IBM exceeded Wall Street’s earnings expectations for the third quarter on Wednesday, October 21, thanks to the company’s $7.8 billion software unit, which saw revenues rise 5 percent to $17.1 billion. Financial analysts had predicted IBM would earn revenues of $16.82 billion and earnings of $2.86 per share.
Investors weren’t particularly impressed, though. Shares slipped after trading closed, despite net income jumping to $2.19 billion, or $2.30 per share, from $1.74 billion, or $1.84 per share, a year earlier. Adjusted earnings exclude acquisition-related adjustments.
IBM software sales grow 8% as consulting business struggles
Software was responsible for doing the most work at IBM. Revenue in this division rose by 8% to exceed Wall Street analysts’ estimate of $7.66 billion. Infrastructure revenue likewise surpassed analyst estimates at $3.70 billion compared with the expected $3.57 billion, representing a growth rate of 4% per year.
On the other hand, Consulting revenue was stagnant. It brought in $5.34 billion, less than the projected revenue of $5.37 billion. Gross margin was also lower at 27.4%, despite rising interest in artificial intelligence services.
IBM CFO Jim Kavanaugh said AI-related work represented approximately 30% of consulting revenue during the quarter and 35% of the division’s order backlog.
“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.”
IBM said it has been putting productivity savings back into digital products instead of keeping every dollar as profit. Management wants more consulting services delivered through reusable software, particularly as businesses spend more on AI systems.
Kavanaugh also talked about the expected $32 billion of annual revenue from software sales, stating his optimism in the company’s management achieving this target. “I think the current street estimates for the year are about $32 billion of revenue. We feel comfortable with that $32 billion of revenue. We reinvested productivity gains into digital assets, accelerating our transition towards a services-as-software model to capture the growing AI opportunity.”
CEO Arvind Krishna thinks that corporations have begun using more sophisticated artificial intelligence solutions to transform their business, as opposed to testing different artificial intelligence solutions in experiments.
However, adjusted gross margin stood at 58.5%, underperforming StreetAccount’s estimates of 59.1%. Therefore, while the earnings estimate beat the analysts’ expectations, there was lower profitability from the revenue of the company.
IBM increased its full-year outlook for improvement in free cash flow by more than $1 billion from an estimated $1 billion in July. IBM’s 2026 constant-currency revenue growth forecast is still between 4% and 5%.
IBM stock falls 15% as S&P 500 gains 13%
About $1.19 billion worth of awards were made to IBM in the last year for technology modernization and software support.
In addition to government deals, IBM has been reported to enter into an agreement for the acquisition of HRL Laboratories, which is a research company held jointly by Boeing and General Motors. This laboratory was formerly Hughes Aircraft Research Lab. The price for the acquisition is not yet known.
The Wall Street analysts have also updated their predictions. Eight analysts issued estimates within the last six months, with a median estimate of $310.
Fatima Boolani at Citigroup gave IBM the highest bullish target ($375) on June 3. Meanwhile, Raimo Lenschow at Barclays predicted $350 on June 1, and Wamsi Mohan at Bank of America predicted $330 on July 6.
Wedbush’s Dan Ives assigned $320 on May 29, RBC Capital’s Matthew Swanson chose $300 on May 6, and JPMorgan’s Brian Essex estimated $291 on June 23. Morgan Stanley’s Erik Woodring was more cautious, setting $267 that same day.
By Wednesday’s end of the regular trading session, IBM stock was down 15%, but the S&P 500 had rallied by 13%.
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