IBM Q3 Earnings Beat Forecasts as Software Revenue Rises 8 Percent

IBM reported third quarter revenue of 17.1 billion dollars on Wednesday, up about 5 percent from a year earlier and ahead of the 16.82 billion dollars analysts expected, according to LSEG data cited by Reuters. Adjusted earnings came in at 2.95 dollars a share, beating estimates of 2.86 dollars a share.

The numbers landed after the United States market close on October 21, on one of the busiest earnings nights of the season, alongside results from Tesla and Meta. IBM shares rose in after hours trading.

Software does the heavy lifting

Software revenue rose 8.3 percent to 7.80 billion dollars, topping estimates of 7.62 billion dollars, Reuters reported. Inside the segment, hybrid cloud sales grew 11 percent and transaction processing revenue rose 9 percent, recovering from a surprise fall in the previous quarter.

Finance chief James Kavanaugh told Reuters that delayed software deals that worried investors last quarter are starting to close. About 25 percent of transaction processing revenue came from deals deferred from the second quarter, he said, and the rest was new business. IBM now expects software revenue growth of about 7 to 8 percent for the year, raising the low end of its earlier 6 to 8 percent range.

The rest of the business

Consulting revenue was flat at 5.3 billion dollars. Infrastructure revenue rose 4.2 percent to 3.71 billion dollars, as 31 percent growth in distributed infrastructure, which covers servers and storage, made up for a fall in the IBM Z mainframe business.

For the year so far, IBM reported operating cash flow of 11.8 billion dollars and free cash flow of 7.8 billion dollars in its earnings release. The company kept its forecast for full year revenue growth of 4 to 5 percent at constant currency, and raised its cash outlook: free cash flow is now expected to grow by more than 1 billion dollars from last year.

Chief executive Arvind Krishna said in the release: "Disciplined execution throughout the quarter drove accelerated revenue growth and strong free cash flow."

The profit picture underneath

The release fills in the rest of the quarter. Earnings on a GAAP basis were 2.31 dollars a share, up 26 percent, with net income of 2.2 billion dollars, also up 26 percent. GAAP gross margin was 56.8 percent, and the operating, non GAAP, pre tax income margin widened 70 basis points to 19.3 percent.

Inside software, the growth was not even. Data revenue rose 19 percent while automation fell 3 percent. Inside infrastructure, hybrid infrastructure grew 8 percent, but the IBM Z mainframe line fell 20 percent and infrastructure support fell 3 percent, which is why the distributed infrastructure surge had to do so much work.

The quarter on its own produced 4.0 billion dollars of operating cash flow and 3.0 billion of free cash flow. IBM returned 1.6 billion dollars to shareholders as dividends in the quarter and declared a quarterly dividend of 1.69 dollars a share, payable on Dec. 10, 2026 to shareholders of record on Nov. 10. The company has paid consecutive quarterly dividends since 1916. It held 11.1 billion dollars in cash, restricted cash and marketable securities against total debt of 63.8 billion dollars, and it has put 11.4 billion dollars into acquisitions this year.