INTERNATIONAL BUSINESS MACHINES CORP (IBM)·Q3 2025 Earnings Summary

Executive Summary

• IBM delivered a solid Q3: revenue $16.33B (+9% y/y; +7% cc) and operating EPS $2.65, both above Wall Street consensus; gross margin expanded y/y and all segments accelerated sequentially . Versus S&P Global consensus, IBM posted a beat on revenue ($16.33B vs $16.10B*) and operating EPS ($2.65 vs $2.45*); S&P’s EBITDA definition showed a miss versus its estimate, though IBM’s reported adjusted EBITDA rose to $4.6B . Values retrieved from S&P Global.*
• Guidance raised: full-year revenue growth now “more than 5%” cc (from “at least 5%”), and free cash flow now “about $14B” (from >$13.5B) .
• Segment performance: Software +10% y/y led by Automation (+24%) and Red Hat (+14% revenue; ~20% bookings growth); Infrastructure +17% y/y with IBM Z +61% (strongest 3Q in nearly two decades); Consulting +3% y/y .
• Strategic momentum: GenAI “book of business” >$9.5B inception-to-date; ARR in Software reached $23.2B (+9% y/y), OpenShift ARR $1.8B (>30% growth) .
• Catalyst: Outlook raise, IBM Z cycle strength and rising AI-driven demand (automation, Red Hat) provide near-term support; management indicated comfort with Q4 consensus and raised the full-year operating pre-tax margin expansion target to “over a point” .

What Went Well and What Went Wrong

• What Went Well

  • Broad-based beat and margin expansion: “accelerated performance across all segments,” exceeding expectations for revenue, profit and FCF; operating gross margin up 120 bps y/y; adjusted EBITDA up 22% y/y in Q3 .
  • Mainframe-led Infrastructure strength: IBM Z +61% y/y; “highest third-quarter revenue in nearly two decades,” underpinning profit leverage and future TP monetization .
  • AI and automation traction: Automation +24% y/y; Red Hat revenue +14% with ~20% bookings growth; GenAI book of business >$9.5B; OpenShift ARR $1.8B, >30% growth .
  • Quote: “Our AI book of business now stands at more than $9.5 billion…we are raising our full-year outlook for revenue growth and free cash flow.” – Arvind Krishna, CEO .

• What Went Wrong

  • Sequential moderation in revenue vs Q2 (seasonality/mix): $16.33B in Q3 vs $16.98B in Q2 as Infrastructure mix shifted and Consulting remained modest (+3% y/y) .
  • S&P-defined EBITDA versus its estimate: S&P’s EBITDA “actual” fell below its consensus (estimate $4.10B* vs S&P “actual” $3.75B*), reflecting definition differences with IBM’s reported adjusted EBITDA of $4.6B . Values retrieved from S&P Global.*
  • Consulting signings/book-to-bill: Total signings declined in Q3 (book-to-bill <1 on a recent-quarter basis), though backlog and GenAI mix improved; management emphasized quality over renewals and backlog realization strength .

Financial Results

Core P&L and Cash Flow (GAAP unless noted)

Notes: IBM reported adjusted EBITDA of $4.6B in Q3 (vs $3.8B in Q3’24) .

Segment Breakdown (Revenue, Profit, Margin; Dollars in $B)

Additional segment color:

• Software details: Automation +24%, Red Hat +14%, Data +8%, Transaction Processing (TP) -1% .
• Infrastructure details: Hybrid Infrastructure +28% (IBM Z +61%; Distributed +10%), Infrastructure Support +1% .
• Consulting details: Strategy & Technology +2%, Intelligent Operations +5% .

KPIs

Discrepancy note: IBM Z y/y growth cited as +61% in the press release and “up 59%” on the call, with “highest third-quarter revenue in nearly two decades” .

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• CEO: “This quarter we accelerated performance across all of our segments, and again exceeded expectations for revenue, profit and free cash flow… Our AI book of business now stands at more than $9.5 billion… we are raising our full-year outlook for revenue growth and free cash flow.” – Arvind Krishna .
• CFO: “Revenue scale, mix, and productivity drove 290 bps of adjusted EBITDA margin expansion, 22% adjusted EBITDA growth, and 15% operating EPS growth… another quarter of strong free cash flow” – Jim Kavanaugh .
• IBM Z/AI: “IBM Z delivered its highest third-quarter revenue in nearly two decades… purpose-built for AI and hybrid cloud, with breakthrough capabilities in real-time inferencing…” .
• Productivity: “We are well ahead… with an expectation of $4.5 billion of annual run-rate savings exiting this year.” – Arvind Krishna .
• AI at scale: “A fully populated [Z17] single system is capable of doing 450 billion inferences per day.” – Arvind Krishna .

Q&A Highlights

• Free cash flow durability: FCF conversion in the “mid to high 120s” sustainable, with 2026 driven by >5% revenue growth, operating leverage, and efficient balance sheet; FY25 FCF raised to about $14B .
• AI demand and shutdown: AI adoption accelerating; government shutdown impact de minimis due to essential nature of workloads and subscription mix .
• Software/TP dynamics: Software organic growth accelerated; TP to return to growth in Q4 as Z17 monetization ramps (pipeline strong) .
• Red Hat cadence: Bookings ~+20%, OpenShift ARR $1.8B (>30%); consumption-based services a known headwind into Q4, but subs underpin double-digit Q4 growth and better 2026 trajectory .
• Consulting: Signings down (fewer renewals), but backlog up and higher quality; GenAI 12% of revenue, >22% of backlog; management targets market-level growth in 2026 .
• Outlook/tone: Raised operating pre-tax margin expansion to >100 bps; comfortable with Q4 consensus on cc revenue and profitability .

Estimates Context

Results vs S&P Global consensus (Q3 2025):

• Revenue: $16.33B actual vs $16.10B consensus* – Bold beat . Values retrieved from S&P Global.*
• Operating EPS: $2.65 actual vs $2.45 consensus* – Bold beat . Values retrieved from S&P Global.*
• EBITDA: S&P EBITDA “actual” $3.75B* vs S&P consensus $4.10B* – miss per S&P definition; IBM reported adjusted EBITDA of $4.6B (company definition) . Values retrieved from S&P Global.*

Additionally: Target Price Consensus Mean $288.32*; Revenue estimates count 16*, EPS estimates count 16*. Values retrieved from S&P Global.*

Key Takeaways for Investors

• IBM delivered a clean top-line and EPS beat and raised FY25 revenue/FCF guidance—near-term catalyst as the Z17 cycle, AI-led automation, and Red Hat bookings support growth into Q4 and 2026 .
• The mainframe cycle is a profit engine: Z17’s strength is expanding segment margins and should drive TP software monetization in coming quarters (management calling TP back to growth in Q4) .
• Software mix is improving: Automation +24% and OpenShift ARR >30% growth reinforce AI/automation penetration; Red Hat bookings (~+20%) set up 2026 acceleration despite temporary consumption headwinds .
• Consulting is inflecting with higher-quality signings and GenAI mix (>22% of backlog), though reported signings are softer; watch backlog realization and GenAI contribution (12% of consulting revenue) .
• FCF engine is robust with raised FY guide (~$14B) and sustainable conversion profile; dividend maintained at $1.68/share alongside disciplined capital allocation .
• Mind the EBITDA definition: S&P’s EBITDA series diverges from IBM’s adjusted EBITDA; prioritize company-reported adjusted EBITDA ($4.6B) when analyzing internal margin progress .
• Management tone constructive: “Optimistic,” comfortable with Q4 consensus, and raising operating pre-tax margin expansion to >100 bps for FY25 .

Additional relevant press releases in the quarter

• IBM to Announce Third-Quarter 2025 Financial Results (timeline coordination) .
• IBM and Groq partner to accelerate enterprise AI deployment (ecosystem signal ahead of results) .

Values retrieved from S&P Global.*