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INTERNATIONAL BUSINESS MACHINES CORP (IBM)·Q2 2025 Earnings Summary

Executive Summary

  • IBM delivered a broad-based beat: revenue $17.0B (+8% YoY; +5% cc), operating EPS $2.80 (+15% YoY), adjusted EBITDA $4.7B (+16% YoY), and raised FY25 free cash flow outlook to “above $13.5B.” Software (+10%) and Infrastructure (+14%) led growth; Consulting was +3% amid a cautious demand backdrop .
  • Versus S&P Global consensus, IBM beat Q2 revenue ($16.98B vs $16.59B*) and operating EPS ($2.80 vs $2.655*); GAAP EPS was $2.31. Management is “comfortable” with Q3 consensus for revenue and profitability .
  • Margin expansion was material: GAAP gross margin 58.8% (+200 bps), operating GM 60.1% (+230 bps), GAAP pre-tax margin 15.3% (+120 bps), and operating pre-tax margin 18.8% (+110 bps), driven by revenue mix (software/infrastructure), productivity programs, and z17 cycle strength .
  • Guidance catalysts: raised FY25 FCF to >$13.5B; reiterated “at least 5%” cc revenue growth with ~1.5-pt currency tailwind; targeted ~1-pt operating pre-tax margin expansion for FY25; Red Hat mid-teens growth and TP now low-single-digit growth expected. Dividend declared at $1.68 per share .

What Went Well and What Went Wrong

What Went Well

  • Strong topline and profitability: Revenue $17.0B, operating EPS $2.80, adjusted EBITDA $4.7B; “once again exceeded expectations” and raised FY25 FCF outlook above $13.5B .
  • Product cycle and mix tailwinds: z17 launched with IBM Z revenue +70% YoY; Infrastructure +14% YoY; Software +10% YoY with Red Hat +16% and Automation +16% .
  • Productivity flywheel: “operating gross profit margin up 230 bps, adjusted EBITDA margin up 200 bps,” reflecting AI-embedded workflows, supply chain optimization, and cost discipline .

Quotes

  • “We once again exceeded expectations for revenue, profit and free cash flow… Our generative AI book of business… more than $7.5 billion.” — Arvind Krishna, CEO .
  • “Revenue growth, portfolio mix and ongoing productivity initiatives drove significant margin expansion and double-digit profit growth.” — Jim Kavanaugh, CFO .

What Went Wrong

  • Consulting muted: +3% YoY but pricing remains challenging; CFO remains “prudently cautious” on consulting’s FY growth contribution despite backlog and GenAI momentum .
  • Distributed Infrastructure down 15% YoY, impacted by product cycle dynamics and client prioritization of IBM Z hardware spend; infrastructure support down 1% .
  • Transaction Processing down 2% at constant currency in Q2 as clients prioritized hardware early in the z17 cycle; IBM expects a return to low-single-digit growth in 2H .

Financial Results

Consolidated Results vs Prior Periods

MetricQ4 2024Q1 2025Q2 2025
Revenue ($USD Billions)$17.553 $14.541 $16.977
GAAP Gross Margin (%)59.5% 55.2% 58.8%
Operating (Non-GAAP) EPS ($)$3.92 $1.60 $2.80
GAAP Diluted EPS ($)$3.11 $1.12 $2.31
Adjusted EBITDA ($USD Billions)$5.6 $3.4 $4.7
GAAP Pre-tax Margin (%)18.8% 8.0% 15.3%

Actuals vs S&P Global Consensus

MetricQ4 2024 ConsensusQ4 2024 ActualQ1 2025 ConsensusQ1 2025 ActualQ2 2025 ConsensusQ2 2025 Actual
Revenue ($USD Billions)$17.547*$17.553 $14.391*$14.541 $16.592*$16.977
Primary EPS ($)$3.776*$3.92 $1.427*$1.60 $2.655*$2.80
EBITDA ($USD Billions)$5.617*$5.6 $2.699*$3.4 $4.327*$4.7

Note: Values marked with “*” retrieved from S&P Global.

Segment Revenue by Quarter

Segment ($USD Billions)Q4 2024Q1 2025Q2 2025
Software$7.924 $6.336 $7.387
Consulting$5.175 $5.068 $5.314
Infrastructure$4.256 $2.886 $4.142
Financing$0.170 $0.191 $0.166
Total Revenue$17.553 $14.541 $16.977

Segment YoY Growth (Q2 2025)

SegmentQ2 2025 YoY GrowthNotes
Software+10%; +8% cc Red Hat +16% (+14% cc), Automation +16% (+14% cc), Data +9% (+7% cc), TP +1% (−2% cc)
Consulting+3%; flat cc Strategy & Technology +1% (−2% cc); Intelligent Operations +5% (+2% cc)
Infrastructure+14%; +11% cc Hybrid Infrastructure +21% (+19% cc); IBM Z +70% (+67% cc); Distributed −15% (−17% cc); Support −1% (−3% cc)
Financing−2%; −3% cc —

KPIs and Balance Sheet

KPI/MetricQ4 2024Q1 2025Q2 2025
Software ARR ($USD Billions)——$22.7 (CFO remark)
GenAI Book of Business ($USD Billions)>$5.0 >$6.0 >$7.5
Free Cash Flow (YTD) ($USD Billions)—$2.0 $4.8 (H1)
Cash, Restricted Cash & Marketable Securities ($USD Billions)$14.8 $17.6 $15.5
Total Debt ($USD Billions)$55.0 $63.3 $64.2 (incl. $11.7B IBM Financing)
Dividend per Share ($)$1.66 (Board approved Jan 28) $1.67 (increase Apr 29) $1.68 (declared July 23)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue growth (cc)FY 2025At least +5% (Q1 PR) At least +5%; currency ~+1.5-pt tailwind (Q2 PR) Maintained; FX tailwind clarified
Free Cash Flow ($)FY 2025About $13.5B (Q1 PR) Above $13.5B (Q2 PR) Raised
Operating pre-tax margin expansionFY 2025~0.5 pt (Investor Day model, implied) ~1.0 pt (raised) Raised
Tax rateFY 2025Mid-teens (Q2 call) Mid-teens (unchanged) Maintained
Red Hat growthFY 2025Mid-teens (model) Mid-teens (reaffirmed) Maintained
Transaction ProcessingFY 2025Mid-single-digit (model) Low single-digit; growth to return in 2H Lowered near-term; 2H recovery
Infrastructure contributionFY 2025Not specified~1.5 pts to IBM revenue growth New detail
Q3 2025 near-term stanceQ3 2025—“Comfortable with consensus” for revenue/profitability Commentary
DividendQ3 2025$1.67 (Apr board action) $1.68 declared; record Aug 8; payable Sep 10 Raised sequentially

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2024)Previous Mentions (Q1 2025)Current Period (Q2 2025)Trend
AI initiatives & GenAI monetizationGenAI book >$5B; AI-led transformation focus GenAI book >$6B; bullish macro for tech GenAI book >$7.5B; recognized by Gartner; AI agents, watsonx stack; client-zero scaling Accelerating adoption, broader ecosystem
IBM Z cycle & hybrid infraIBM Z down YoY ahead of new cycle IBM Z −15% YoY; pre-launch z17 launch; IBM Z +70% YoY; hybrid infra +21% Strong cycle start; long-term stack multiplier
Software growth mixSoftware +10% YoY in Q4 Software +7% YoY in Q1; ARR framework update Software +10% YoY; Red Hat +16%; Automation +16%; Data +9% Consistent double-digit drivers
Consulting demand/backlogConsulting −2% YoY in Q4; cautious Consulting −2% YoY; flat cc; cautious Consulting +3% YoY; backlog $32B; prudently cautious on FY growth Stabilizing; quality of bookings improving
Productivity & marginsFY24 op GM 57.8% Q1 op GM 56.6% Op GM 60.1%, op pre-tax margin 18.8%; annual run-rate savings target raised to ~$4.5B by YE25 Upward margin trajectory
Macro/federal——Optimistic macro; federal shift to modernization and AI action plan Improving visibility

Management Commentary

  • Strategic focus remains hybrid cloud and AI, anchored by client trust, open platforms, innovation, domain expertise, and ecosystem scale .
  • Product innovation: z17 with Telum II enabling on-platform AI; Power11 introduced; quantum milestone in Japan (System 2 with RIKEN); M&A (DataStax) to bolster real-time AI data .
  • Quotes:
    • “Our strategy remains focused: hybrid cloud and artificial intelligence… Our GenAI book of business now stands at over $7.5 billion inception to date” — Arvind Krishna .
    • “We exceeded our expectations on revenue, profitability, adjusted EBITDA, and earnings per share… Through the first half, we generated $4.8 billion of free cash flow” — Jim Kavanaugh .

Q&A Highlights

  • Software organic growth pacing and drivers: CFO detailed Red Hat (~14–15% growth), Automation mid-to-high teens supported by HashiCorp synergies, Data executing to model; TP to return to low-single-digit growth as z17 capacity ramps .
  • Guidance stance: Beat across metrics; raised productivity savings to ~$4.5B run-rate by YE25; upside potential acknowledged but maintaining prudence with half the year remaining; “comfortable” with Q3 consensus .
  • Consulting outlook: Backlog ~$32B, duration shorter, higher quality revenue realization; net new client wins up; GenAI >10% of consulting revenue with margin uplift; still cautious given environment .
  • Macro and federal spending: CEO turned from “cautious optimism” to “optimism” globally; U.S. federal pivoting to modernization and AI adoption, improving IBM visibility .
  • AI stack incrementalism: AI spend largely incremental on infra/software; some cannibalization shifts from labor to software; net positive for IBM’s portfolio .

Estimates Context

  • Q2 2025: Revenue beat ($16.98B vs $16.59B*), operating EPS beat ($2.80 vs $2.655*); GAAP EPS $2.31. Adjusted EBITDA above consensus ($4.7B vs $4.33B*), reflecting IBM’s adjusted definition .
  • Prior quarters: Q1 2025 revenue and operating EPS beat; Q4 2024 operating EPS modestly above consensus; EBITDA exceeded in Q4 .
  • Implications for estimates: FY25 FCF lifted above $13.5B, operating pre-tax margin expansion target raised to ~1 pt, infra contribution quantified (~1.5 pts), Red Hat mid-teens reaffirmed, TP lower near term then improves; Q3 “comfortable” stance supports near-term consensus stability .

Note: Values marked with “*” retrieved from S&P Global.

Key Takeaways for Investors

  • Mix-led margin expansion looks durable: software growth and z17 cycle are driving operating leverage; IBM raised margin and FCF targets, a positive for multi-quarter estimate revisions .
  • AI flywheel across IBM (software, consulting, infra) is gaining monetization momentum with >$7.5B GenAI book; partners (Oracle, Box, AWS, Microsoft, EY, WPP) broaden reach .
  • z17 cycle strength should support 2H trajectory and TP rebound, with hybrid infra tailwinds; expect continued Infrastructure contribution to overall growth (~1.5 pts) .
  • Consulting stabilized with improving quality (shorter duration, higher realization) and GenAI margin uplift, but management remains cautious; monitor backlog runout and pricing dynamics .
  • Balance sheet/liquidity intact despite acquisitions (HashiCorp, DataStax) and higher debt; cash $15.5B and investment-grade profile maintained .
  • Near-term trading: Beat-and-raise (FCF, margins) and z17 momentum are positive catalysts; any further upside hinges on consulting acceleration and sustained software organic growth.
  • Medium-term thesis: Hybrid cloud + AI strategy, ARR growth, productivity programs, and IBM Z multiplier underpin sustainable profitable growth, with M&A synergies enhancing automation/data offerings .

Citations: IBM Q2 2025 8-K and press release ; Earnings call transcript ; Q1 2025 8-K ; Q4 2024 8-K .