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WMA 2024-IBM

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Big Blue, based in Armonk, N.Y., was early to the AI game with Watson, which was first introduced over two decades ago, mesmerizing the world with what the tech could do. In 2023, the company launched its generative AI offerings, called Watsonx, with the conviction that the technology will bring about a productivity boom. CEO Arvind Krishna expects close to a third of current roles at the company can be taken over by AI and automation in the next five years, freeing up human staff for high-value work. The benefits from boosting productivity could mean reinvestment and larger margins, Krishna suggested. For its part, IBM’s Watsonx already has clients like NASA and Wix on board. The company also brings AI to clients to assist them with automation, modernization, and providing customer care services. For instance, Brazilian bank Bradesco automated its customer service answers using Watson Assistant, responding to 283,000 questions monthly. IBM is focusing on expanding the use of its AI where it is scalable and relevant, while strengthening its position beyond a legacy IT business; it has committed to <a class="waffle-rich-text-link" href="https://newsroom.ibm.com/2023-09-18-IBM-Commits-to-Train-2-Million-in-Artificial-Intelligence-in-Three-Years,-with-a-Focus-on-Underrepresented-Communities">training 2 million</a> people in AI over the next three years. It acquired software company Apptio in a $4.6 billion deal to complement its AI portfolio and Red Hat cloud business.

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F500 2023 065 IBM_quantum-computers-and-accelerated-discovery_40645906341_o

Information technology company IBM delivered $60.5 billion in total revenue in 2022, with its hybrid cloud unit accounting for $22.4 billion of that sum. 
<ul> 
 	<li>Still, sales growth stagnated at the end of 2022, and IBM said it would cut about 3,900 jobs.</li> 
 	<li>In May 2023, IBM said it would give $100 million to the University of Chicago and the University of Tokyo to aid in the building of a quantum-centric supercomputer within a decade.</li> 
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</ul>

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WMAC-2022-46-IBM

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CTW.1122. IBM

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F500 2022-IBM

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G500 121 IBM

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G500-2020-118-IBM

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F500-2020-038-IBM

In 2019 IBM took the most dramatic step yet in its years-long project of adapting to the fast-changing tech environment. It bought Red Hat, the main distributor of the open-source operating system Linux, paying $34 billion in its largest acquisition ever. But progress on CEO Ginni Rometty’s top priorities—cloud computing, social engagement, mobile devices, and data analytics—remained frustratingly slow. Revenue shrank; IBM’s Fortune 500 rank has declined every year for over a decade. In January 2020 the company announced that Rometty would step down after eight years as CEO, to be succeeded by longtime executive Arvind Krishna, who took over in April.

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Years on list

U.S. job openings

Year founded

Perks

100% health coverage

Unlimited sick days

Telecommuting

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Subsidized childcare

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Fully-paid sabbaticals

On-site fitness/subsidized gym

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Non-discrimination policy includes sexual orientation

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College tuition reimbursement

Student loan debt repayment

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Total Return to Investors (10 year, annualized)

IBM is a cornerstone of U.S. business that is best known for its software, cloud computing services, and consulting. Incorporated in 1911, and later rebranded as International Business Machines, the company has ridden the many waves of innovation over the decades, from early technology such as tabulating machines, and time clocks for employee punch-ins, to today’s advancements in artificial intelligence. As of 2024, it was among just a few dozen companies to have appeared on the Fortune 500 every year since the list’s inception in 1955.

Q3 2026

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International Business Machines (IBM): Company Profile, Stock Price, News, Rankings

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International Business Machines

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Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Olympia McNerney, IBM's Global Head of Investor Relations. Olympia, you may begin.

Thank you. I'd like to welcome you to IBM's third quarter 2026 earnings presentation. I'm Olympia McNerney, and I'm here today with Arvind Krishna, IBM's Chairman, President, and Chief Executive Officer, and Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. We'll post today's prepared remarks and a replay of today's webcast on the IBM investor website within a couple of hours. The earnings presentation is already available. To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation, which is posted to our investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995.

These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filings. With that, I'll turn the call over to Arvind.

Thank you for joining us today. Revenue growth in the third quarter accelerated to 6% above the base case we laid out in July. This performance reflects acceleration across our segments, led by software growth of 9%, infrastructure growth of 5%, and modest improvement in consulting. We entered the quarter focused on disciplined execution, which also drove strong performance in profitability and free cash flow. These results demonstrate the strength of our portfolio, the continued value clients place in mission-critical platforms, and our confidence in both our strategy and the outlook for the balance of the year. Technology innovation in both hybrid infrastructure and super intelligence is leading to better business performance. This quarter's results reinforce the strategic choices we have made over the last several years to advance IBM as a software-led hybrid cloud and AI platform company.

In software, Red Hat again grew 11% with bookings growth accelerating back to the high teens. OpenShift ARR growth accelerated to over 30% as organizations scale super intelligence applications and agents into production, reinforcing our conviction that we remain in the early stages of a long-term application modernization cycle. Transaction processing grew 10%, underscoring the strategic importance of the mainframe and validating our view that the softness we saw in the second quarter reflected timing rather than underlying demand. Data grew 20%, supported by continued strength in Confluent. Infrastructure was up 5%, driven by continued momentum in distributed infrastructure, growing 32% this quarter. AI continues to increase demand for storage, and we are gaining share through differentiated offerings across FlashSystem, Storage Fusion, Tape, and IBM Z storage, including AI-enabled capabilities that help clients scale and manage data for AI.

Consulting revenue grew 2% as clients modernized to deploy AI securely and at scale. The durability of our portfolio remains a defining feature of IBM today. z17 continued the strongest innovation cycle in the platform's history, generating more than $1 billion of incremental revenue over six quarters, compared with prior programs. This reflects the security, reliability, scalability, and compelling economics of the platform. As infrastructure costs rise, IBM Z delivers a two to 15 times total cost of ownership advantage versus off-platform alternatives, positioning us to capture additional value as AI workloads grow. Building on that advantage, we introduced new single-frame and rack-mount IBM Z systems in July that help clients address data center space, cost, and deployment constraints without compromising performance or security. Client response has been strong, contributing to the highest mid-range revenue launch in IBM Z this quarter in nearly two decades.

Last quarter, we told you Lightwell represents a multibillion-dollar opportunity for IBM and Red Hat to help clients secure their open-source software. Since then, some of the world's largest enterprises have signed up as clients, and we have built a pipeline approaching $700 million in a short period of time. We have released more than 40,000 remediated packages to the Lightwell network, demonstrating the rapid scale-up of our remediation capabilities. Now turning to our AI strategy. Enterprise AI is entering its next phase. Deploying more models or building more agents will not be enough. The advantage will belong to a company that can operate AI securely, efficiently, and sustainably across the enterprise.

Organizations are recognizing that AI is only as effective as the system around it, the data that provides context, the workflows that orchestrate action, the infrastructure that secures and optimizes operations, and the hybrid cloud foundation that provides flexibility without lock-in. IBM has assembled these capabilities across four platforms. Confluent provides continuous business context through a real-time data foundation. watsonx, including IBM Bob and watsonx Orchestrate, support AI-driven software development and agent orchestration. HashiCorp and Apptio automate identity, access, and policy while optimizing cost and performance. Red Hat provides the open hybrid architecture spanning public cloud, on-premises, sovereign environments, and the edge. Together, these platforms help clients move from isolated deployments to AI operating at enterprise scale. Data sits at the center of the AI operating model. 72% of organizations report insufficient real-time data infrastructure, which holds back AI at scale. Agents need the current state of the business.

That is why we are excited about Streamhouse, a capability from Confluent that continuously captures, transforms, and queries real-time data. It complements warehouses and lake houses. A Streamhouse makes real-time governed data continuously available to applications, analytics, and AI, unifying operational and analytical data into a single architecture. We believe Confluent is uniquely positioned with a complete open and hybrid approach that helps clients avoid lock-in while deploying wherever the data resides. As AI scales, clients ask two questions: what will it cost and who controls it? We are innovating on both. Apptio now connects AI spend to business results, providing visibility into AI usage, token consumption, and the cost of running it across the enterprise.

llm-d, an open-source project developed with Red Hat and Google, reuses previously processed context, helping clients run large AI models at five to 10 times lower cost by making more efficient use of existing GPU infrastructure. IBM Bob now runs on-prem, so clients in regulated and sovereign environments can keep code and models on their own infrastructure. Governance matters as much as intelligence. As agents multiply, enterprises need to know who each agent is, what authority it has, and what it can access. HashiCorp Vault allows clients to register, authorize, audit, and revoke agents and secure their credentials. IBM Agent Identity and HashiCorp Vault are partnering with NVIDIA Open Agent Safety Platform to strengthen agent security. We believe Agent Identity will become as foundational to enterprise AI as identity has become to the internet. Finally, quantum remains a strategic area of differentiation for IBM and a significant long-term opportunity.

In July, three independent demonstrations of quantum advantage were achieved on IBM hardware with the University of Chicago, Algorithmiq, and Qedma, providing further evidence that quantum computing is moving from scientific promise towards practical value. Our Nighthawk r2 processor has achieved important roadmap milestones across speed, scale, and quality, delivering 7,500 gates, executing 100,000 circuits per second, and enabling performance improvements of up to 19 times over prior generation systems. That performance changes both time to solution and the economics of quantum computation. Workloads costing approximately $100 to run on IBM could cost up to $10 million on slower competitive modalities. Recently, IBM was selected for Stage C, the third phase of the Quantum Benchmarking Initiative led by DARPA, the U.S. Defense Advanced Research Projects Agency, another validation of the strength of IBM's path to building a fault-tolerant quantum computer. Commercial momentum is also growing.

This year, IBM Quantum has signed 16 enterprise engagements across industries including automotive, aerospace, telecommunications, financial services, and manufacturing. This includes AT&T and General Motors, amongst many others, who are now all part of the IBM Quantum Network, the world's largest network of quantum innovators. We are also advancing the technology and infrastructure required for industrial-scale fault-tolerant computing, including the successful connection of our first modular cryogenic systems and continued progress on our 300,000 sq ft Poughkeepsie manufacturing facility. This, along with the closing of the $1 billion award from the Department of Commerce in Anderon for manufacturing quantum wafers, gives us confidence that after the Starling demonstration, we are ready to scale. We look forward to talking more about our progress at our Quantum Day on December 10.

In closing, our third quarter performance reflects the strength of our portfolio and the progress we are making against our strategic priorities of delivering both sustainable revenue growth and higher profitability. Our results reinforce our confidence in delivering revenue growth for 2026 in a range of 4%-5% and enable us to raise our year-over-year free cash flow growth expectation to more than $1 billion. With that, let me hand it over to Jim.

Thanks, Arvind. In the third quarter, we delivered solid results with 6% revenue growth, 70 basis points of operating pre-tax margin expansion, and 11% diluted operating earnings per share growth. Through the first nine months, we generated about $8 billion of free cash flow, up 8% year-over-year. These results reflect strength across our portfolio and solid execution against our priorities. Let me walk through the performance in each of our segments. Software revenue growth accelerated four points sequentially to 9% this quarter, including over four points of organic growth. This performance was driven by our high-value annual recurring revenue base, which grew 8% to $24.9 billion. Three of our four software sub-segments grew revenue double digits, led by the combination of strong new business performance and pipeline closure rates, including the successful closure of around two-thirds of the large deals that slipped from the second quarter.

Our results represent the high end of the range we outlined in July, reinforcing our confidence in the strength of our portfolio. Turning to our sub-segments, Red Hat revenue grew 11% again this quarter, fueled by bookings accelerating back to the high teens. Lightwell was recently made generally available, and we have strong early demand with a pipeline that is already approaching $700 million. OpenShift is now a $2.4 billion ARR business, with growth accelerating to more than 30%. Our virtualization offering continues to scale, with nearly $800 million in contracts signed since early 2024 and about $750 million in pipeline. Data grew 20%, driven by another strong performance from Confluent, with bookings growth of about 20%. Transaction processing grew 10% in the quarter, driven by demand for this mission-critical software and strong execution against our pipeline.

HashiCorp continues to perform well, growing bookings across all geographies and accelerating revenue growth sequentially. However, automation was impacted by a tougher compare. Turning to infrastructure, revenue growth accelerated to 5%, driven by 32% growth in distributed infrastructure. Storage delivered record revenue growth and continued to gain market share, with broad-based demand across FlashSystem, Storage Fusion, Tape, and IBM Z Storage. Strength across storage and power reflects the growing importance of differentiated infrastructure as clients modernize their environments, address data growth, and support AI at scale. With a sizable backlog in distributed infrastructure exiting the quarter, we are well positioned for continued momentum in the fourth quarter. z17 continues to perform exceptionally well, wrapping on the strongest start to a Z program last year.

Program-to-date performance remains well ahead of the prior generation, up over $1 billion, and this quarter, we had the strongest mid-range launch in IBM Z in nearly two decades. Beyond the strength of the program, IBM mainframe clients, representing approximately 85% of installed MIPS capacity, are maintaining or growing their capacity, and aggregated installed capacity has tripled over the last few programs. Consulting revenue grew 2% this quarter, reflecting continued client demand for AI-enabled transformation. Growth was led by strategy and technology, up 4%, with strength in application modernization and data and AI transformation. While cybersecurity delivered nearly double-digit growth in intelligent operations. AI is increasingly embedded in broader transformations our clients are undertaking, representing about 30% of our consulting revenue in the quarter and 35% of our backlog.

We are also expanding the ecosystem of capabilities we bring to clients, including through our new strategic partnerships with OpenAI and our expanded relationship with Google Cloud, as we help clients scale enterprise AI. Clients remain at different stages of adoption, but we continue to see them modernizing applications, strengthening their data foundations, and re-engineering workflows as they move forward toward embedding AI into core business processes at scale. Our integrated model, combining deep domain expertise, technology, and reusable assets, positions us to help clients capture business value from AI while accelerating time to value. Let me now discuss profitability. Adjusted EBITDA and operating pre-tax margins expanded by 60 and 70 basis points, respectively. As I mentioned last quarter, we accelerated our productivity initiatives to help enhance our operating profit margin and free cash flow commitments while continuing to invest for growth.

We made significant progress this quarter, driving efficiencies across G&A and sales, reinforcing the power of our productivity flywheel. Segment profit margins expanded by 210 basis points in software and 120 basis points in infrastructure, driven by ongoing productivity actions. Consulting segment profit margin declined modestly as we reinvested productivity gains into digital assets Accelerating our transition towards a services as software model to capture the growing AI opportunity. Through the first nine months of the year, we generated about $8 billion of free cash flow, up about $600 million year over year, driven by about $1 billion increase in Adjusted EBITDA, offset by higher CapEx, cash taxes, and net interest expense. Our free cash flow margin for the first nine months of the year is the highest in reported history, highlighting our strong execution against productivity initiatives and laser focus on operational discipline.

We exited the third quarter with a strong liquidity position and a solid investment-grade balance sheet, with cash of $11.1 billion. We returned $4.8 billion to shareholders in the form of dividends through the first nine months of the year. Our debt balance ending the quarter was $63.8 billion, including debt of $12.7 billion for our financing business, with a receivables portfolio that is almost 80% investment grade. Now, let me talk about what we are seeing going forward. The strength and diversity of our portfolio, disciplined capital allocation, and sustained productivity execution underpin our revenue growth, earnings expansion, and free cash flow performance. Through the first nine months of the year, we delivered over 4% revenue growth, 9% operating pre-tax income growth, 10% operating earnings per share growth, and 8% free cash flow growth.

We continue to expect revenue growth for 2026 in the range of 4%-5% and are raising our expectation for free cash flow growth to more than $1 billion. Ninety days ago, we provided a full-year revenue growth range with profit and free cash flow expectations anchored to a 4% base case. We continue to take the same approach for the full year, anchoring profit, free cash flow, and segment expectations to that base case. Given our strong third quarter software performance, our confidence in the full-year outlook has increased. We now expect full-year software growth of approximately 7%-8%, with about 7% as the revised base case. For the full year, we expect double-digit growth in hybrid cloud, mid-teens growth in data, and low double-digit growth in automation. For transaction processing, we are raising our expectations for the full year, with growth expected to be flat.

Infrastructure growth accelerated in the third quarter, with significantly stronger cycle-to-cycle TP performance of z17, underscoring the durability of the platform and the value it delivers to clients. Combined with continued strength in distributed infrastructure, we continue to expect low double-digit infrastructure revenue growth for the full year. In consulting, backlog quality and momentum in GenAI continue to support a modest acceleration to low to mid-single digit revenue growth for the year. In the third quarter, our operational discipline and accelerated productivity initiatives allowed us to enhance margins and deliver free cash flow commitments while continuing to invest for growth. These actions include deploying AI and automation at scale across our company, reducing third-party spend, improving sales and marketing efficiency, using AI to drive more efficient software development, optimizing our supply chain, and enhancing services delivery.

We continue to expect 100 basis points of operating pre-tax margin expansion for the full year, reflecting the flow-through from the third quarter earnings beat and continued operational discipline. Our operating tax rate expectation for the year remains in the mid-teens. For the full year, we are raising our expectation for free cash flow growth to more than $1 billion. The primary driver of this growth will be Adjusted EBITDA, offset by higher CapEx, higher cash tax, and net interest expense. Our free cash flow continues to be driven by growth in Adjusted EBITDA and demonstrates consistent free cash flow realization of about 130% over the last few years. Let me close by saying that our third quarter performance reinforces our confidence in our portfolio, the resilience of our business model, and our outlook for the year.

At the same time, we continue to invest in the technologies that will shape IBM's next chapter of growth. As Arvind mentioned, Quantum continues to advance across technology, ecosystem adoption, and scale up. While still early, the progress we are seeing from enterprise engagements to government validation reinforces our confidence in both our roadmap and the long-term opportunity ahead. We look forward to discussing in more detail at our Quantum Day in December. Arvind and I are now happy to take questions. Olympia, let's get started.

Thank you, Jim. Before we begin Q&A, I would like to mention a couple of items. First, supplemental information is provided at the end of the presentation. Second, as always, I would ask you to refrain from multi-part questions. Operator, let us please open it up for questions.

Thank you. At this time, we will begin the question and answer session of the conference. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Amit Daryanani with Evercore. Please go ahead.

Yep. Thanks a lot. Good afternoon, everyone, and great to see some nice software acceleration here. Arvind, I think last quarter we discussed a lot about customers prioritizing infrastructure over software purchases. This quarter it seems like transaction processing is at double-digit growth while infrastructure has remained very strong for you folks. Can you just talk about what changed in customer spending priorities? Are you primarily just recovering deferred transactions at this point, or are you actually starting to see infrastructure investments starting to create more incremental demand for IBM software? With Red Hat bookings actually growing at high teens, is that an early indication that software can actually accelerate as you go into 2027? Thank you.

Amit, thanks for that question, and also thank you for observing the numbers. Let me comment on the overall customer priorities, the tie towards infrastructure and Red Hat, and I am going to ask Jim to cover the transaction processing piece a little bit. First, as we look at customer spending priorities, customer spending priorities in trying to leverage AI remain strong. As you begin to leverage it, how does the average customer get value? They have to rewrite an application, they have to modernize an existing application, and you then ask the question: where do those run? That tends to be a tailwind for Red Hat OpenShift, and I think we are at the very beginning of this cycle, so I expect that to carry on for a long time.

Then the moment they get to saying, "Okay, I will write the application on Red Hat OpenShift," you then get to, how do I unlock the data from all of the enterprise data that I need to power that AI application? Remember, 90% of enterprise data is not on the cloud. It is very much inside the enterprise. So Confluent tends to be a tailwind. I expect these to carry on for a long time. The automation portfolio will get a benefit when these applications all get to scale and people start worrying about managing hundreds and thousands of them. At that point, automation will also get a tailwind. On the point you are making on Red Hat, look, we are very comfortable saying that based on what we can see, we are comfortable about double-digit growth in the fourth quarter of this year.

Right now, we do not really want to comment on 2027 growth, but generally speaking, I can say when we get these kinds of booking growths, it translates into good revenue growth going forward. Jim, maybe a comment on TP.

Yeah, just to build on your points, Arvind, and Amit, thank you very much for the comment and the question. We are very pleased overall with our software performance. Team executed extremely well. Four points sequentially to 9% printed here in third quarter, and it was all organically driven. Pervasively across our portfolio, three of our four subcategories accelerated and grew double digits overall. That was a reflection of both, we talked a lot last quarter about the 80% high-value recurring revenue growing nicely at high single digit, but we saw a very nice rebound in our transactional business, that remaining 20%, that grew actually double digits, led by our ELAs that were up north of 20% with an NRR of north of 130% overall. That is a function of, yes, disciplined execution on slip deals, but also a function of net new business contribution in the quarter.

I would tell you before all of you ask, about a quarter of it is the slip deals with regards to overall software acceleration, and about three-quarters of it is net new business that we are capturing overall, so to build on Arvind's point. Now on TP. TP, we are obviously pleased. Double-digit growth. I think this instantiates the demand for our mission-critical strategic mainframe software. A lot of discussions a quarter ago about demand destruction versus timing. I think this puts this to rest right now, because when you take a look at it, we have been talking all year long about the reinforcement of confidence we have in our mainframe platform, and how we monetize the strong z17 performance, right? That model is, the monetization model is the more capacity you put in the marketplace, the higher monetization opportunity, the higher price opportunity, the higher value creation opportunity.

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