IBM Q2 2025: Software Growth Slows to 3-4%, AI Book Hits $7.5B
- Integrated Software Momentum: IBM's software portfolio, driven by strong performance in Red Hat (14% growth and mid-teens organic growth outlook) and automation (operating well above model expectations), positions the company for sustained organic growth.
- AI Leadership: Building a cumulative Gen AI book of business exceeding $7,500,000,000 and rolling out differentiated AI products (e.g., Watson X Code Assistant on Z) highlights IBM’s leadership and potential to drive incremental revenue, with strong customer pipeline momentum in the AI domain.
- Operational Efficiency and Margin Expansion: The company's disciplined execution—evidenced by record free cash flow generation, enhanced operating margins, and significant productivity initiatives—underscores its ability to drive profitability despite macro headwinds.
- Organic software growth slowdown: Multiple questions highlighted that organic growth in software decelerated to only 3%-4% in the quarter, which raises concerns about the sustainability of the previously guided double-digit growth rate later in the year.
- Pressure on transaction processing revenue: The performance in transaction processing was flat (down 2%) as clients shifted spending toward hardware (Z17 mainframe), suggesting that short-term revenue may suffer due to delayed software monetization from mainframe cycles.
- Volatility in the consulting segment: The consulting business experienced flat revenue and lower signings—partly due to high early renewals dragging down net new business—with some concerns over shorter contract durations and margin pressures, which could impact future growth and cash flow.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +7.6% | Q2 2025 total revenue increased to $16,977 million from $15,770 million, driven by robust growth in Software (+9.5% ) and significant rebound in Infrastructure (+13.6% ). This improvement builds on prior period trends where rigorous investments and favorable geographic performance (especially in EMEA at +14.6% and Americas at +5.9% ) fueled momentum. |
Software Revenue | +9.5% | Software revenue rose from $6,739 million to $7,387 million due to persistent strength in Hybrid Cloud, Automation, and generative AI solutions. These drivers, which were already supporting solid growth in Q1 2024 and Q1 2025 , continue to boost revenue with double-digit improvements. |
Infrastructure Revenue | +13.6% | Infrastructure revenue increased from $3,645 million to $4,142 million, reflecting a marked turnaround from previous quarters where product cycle issues, particularly in IBM Z, had weighed on performance. The launch of next-generation products (e.g., IBM z17) and renewed hardware demand helped overcome earlier declines noted in Q1 2025. |
Consulting Revenue | +2.6% | Consulting revenue grew modestly from $5,179 million to $5,314 million as previous challenges from discretionary spending and delayed signings began to normalize. Enhanced investments in generative AI and a rebound in client confidence—after headwinds seen in Q1 2024 and Q1 2025 —contributed to the steady, though modest, recovery. |
EMEA Revenue | +14.6% | EMEA revenue surged from $4,722 million to $5,413 million, driven by strong performance in key markets (e.g., the UK up 10.7%, Italy up 6.7%, and France up 3.1% as reported in previous periods ) and favorable currency adjustments. This robust regional growth represents a recovery from earlier headwinds in Infrastructure seen in Q1 2024, further supported by the momentum in Software and Hybrid solutions. |
Americas Revenue | +5.9% | Americas revenue improved from $7,979 million to $8,462 million, mainly reflecting robust performance in the US and Latin America. This growth comes after mixed results in previous quarters—where Canada’s softness and currency effects had moderated performance (as noted in Q1 reports )—and indicates a gradual recovery in client spending. |
Asia Pacific Revenue | +1.1% | Asia Pacific revenue experienced a modest increase from $3,069 million to $3,103 million, suggesting stabilization after earlier volatility. While previous periods were marked by significant declines in certain markets (notably China down by over 26% in Q1 2025 ), steady gains in Japan and India helped offset these losses, leading to slight overall growth. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue growth | FY 2025 | 5%-plus | 5% plus | no change |
Free Cash Flow | FY 2025 | $13.5 billion | above $13,500,000,000 | no change |
Operating Pre-Tax Margin | FY 2025 | expand by over 0.5 point | expand by about a point | raised |
Tax Rate | FY 2025 | mid-teens | mid-teens | no change |
Software revenue growth | FY 2025 | mid-teens growth | approaching double digits | lowered |
Consulting growth | FY 2025 | flat or low single digits | prudently cautious | no change |
Infrastructure contribution | FY 2025 | growth expected | about 1.5 points | raised |
Transaction processing growth | FY 2025 | no prior guidance | low single-digit growth | no prior guidance |
Productivity savings | FY 2025 | no prior guidance | $4,500,000,000 | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q2 2025 | $16.4 billion to $16.75 billion | $16.977 billion | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Integrated Software Growth | Discussed in Q1 2025 ( ), Q4 2024 ( ), and Q3 2024 ( ) with emphasis on multiple components such as Red Hat, automation, data and recurring revenue. | Q2 2025 call noted software growth at 8% with confidence of approaching double‐digit annual growth, driven by Red Hat and other portfolio contributions ( ). | Recurring focus with steady portfolio strength. Quarterly fluctuations exist, but forward‐looking guidance remains positive ( ). |
AI and Generative AI Initiatives | Emphasized in Q1 2025 ( ), Q4 2024 ( ) and Q3 2024 ( ), outlining generative AI product contributions and growing books of business in consulting and software. | Q2 2025 highlighted accelerated momentum with a generative AI book of business over $7.5B, deeper integration in workflows, and expanded partner collaborations ( ). | Growing momentum and scale. Enhanced product offerings and increased market recognition indicate a stronger future impact ( ). |
Consulting Business Performance and Volatility | Covered in Q1 2025 ( ), Q4 2024 ( ) and Q3 2024 ( ) with discussions on flat revenue, volatility due to client pullbacks, and evolving signings. | Q2 2025 reported flat revenue, a healthy backlog with slight improvements in strategic wins and adjusted booking durations ( ). | Stable but amid volatility. While traditional challenges persist, there is cautious optimism with new client wins and a solid backlog ( ). |
Operational Efficiency, Free Cash Flow, and Margin Expansion | Addressed in Q1 2025 ( ), Q4 2024 ( ) and Q3 2024 ( ) highlighting significant productivity initiatives and margin gains. | Q2 2025 showcased record free cash flow, improved EBITDA and operating margins with 200 bps of EBITDA margin expansion and a strong focus on productivity ( ). | Consistently positive and improving. Financial management and efficiency measures are strengthening margins and cash flow generation, enhancing future investment potential ( ). |
Strategic Acquisitions | Mentioned in Q1 2025 ( ), Q4 2024 ( ) and Q3 2024 ( ) with emphasis on transactions like HashiCorp, Neural Magic, and others enhancing the hybrid cloud and AI strategy. | Q2 2025 reiterated the strategic importance of acquisitions, particularly highlighting HashiCorp’s strong start and automation synergies, with a pipeline three times last year ( ). | Consistent emphasis with growing synergy. Acquisitions remain central to growth, with enhanced expectations of value creation through integration and portfolio expansion ( ). |
Mainframe and Transaction Processing Revenue Dynamics | Q1 2025 ( ) discussed the transition from the z16 and upcoming z17 launch; Q4 2024 ( ) and Q3 2024 ( ) focused on strong z16 performance and mixed transaction processing trends. | Q2 2025 emphasized robust IBM Z performance, with IBM Z up 67% on the Z17 program, while transaction processing declined 2% due to cyclical hardware spend shifts ( ). | Mixed dynamics with a positive outlook. Mainframe performance is strong thanks to the new cycle, though transaction processing shows expected cyclical pressure ( ). |
Sustainability of Organic Software Growth | Q1 2025 ( ) noted an ARR of $21.7B with 11% growth and 6 points from organic software; Q4 2024 ( ) and Q3 2024 ( ) discussed organic contributions of 7–8 points and recurring revenue strength. | Q2 2025 highlighted a robust recurring revenue base of $23B with double digit growth, underpinned by strong contributions from Red Hat, automation, and data segments ( ). | Steady and optimistic. The narrative remains that organic growth is sustainable and may even accelerate going forward given the high recurring revenue mix ( ). |
FX and Currency Volatility Risks | Q1 2025 ( ) detailed significant FX devaluation impacts; Q4 2024 ( ) and Q3 2024 ( ) mentioned modest headwinds due to a strengthening dollar. | Q2 2025 reported FX as a minor tailwind, with only a small portion of the revenue beat attributable to currency effects ( ). | Reduced prominence. FX volatility is now less of a headwind compared to the dramatic impact noted in Q1 2025, suggesting more stable currency conditions ( ). |
Transient Impacts | Q1 2025 ( ) mentioned some transient impacts from DOGE-related initiatives affecting consulting, though this was limited in scope; Q3 2024 and Q4 2024 did not mention this. | Q2 2025 did not mention any transient impacts such as DOGE-related initiatives ([N/A]). | Disappearing topic. Previously noted transient effects are no longer mentioned, indicating these impacts have likely subsided and are not a current concern ( ). |
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Guidance Outlook
Q: Why not raise guidance despite strong Q2 results?
A: Management explained that although free cash flow and revenue exceeded expectations, they remain conservative amid remaining uncertainties while benefiting from productivity gains and a solid operating margin, leaving ample upside in the back half of the year. -
Software Trends
Q: Did organic software growth decelerate to 3–4%?
A: Management noted that organic software growth dipped to about 3–4% in the quarter due to puts and takes across segments like transaction processing, but they expect acceleration from strong Red Hat, automation, and other synergy efforts in the coming quarters. -
Future Outlook
Q: Can software growth improve into 2026?
A: Management is confident that their robust software portfolio—with solid performance from Red Hat, automation, and AI—will not only sustain but potentially improve organic growth into 2026, supported by a shortened consulting backlog and enhanced conversion in new projects. -
Customer Spending
Q: How are customer spending and Red Hat trends evolving?
A: Management observed that despite a volatile macro climate, customers continue prioritizing technology investments, with a resilient demand for Red Hat and virtualization solutions driving container platform adoption and overall enhanced client spending. -
Public Sector
Q: What is the impact of shifting federal spending priorities?
A: Management indicated that federal focus is moving from mere cost cutting to modernizing agencies, with clear high-level engagement and renewed emphasis on leveraging technology and AI to improve services and reduce waste. -
GenAI Orchestrate
Q: How do GenAI products differentiate in the market?
A: Management highlighted strong early adoption of their GenAI suite, emphasizing that their Watson X offerings—including orchestration that blends proprietary and third‐party agents—are uniquely positioned to transform client workflows incrementally without cannibalizing existing spend.
Research analysts covering INTERNATIONAL BUSINESS MACHINES.