lease propensity. Depending on the size and complexity of the workload, we have anywhere from a 2 to a 15x TCO advantage running on the mainframe. That's why Arvind said in prepared remarks, we do not see any evidence of clients migrating off mainframe. And lease propensity, which is a great indicator, we're actually in a very nice sweet spot as we enter second half from an upgrade. And then finally, AI-driven value. When you look at it, applications, data, security, all on the platform, we do 450 billion inferences per day at one millisecond with eight nines availability. We've got clients that have already purchased over 50% of our Spire inferencing. And those clients that have purchased that are growing MIPS capacity, the way we monetize value by over three times faster than others. So then you get to TP. The reason I went through that on mainframe, how do you monetize the value of that 3x multiplier in TP? The more capacity that's in the marketplace, the more monetization opportunity, the more price opportunity, the more value creation opportunity. That performance, we have all the confidence in the world in Z in the second half. But when we look at TP and the models that we have done, given how much MIPS capacity is out there, the first thing that we should all remember, that is a great future indicator of monetization and revenue growth the opportunity for us to go capitalize on that. The key question then becomes timing. And when you look at it, unlike the high value innovation we bring in many of our data, automation, et cetera, the client has capability around their purchases of MLC. They could run on an OPEX model without doing a big purchase for three years for quite some time. But eventually, that technology upgrade cycle catches them, and it moves in IBM's favor. And the economics, as you can imagine, the price differential moves in IBM's favor. So when you look at that, we have all the confidence in the world around a growth vector of TP. But when we look at the guidance in the second half, I think prudently when we're looking at 6% to 8%, 6% being the anchor, 8% approaching double digits in the second half. We've got TP down low single digits to mid single digits overall because we're going to look at that as a 2027 growth factor opportunity for us.

Operator, let's take the next question.

Your next question comes from Fatima Boulani with Citi. Please state your question.

Good afternoon. Thank you so much for taking my questions. Arvind, this is a question for you, and I want to flip some of the commentary on its head a little bit. So clearly, 11th hour, you had the deal slippage on the tens of the large deals. It's very encouraging to hear that you've been able to recoup and recapture these deals in such a short amount of time into the third quarter. So what I wanted to ask you, what exactly changed in the last three to for weeks that catalyzed, you know, pushing some of these large transactions that did slip to a successful finish line. And were there any internal or IBM-specific efforts or initiatives that you maybe took a more assertive stance with to, you know, recapture these transactions? And as a follow-up, you know, Jim just mentioned, and you also mentioned this near prepared marks, 85% of the installed MIPS capacity is still in your installed base. So, you know, conversely, what is actually happening to the 15% that is not stable to growing? Thank you very much.

Yeah. So, Fatima, thanks for the question. And let's talk about this a little bit. So, first, it's important to understand why this slipped. I actually believe that even our clients had every intention until about a month before that they were going to consummate these deals. You can imagine, we do have a lot of discipline and we do a lot of work to make sure it's a good business case, budgets exist, et cetera. I think that our clients themselves had not really thought through that some of the alternate purchases they were doing were increasing 30% in dollar value quarter to quarter. When they were faced with that issue, then they decided to move budget to those areas where they were having that extreme rise. Now, as we have gone through and done, we have actually held our price so far in the month of July. We have not taken increases. I think that our teams are a bit more reluctant and less aggressive than others. in portraying some of those increases in hardware that are coming into the market. As they become more aware that they cannot hold these prices for more than a few weeks, then that itself is going to make an impact where we play into that part as well, albeit we are nowhere near as aggressive as some of the alternate infrastructure providers. Now, on the software side, that becomes coupled often to that hardware purchase because they definitely want to leverage that hardware that they're getting from us, and then they will couple the software purchasers into it. But I actually believe that the biggest part is they deferred it and then they realized that this is mission critical. All I'm doing is taking on tech debt. I better actually act on this once they kind of got over the compression of time they were in at the end of the quarter and said, I don't really want to get into tech debt on a platform that I'm keeping for the long term. So if I'm not going to do that, then I've got to go find the money and get this done. And so my teams can go get the work done and give us all of those abilities that Jim talked about so eloquently in the last question of the innovation we do both on Z and in other platforms.

Great. Let's take the next question, operator.

Your next question comes from Eric Woodring with Morgan Stanley. please state your question. Eric, when your line is open, go ahead, try it again, Eric, please.

Can you hear me?

Yes, go ahead.

Can you hear me?

Sorry about that, guys. So thank you for taking my questions. Arvind, I want to touch on the data segment within software. And specifically, I think if you take your really bullish comments on Confluent accelerating, you get to organic data revenue growth that was down year over year, maybe mid-single digits in the second quarter. And that just stands out from the rest of the portfolio, the non-TP portfolio. So can you maybe just help us better understand exactly why that kind of organic data part underperformed the rest of non-TP software and why IBM's data software, you know, of all things, maybe got deprioritized this specific quarter this early in the AI build-out? Thank you so much.

Eric, thanks for the question. First, let's understand. As we said, in aggregate, about 400 to 500 of the miss was in software overall. And when we think of those large CapEx deals, while it is majority, but think majority is being 50 to 60% TP software, there is a lot of data also in there. It actually has less of automation because a lot of the automation portfolio has already moved to being subscription-based with things like Hashi and Aptio. So as you think about that, data takes what I would call maybe the run-by shooting. So in the run-by shooting, data gets hurt because people are buying less of it, and that impacts that. Now, if I take the next 12 months and if I look at what both I talked about and where we see the demand signals, I fully expect data to perform well and to give us that tailwind that we are wanting there. Also, at the end of the day, clients have a certain number of dollars. So if Confluent looks more attractive than other things, they are going to buy more of what is the thing that gives them the most near-term value. And we are fine with that. It gives us incumbency, it gives us a footprint, and we can go back in there in the next quarter and the quarter after to get other things in case that there is aggregate budget pressure. After all, we do have a large share of wallet at many of these clients, so there is a question of how much they will spend here. But I fully expect that we will do well in the data portfolio.

Great. Operator, let's take one last question.

Thank you. And our last question comes from Matt Swanson with RBC. Please get your question.

Great. Thank you so much for taking my question. Arvin, you've been really deliberate about the areas of security that you've invested in over the last few years. When we're looking at Project Lightwell, could you just talk about, I guess, post-mythos, kind of the breakdown of, one, how big of an opportunity this is. It's obviously an area open source that you have a lot of expertise, but also how important solutions in this area in general are for you as the largest enterprise provider of open source software, but kind of protecting the ecosystem you guys have worked so hard to build out.

Yeah. So, Matt, thank you. Look, if I look at this first, let's step back and look at open source versus proprietary. If I look at the amount of running code out there, I would posit to you that open source is now larger than all proprietary code in terms of the volume of software that is there. At the same time, the number of people who have been able to commercialize it or monetize it is limited. I think also, Matt, we should be careful. We say that, but a lot of the hyperscalers, a lot of the infrastructure out there does actually run on open source, albeit with modifications by those providers. So now the question comes, open source is quite good at remedying the last version, maybe the version minus one, but those movements are a six month cycles. Once an enterprise is getting value from an application, that tends to run for seven to 10 years. we looked at this historically and we said that is a place that we want to go play five years ago it would have required an army of people to be able to go do it you would have required people with expertise in each of those pieces of open source you would have had to build those build environments you had to keep those committers engaged and productive and so you look at that and you say not clear that there is an economic return so the same tools that are being used to attack all code, both proprietary and open source, can also be used to effectively be those experts and build those out. So what we did was we built kind of a factory using AI models to be able to patch open source even when it is not one that we have human expertise in. But as we do that, we actually are not just patching it. We are running test harnesses against it. We'll be able to evaluate it in the environments that our clients need and want so we can do all of that. Your question on what is the addressable opportunity? Look, this is early days. How about if I characterize it? We believe that it's in the multiple billions of dollars. Whether it turns out to be that the time for the open source protection here is five or 10 or 15, it's in that range of billions of dollars. And here, I will tell you, we are going to measure ourselves in terms of how many hundreds of clients we can get signed up over the first many months. That is how aggressive we want to get. And we believe that that becomes a flywheel that multiplies. Because as we get more and more clients signed up, we learn a lot more also about what they want as remedies. And as we learn what they want as remedies, that makes our network effect on this grow more and more. Let's remember, we put out 7,500 packages of remediations in the first three weeks. We believe, by the way, that's not counting the 30,000 packages we already do with Linux and Hashi and Confluent and Kubernetes and OpenShift, et cetera. So in aggregate, we believe that this is a multiple-billion-dollar opportunity, which we're going to go after really fast and hard, leveraging expertise in AI and open source, both. So thank you all for these questions. I thought it was very fair and very appropriate questioning. Is the business coming back? Is the cash flow there? How are you going to grow in the various parts? What's your long-term commitment? How strong is the mainframe incumbency? So I do really thank you all on these questions. We remain confident in the growth opportunities ahead of us and the actions we are taking to improve execution. I look forward to sharing our progress with you as we move through the rest of the year.

Thank you, Arvind. Operator, let me turn it back to you to close out the call.

Thank you all for participating on today's call. The conference has now ended. You may disconnect at this time.