IBM beats Q3 earnings on software rebound, guides full-year revenue growth
IBM's software division just delivered a quarter that silenced critics who called the July stumble a warning sign, but the real test has nothing to do with last quarter's numbers and everything to do with what Red Hat does next.
IBM (NYSE:IBM | IBM Price Prediction) closed the regular session on October 21 at $251.46, up 3.94%. It then released third-quarter results that sent shares up as much as 6% after hours.
Revenue came in at $17.1 billion against expectations of $16.82 billion. Adjusted EPS of $2.95 exceeded the $2.86 estimate, and the earnings release filed with the SEC shows free cash flow rising to $3.03 billion.
The beat follows a rough July. Software deals slid that quarter, and EPS came in at $2.93, missing the $2.97 estimate. In an interview after this week’s report, Chief Executive Arvind Krishna said that stumble came down to timing. He declined to promise more than IBM can deliver.
The share price data points in two directions. The stock gained 10.35% in the week before the report but is still down 13.38% year to date. You have to decide whether this quarter marks the start of a recovery. Or it marks the end of a relief rally that has already played out.
Software Rebounded, and Most of It Was New Business
Software revenue rose 8.2% to $7.804 billion, with Data up 19%. IBM closed two-thirds of the deals that slipped out of the second quarter. Chief Financial Officer Jim Kavanaugh said on the call that about a quarter of the software acceleration came from those deals. He put the other three-quarters down to net new business.
The slid deals will not repeat. Transaction processing, the mainframe software line, grew 10%, and Kavanaugh said he expects that pace to moderate in the fourth quarter.
The net new portion is the bigger share. Annual recurring revenue grew 8% to $24.9 billion, which gives the fourth quarter a stronger floor than July suggested.
Red Hat’s Big Swing Still Averages Out to Flat
Red Hat is IBM’s highest-quality growth engine and the core of its hybrid cloud and AI pitch. OpenShift is now a $2.4 billion annual recurring revenue business growing over 30%.
Krishna said Red Hat growth moved from minus 7% last quarter to plus 10% this quarter. He acknowledged that averaging out the two gives flat to slight growth.
He still expects double-digit growth to continue. Red Hat bookings growth climbed back to the high teens, and bookings usually turn into revenue over the following quarters.
The fourth-quarter report will test that forecast. A single-digit Red Hat quarter would undermine the credibility Krishna says he is rebuilding.
Guiding Low Keeps the Bar Within Reach
IBM kept fiscal 2026 revenue growth guidance at 4% to 5% and raised its free cash flow outlook, as its third-quarter earnings materials show.
Krishna spoke. He said: “I want to give numbers on which we have extremely high confidence and not lean in because we’ve got to rebuild. Credibility is the way I would put it.”
A lower bar makes beats easier, but a 4% to 5% growth range also shows that IBM is still a slow grower. Consulting is the main drag, with revenue up just 0.2%.
Cash makes a stronger case. Operating pre-tax margin expanded 70 bps to 19.3%, and the board declared a $1.69 quarterly dividend, extending a payment record that goes back to 1916. That kind of streak is rare. We ranked ten of the longest-running dividend growers by valuation in a free Dividend Kings report.
Quantum Comes Free With the Shares
Krishna said: “I don’t think any of our quantum prowess is priced into the stock. I’m pretty convinced that we are actually ahead on that.”
If quantum isn’t priced in, today’s valuation rests on cash flows from software, consulting and infrastructure, and quantum then works like an option you hold at no extra cost.
IBM has evidence to support its claim of being ahead. It cited three independent demonstrations of quantum advantage on its hardware in July and its selection for Stage C of DARPA’s quantum benchmarking initiative. It also cited 16 enterprise deals this year.
However, IBM has not disclosed a quantum revenue figure, and commercial timelines remain uncertain. Its Quantum Day on December 10 is the next checkpoint.
What IBM’s Fourth Quarter Has to Prove
IBM’s investment case rests on steady cash flow with AI exposure. Software is growing faster than the company as a whole, the free cash flow outlook went up, and the guidance looks beatable.
Timing is the main concern. After IBM beat estimates in the first quarter, shares fell 8.25% on the day, so the after-hours gain could fade.
Deals could slide again, consulting is flat, and hyperscalers are competing for the same enterprise AI budgets, and a Red Hat miss would make all three worse.
IBM combines a dividend record going back decades with a share price still down 13.38% this year. If Red Hat posts double-digit growth again in the fourth quarter, the case gets much stronger.
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Omor Ibne Ehsan is a writer at 24/7 Wall St. He is a self-taught investor with a focus on growth, cyclical, and dividend equities that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as penny stocks.
