IBM growth rebounds to 5%, cash outlook rises; mainframe sales sink 20%

IBM reports four businesses. Its Software unit is made up of Hybrid Cloud (Red Hat), Automation, Data and Transaction Processing, and about 80% of software revenue is recurring.¹ The other three are Consulting, with $5.3 billion of revenue this quarter, Infrastructure, with $3.7 billion, and Financing, with $0.2 billion. Infrastructure includes the IBM Z mainframe line and Distributed Infrastructure.² IBM had $67.5 billion of revenue in 2025 and gets about sixty percent of its sales outside the United States.³

It competes with Microsoft, Oracle, Amazon and Alphabet in software, with Accenture and Capgemini in consulting, and with Dell, Hewlett-Packard Enterprise and Pure Storage in hardware.

In January IBM set 2026 goals of revenue growth above 5% at constant currency, which strips out exchange-rate swings, and free cash flow up about $1 billion.¹ In March it closed its purchase of Confluent, a software company, paying $31 a share in cash, about $11.3 billion of equity value.² Then the second quarter missed. Revenue grew only 1%, IBM Z sales fell 42%, and IBM cut its full-year revenue growth goal to 4% to 5%.³

According to a law firm seeking clients, the stock fell $73.16 a share, or 25.21%, to close at $217.07 on July 14, when IBM released preliminary results. That puts the price before the drop at about $290.¹ Another firm, Hagens Berman, says it is investigating potential securities-law violations tied to IBM's statements about IBM Z; its notice describes an investigation, not a lawsuit.²

IBM kept borrowing. In August it sold 1.75 billion Canadian dollars of 4.100% notes due 2030 and 1.0 billion Canadian dollars of 4.750% notes due 2034, raising about 2,736 million Canadian dollars after costs for general corporate purposes.¹ The notes are unsecured and rank equally with IBM's other unsecured debt. On October 1 the board added Frank Baker, co-founder of the investment firm Siris Capital Group.²

In our price data the stock slid from $248.67 on September 15 to $219.82 on September 30, then climbed about 10% to $242 by October 20, the last close before the results.

Total revenue was $17,103 million, against $16,331 million a year earlier. Software, the biggest and most profitable unit, grew 8% to $7.8 billion, with Red Hat up 11%, Data up 19% and Transaction Processing up 9%, while Automation fell 3%.¹ Software segment profit rose about 15% to $2,734 million, and its margin widened to 35.0% from 32.9%.² Consulting revenue was flat at $5.3 billion, and its profit slipped to $653 million from $686 million.³

Infrastructure revenue rose 4% to $3.7 billion, but the mix inside it matters. IBM Z mainframe revenue fell 20%, after a 42% drop in the second quarter, while Distributed Infrastructure rose 31%.¹ The mainframe slump eased but did not end. The fourth quarter also faces a hard comparison, because IBM Z grew 67% in the same quarter of 2025.²

Two profit measures tell different stories. Reported earnings per share from continuing operations rose 26% to $2.31, yet pre-tax income rose only 3%.¹ The gap is tax. The tax bill fell to $298 million from $686 million, and the effective tax rate fell to 11.9% from 28.2%.² The year-ago quarter also carried a $0.33 per share tax-reform charge, which IBM treats as outside normal operations.³

IBM's adjusted measure, which it calls operating earnings, leaves out acquisition charges, intangible asset amortization and some retirement costs.¹ On that basis, earnings per share were $2.95, up 11%. That is $2.31 reported, plus $0.57 of acquisition items and $0.07 of retirement items.² A lower operating tax rate, 14.7% against 17.0%, helped that figure too.³

Non-cash costs are rising. Amortization of software and acquired intangibles was $828 million, up from $699 million, and stock-based pay was $535 million, up from $444 million.

IBM defines free cash flow as operating cash minus the change in Financing receivables and minus net capital spending.¹ Third-quarter free cash flow was $3.0 billion, up $0.7 billion. Free cash flow for the year to date was $7,787 million, against $7,181 million at the same point of 2025.² Reported operating cash for the year to date rose $2.6 billion to $11.8 billion, but most of that came from a smaller balance of IBM Financing receivables, the client loans and receivables that IBM collects or sells to a third-party investor.³ The change in Financing receivables added $2,805 million, against $905 million a year earlier. Without it, operating cash rose only about $738 million, to $8,986 million from $8,248 million.⁴ That receivables drop sits inside the $804 million that changes in operating assets and liabilities added this year, so without it those items used about $2.0 billion.⁵

IBM now expects 2026 free cash flow to rise by more than $1 billion; in July it said about $1 billion. With 2025 free cash flow of $14,734 million, the goal means more than $15.7 billion.¹ After $7,787 million so far this year, the fourth quarter needs about $7.9 billion, against $7.6 billion a year earlier.² IBM kept its goal of 4% to 5% revenue growth at constant currency and expects currency to be neutral for the year.³ Revenue so far this year grew about 4.9% as reported, but less at constant currency, the basis of the goal: Software grew 7.0% against 8.1% reported, and Infrastructure 1.9% against 2.7%, so the fourth quarter has to grow faster than the year to date to reach 4% to 5%.⁴

IBM ended September with $11.1 billion of cash, restricted cash and marketable securities, down $3.4 billion this year. Total debt was $63.8 billion, including $12.7 billion that funds IBM Financing.¹ Net of cash, debt is about $52.7 billion. That is about 2.6 times adjusted EBITDA of about $20.2 billion over the past year, or about 2 times if Financing debt is left out.² Adjusted EBITDA is IBM's measure of earnings before interest, taxes, depreciation and amortization, and it also adds back stock-based pay and workforce rebalancing charges. So far this year, adjusted EBITDA of $13.7 billion covered interest expense of $1,451 million about 9 times.³

Near-term maturities are modest. As of June 30, $437 million of long-term debt was due in the rest of 2026 and $6,713 million in 2027, about $7.2 billion together.¹ That is less than the cash on hand, and IBM also had $10.0 billion of committed bank credit lines, with nothing borrowed under them at June 30.² Those credit lines require net interest coverage of at least 2.20 to 1, and IBM said it complied with its debt covenants. Its senior debt is rated A3 by Moody's and A- by S&P and Fitch.³ Current liabilities of $36,485 million exceed current assets of $31,192 million, but $15,164 million of those liabilities is deferred income, money clients paid in advance that IBM settles by delivering work rather than by paying cash.⁴

The board declared a $1.69 quarterly dividend, payable December 10 to holders of record on November 10.¹ Dividends took $4,762 million so far this year, about 61% of free cash flow, against $4,681 million, or about 65%, at the same point of 2025; for all of 2025 the share was about 42% of $14,734 million because IBM earns about half its free cash flow in the fourth quarter.² IBM notes that not all free cash flow is available for spending at its discretion.³

Buybacks have been suspended since the 2019 Red Hat deal, and diluted shares rose about 0.5% to 953.5 million.¹ Equity plans had 32,163,174 options and stock units outstanding at the end of 2025, and a plan created for the Confluent deal can grant up to 5,140,000 more shares.² The issued Series A preferred shares sit with an IBM subsidiary. Common holders are paid after all debts and after any preferred holders.³

Part of the growth was bought. IBM spent $11.4 billion on acquisitions this year, and Confluent alone had a total purchase price of $11,602 million.¹ Confluent brought $7,238 million of goodwill, and only 1% of the goodwill is expected to be tax deductible.² Goodwill reached $74,916 million and intangible assets $13,603 million, and IBM lists goodwill impairment as a risk. In July IBM also agreed to buy another business, expected to close in the second half of 2026.³

At $260.62 after hours and 942,134,390 shares outstanding at June 30, IBM is worth about $245.5 billion.¹ Free cash flow over the past year was about $15.3 billion, about 6.2% of that value. Adjusted earnings per share over the past year were $12.32, so the stock trades at about 21.2 times.² IBM rose 7.7% after hours from its $242 close, while the S&P 500 index fund rose 0.5% by its 16:00 ET close.³

The bull case is that the second quarter was a stall, not a break. Revenue growth went from 1% to 5%, Software margins widened, and the cash goal went up after free cash flow rose $0.7 billion in the quarter.¹ Interest is covered about 9 times, the debt carries single-A ratings, and dividends used about 61% of free cash flow so far this year.² At about 21.2 times adjusted earnings, a buyer pays a moderate price for adjusted earnings per share growing 11%.³

The bear case, strongest point first. Mainframes are still shrinking, and the fourth quarter laps 67% IBM Z growth.¹ Reported profit growth leaned on tax: pre-tax income rose 3% while the tax rate fell to 11.9% from 28.2%; on IBM's adjusted basis pre-tax income rose 9%, so tax did far less of the work there.² The jump in operating cash came mostly from a smaller balance of IBM Financing receivables, the client loans that IBM collects or sells to a third-party investor.³ Growth is partly acquired, debt is $63.8 billion, and goodwill is $74,916 million. Consulting, flat with a thinner margin, gives little help.⁴

What would prove the bull case wrong is fourth-quarter free cash flow below about $7.9 billion, which would miss the new goal, or another round of slipped deals.¹ The next dated events are the November 10 dividend record date and the December 10 payment. Fourth-quarter results come after year-end; a year ago IBM reported them on January 28.² One insider sale came before the run-up: on August 26 a senior vice president sold 25,000 shares at about $230.32 each.³

IBM does not say how much of the quarter's revenue or profit came from Confluent and its other 2026 purchases, so growth without acquisitions is not known.

The release gives the 11.9% tax rate but not the reason it fell, or whether the lower rate will last.

IBM does not say how many of the large deals that slipped in the second quarter closed in the third, or how much revenue they added.

IBM held its earnings call at 5:00 p.m. on October 21. We have no transcript, so any fourth-quarter detail given there is not in our sources.

Our sources print no analyst forecast figures, so we cannot say by how much IBM beat or missed them.

The filings do not name the business IBM agreed to buy on July 22 or its price. An IBM release says it completed the purchase of HRL Laboratories on August 26, without giving terms, and does not tie it to the July agreement.