International Business Machines Corporation IBM reported strong third-quarter 2026 results, with adjusted earnings rising 11% year over year to $2.95 per share. The figure beat the Zacks Consensus Estimate of $2.88 by 2.4%. Revenues increased 4.7% to $17.10 billion, surpassing the consensus mark of $16.87 billion by 1.4%.
The upside reflected accelerating Software and Infrastructure growth, improved transaction execution and productivity initiatives. Software annual recurring revenue (ARR) reached $24.9 billion, up 8% year over year. Operating pre-tax margin expanded 70 basis points (bps).
International Business Machines Corporation Price, Consensus and EPS Surprise
International Business Machines Corporation price-consensus-eps-surprise-chart | International Business Machines Corporation Quote
Software Growth Accelerates on Deal Closures
Software revenues increased 8.2% year over year to $7.80 billion, up 8.7% at constant currency. Hybrid Cloud revenues grew 11%, supported by Red Hat, while Data jumped 20% at constant currency, benefiting from Confluent's performance. Automation declined 3% amid a challenging comparison.
Transaction Processing rebounded sharply, growing 10% at constant currency after a soft prior quarter. Management attributed the recovery to renewed demand and the closure of approximately two-thirds of large transactions delayed from the second quarter. These deferred deals contributed roughly one-quarter of the sequential Software growth acceleration.
Red Hat bookings growth accelerated to the high teens, while OpenShift ARR surpassed $2.4 billion, increasing more than 30%. Software segment profit climbed 15.2% to $2.73 billion, lifting margin 210 bps to 35%.
Infrastructure Benefits From Storage Demand
Infrastructure revenues rose 4.2% year over year to $3.71 billion, representing 4.9% growth at constant currency. Hybrid Infrastructure advanced 9% at constant currency, driven by 32% growth in Distributed Infrastructure, reflecting broad-based strength in storage and Power systems.
IBM Z revenues declined 19% at constant currency against a demanding year-ago comparison. Nevertheless, the z17 program generated more than $1 billion in incremental revenues compared with the previous generation over six quarters. New midrange systems also delivered the platform's strongest midrange revenue launch in nearly two decades.
Infrastructure segment profit increased 11% to $715 million, while margin expanded 120 bps to 19.3%, aided by productivity initiatives.
Consulting Business Sees Modest Improvement
Consulting revenues were nearly flat year over year at $5.34 billion, increasing 1.8% at constant currency. Strategy and Technology grew 4% at constant currency, supported by application modernization and data and AI transformation demand. Intelligent Operations remained flat on a constant-currency basis.
Generative AI accounted for approximately 30% of quarterly Consulting revenues and 35% of backlog. Consulting signings totaled $5 billion, declining 2% at constant currency, while the trailing 12-month book-to-bill ratio was 1.04.
Segment profit declined 4.8% to $653 million, with margin contracting around 60 bps to 12.2% as IBM reinvested productivity savings into digital capabilities.
Profitability Expands Despite Cost Pressure
IBM's non-GAAP gross profit rose 4% to $10 billion, although gross margin contracted 20 bps to 58.5%. Operating expenses and other income totaled $6.71 billion, declining roughly 2% year over year.
Non-GAAP pre-tax income increased 9% to $3.30 billion, while adjusted EBITDA rose 7% to $4.9 billion. Adjusted EBITDA margin improved approximately 60 bps to 28.7%, reflecting operational efficiencies across general administration, sales and software development.
Strong Cash Flow and Liquidity
IBM generated $4.03 billion in operating cash flow during the quarter compared with $3.08 billion a year earlier. Free cash flow increased $0.7 billion to $3 billion. For the first nine months, free cash flow reached $7.8 billion, up $0.6 billion year over year.
The company exited the September quarter with $11.1 billion in cash, restricted cash and marketable securities. Total debt was $63.8 billion, including $12.7 billion attributable to IBM Financing. Quarterly dividend payments totaled approximately $1.6 billion.
Outlook
IBM reaffirmed its full-year 2026 constant-currency revenue growth expectation of 4% to 5%. However, management raised its free cash flow outlook, now anticipating an increase exceeding $1 billion year over year.
Software revenues are projected to grow 7% to 8%, supported by double-digit Hybrid Cloud growth and mid-teens Data expansion. Transaction Processing is now expected to remain flat for the year, an improvement from previous expectations.
Infrastructure revenues are forecast to grow in the low single digits, while Consulting growth is expected to accelerate to the low-to-mid-single-digit range. IBM also maintained its target of 100 bps operating pre-tax margin expansion for 2026, supported by continued productivity improvements.
Zacks Rank
IBM currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Upcoming Releases
Arista Networks Inc. ANET is scheduled to release third-quarter 2026 earnings on Nov. 3. The Zacks Consensus Estimate for earnings is pegged at $1.08 per share, suggesting growth of 44% from the year-ago reported figure.
Arista has a long-term earnings growth expectation of 22.8%. Arista delivered an average earnings surprise of 8.9% in the last four reported quarters.
Akamai Technologies, Inc. AKAM is slated to release third-quarter 2026 earnings on Nov. 5. The Zacks Consensus Estimate for earnings is pegged at $1.67 per share, indicating a 10.2% decline from the year-ago reported figure.
Akamai has a long-term earnings growth expectation of 5.9%. Akamai delivered an average earnings surprise of 4.8% in the last four reported quarters.
GLOBALFOUNDRIES Inc. GFS is set to release third-quarter 2026 earnings on Nov. 4. The Zacks Consensus Estimate for earnings is pegged at 51 cents per share, implying a rise of 24.4% from the year-ago reported figure.
GLOBALFOUNDRIES has a long-term earnings growth expectation of 21.2%. GFS delivered an average earnings surprise of 10.9% in the last four reported quarters.
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