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IBM reported third-quarter revenue of $17.1 billion, above the $16.9 billion consensus. Adjusted earnings per share were $2.95, compared with the consensus of $2.88. Revenue rose from $16.3 billion a year earlier, while diluted EPS increased to $2.30 from $1.84.
IBM’s filing said reported Software revenue grew 8.2 percent, helped by new business, including Confluent, and the closure of large deals delayed from the second quarter. Consulting revenue was essentially flat as reported, while Infrastructure revenue rose 4.2 percent. Within Infrastructure, the filing said Distributed Infrastructure grew as IBM Z declined amid product-cycle dynamics.
Gross margin fell to 56.8% from 57.3% a year earlier. IBM attributed higher total expense and other income to portfolio innovation investments and retirement-related costs, partly offset by productivity savings and currency effects. The filing reported quarterly free cash flow of $3.0 billion, an increase of $0.7 billion from the prior year.
| Q3 FY2026 | Q3 FY2025 | Change | |
|---|---|---|---|
| Revenue | $17.1 billion | $16.3 billion | 4.73% |
| Diluted EPS | $2.30 | $1.84 | 25.0% |
| Gross margin | 56.8% | 57.3% | −0.5 percentage points |
| Operating margin | 15.9% | 15.5% | 0.4 percentage points |
| Free cash flow | $3.7 billion | $2.8 billion | 31.3% |
| Against the consensus | Reported | Consensus | Result |
|---|---|---|---|
| Adjusted EPS | $2.95 | $2.88 | Beat by 2.43% |
| Revenue | $17.1 billion | $16.9 billion | Beat by 1.37% |
Adjusted EPS is the figure the consensus estimates, not the GAAP EPS above.
What management said on the call
CEO Arvind Krishna said clients seeking value from AI must rewrite or modernize applications, creating demand for Red Hat OpenShift. He said those clients also need access to enterprise data to power AI applications, which supports Confluent. CFO Jim Kavanaugh said AI represented about 30% of Consulting revenue in the quarter and 35% of its backlog.
Asked about software’s acceleration, Kavanaugh said it reflected recurring revenue as well as a rebound in transactional business. He attributed about a quarter of the acceleration to deals delayed from the second quarter and about three-quarters to new business. In prepared remarks, he said IBM had closed around two-thirds of the large deals that slipped from the prior quarter.
Analysts also pressed executives on transaction-processing demand after the earlier delays. Krishna said the third quarter benefited from both deferred purchases and a normal buying cycle. Kavanaugh said greater mainframe capacity creates opportunities to monetize software and increase pricing. Krishna added that he expected more normalized transaction-processing performance and possible moderation in the fourth quarter.
On profitability, Kavanaugh said productivity actions helped expand Software and Infrastructure segment margins, while Consulting reinvested productivity gains in digital assets. He described IBM’s approach as using AI and automation, reducing third-party spending and improving sales and marketing efficiency. In the discussion of future software growth, he identified recurring revenue, new products and acquisition synergies as indicators, adding: “We’ll quantify that in January.”
Krishna also discussed competition between AI models, saying enterprises weigh performance against cost when choosing alternatives. He said easier-to-use software could help organizations run open-weight models on their own infrastructure.
Guidance
Kavanaugh raised IBM’s FY2026 software revenue growth outlook to approximately 7%-8%, from the prior 6% to 8% range. He also said IBM now expects transaction-processing growth to be flat; Krishna referred to the earlier expectation as a low to mid-single digit decline.
IBM now expects low double-digit Infrastructure revenue growth for the year, compared with its earlier low single-digit expectation. Krishna said IBM raised its year-over-year free cash flow growth expectation to more than $1 billion.
| Metric | For | Guide | Previous guide | Change |
|---|---|---|---|---|
| Free cash flow | FY2026 | $1.0 billion | $1.0 billion | Held |
| Tax rate, non-GAAP | FY2026 | IBM expects its FY2026 operating tax rate to be in the mid-teens. | — | — |
| Operating margin, non-GAAP | FY2026 | 1.00% | — | New |
| Revenue, Consulting, non Gaap | FY2026 | IBM expects FY2026 consulting revenue growth to be low to mid-single digit. | — | — |
| Revenue, Infrastructure, non Gaap | FY2026 | IBM expects FY2026 infrastructure revenue growth to be low double digit. | — | — |
| Revenue, Transaction Processing, non Gaap | FY2026 | IBM expects FY2026 transaction-processing revenue growth to be flat. | — | — |
| Revenue, Hybrid Cloud, non Gaap | FY2026 | IBM expects FY2026 hybrid-cloud revenue growth to be double digit. | — | — |
| Revenue growth, Software, non Gaap | FY2026 | 7.00%–8.00% | — | New |
| Revenue, Transaction Processing, non Gaap | Q4 FY2026 | IBM expects Q4 FY2026 transaction-processing performance to moderate from Q3. | — | — |
| Revenue, Red Hat, non Gaap | Q4 FY2026 | IBM expects Q4 FY2026 Red Hat revenue growth to be double digit. | — | — |
| Free cash flow, non-GAAP | FY2026 | $1.0 billion | — | New |
| Revenue growth, non-GAAP | FY2026 | 4.00%–5.00% | — | New |
| Operating margin | FY2026 | 1.00% | — | New |
| Revenue growth, Software | FY2026 | 6.00%–8.00% | — | New |