Key takeaways:
- IBM reported adjusted earnings of $2.95 per share, beating analyst estimates.
- The company’s revenue rose 5% to $17.10 billion in the third quarter.
- IBM raised its free cash flow outlook while keeping revenue growth guidance unchanged.
The IBM Q3 earnings were stronger than expected, with revenue and adjusted earnings exceeding analyst estimates. However, its shares fell in extended trading on Wednesday following the results. The technology company reported $17.10 billion in revenue for the quarter, up about 5% from a year earlier, compared with analyst expectations of $16.82 billion. Adjusted earnings reached $2.95 per share, above the expected $2.86. Net income rose to $2.19 billion, or $2.30 per share, from $1.74 billion, or $1.84 per share, in the same period last year.
IBM raises free cash flow outlook as software revenue grows
IBM expects full-year free cash flow to increase by more than $1 billion. Its previous outlook, shared in July, called for an increase of about $1 billion. The company kept its 2026 constant currency revenue growth forecast at 4% to 5%.
IBM also maintained confidence in its full-year revenue outlook. Chief Financial Officer Jim Kavanaugh said the company remained comfortable with revenue of about $32 billion, in line with current analyst estimates.
Software remained IBM’s largest revenue segment during the quarter. The division generated $7.80 billion, an 8% increase from a year earlier. That figure also exceeded the $7.66 billion analysts had expected.
Infrastructure revenue reached $3.70 billion, up 4% and above the expected $3.57 billion. These IBM Q3 earnings figures point to continued demand across IBM’s software and infrastructure businesses, even as its consulting division faced slower growth.
IBM’s adjusted gross margin was 58.5%, below the 59.1% analysts had expected. The company’s overall results beat earnings and revenue forecasts, but the lower margin figure showed that higher sales did not translate into the expected level of gross profitability.
Consulting revenue stays flat as AI work expands
IBM’s consulting business reported revenue of $5.34 billion, roughly unchanged from a year earlier and slightly below the $5.37 billion analyst estimate. Its gross margin narrowed to 27.4% from 28.9% in the second quarter.
Kavanaugh said AI-related work accounted for about 30% of consulting revenue during the quarter and 35% of the division’s backlog. The figures show how much AI projects now contribute to IBM’s consulting business, even as the unit faces pressure on revenue growth and margins.
Kavanaugh also said IBM was directing productivity gains into digital assets as it moved toward a services-as-software model. This approach reflects the company’s effort to adapt its consulting operations as clients expand their use of AI.
During the quarter, IBM agreed to acquire HRL Laboratories from Boeing and General Motors. The companies did not disclose the purchase price. HRL Laboratories, previously known as Hughes Aircraft’s research division, conducts research in areas relevant to advanced technology.
IBM’s stock has declined 15% since the start of the year as of Wednesday’s market close, while the S&P 500 has gained 13%. The difference highlights the gap between the company’s share performance and the broader US stock market.
Adjusted earnings exclude acquisition-related adjustments. While IBM Q3 earnings exceeded analyst expectations and improved its free cash flow outlook, its consulting performance, gross margin, and share price remain important measures to watch in future results.
