IBM rides mainframe and AI wave to strongest growth in years

IBM revenues are on a rising trend with its locked-in customers spending big on the new mainframe cycle and GenAI software and services, with more to come.

Big Blue reported revenues of $16.3 billion, up 9 percent year-over-year, with a $1.74 billion GAAP profit, reversing the year-ago $3 million loss. Four of its five reporting segments grew as well: Software up 10 percent year-over-year to $7.2 billion, Consulting up 3 percent to $5.3 billion, Infrastructure up 17 percent to $3.6 billion, and financing up 10 percent to $200 million. The flop here was the Other category, which dropped 44 percent year-over-year to $38 million. Set against the Software revenue, this is just 0.53 percent of that number and barely matters.

IBM chairman, president, and CEO Arvind Krishna said: “This quarter we accelerated performance across all of our segments, and again exceeded expectations for revenue, profit and free cash flow. Clients globally continue to leverage our technology and domain expertise to drive productivity in their operations and deliver real business value with AI. Our AI book of business now stands at more than $9.5 billion.”

The revenue growth rate was the highest for several years, as a chart of revenue growth by quarter by year shows:

This is IBM’s second consecutive growth quarter and it’s raising its outlook for the full year and next quarter, with Krishna saying: “We continue to see broad-based demand from clients and remain optimistic.”

The macro background is positive. “Technology remains a key driver of growth and competitive advantage. AI adoption is accelerating, and hybrid cloud remains the foundation of enterprise IT.”

Financial Summary

• Gross profit margin: 58.7 percent, up 1.2 basis points year-on-year
• Operating cash flow: $7.2 billion, up $600 million year-on-year
• Free cash flow: $2.4 billion and up 9 percent year-over-year
• Cash, restricted cash, and marketable securities: $14.9 billion, up from $13.7 a year ago
• Debt: $63.1 billion, up from $56.6 billion a year ago
• EPS: $2.65, up 15 percent

A chart of the segment revenue trends shows that Software, Consulting and Infrastructure, in that order, dominate the revenue picture. Software growth was led by automation to optimize operations, automate infrastructure and workflows, build resiliency, and drive cost efficiency for clients. Many of IBM’s automation products have AI components.

Consulting accelerated year-over-year, returning to growth, and reflecting growing demand for AI services as IBM’s clients needed help designing, deploying, and governing AI at scale. There was more than $1.5 billion in GenAI bookings in the quarter.

Infrastructure did well, Krishna said, “driven by continued strength in z17, our strongest two quarter launch in history. The Spyre accelerator, which will be available in Q4, will bring advanced generative AI and real-time inferencing capabilities inside IBM Z.”

IBM Z revenues grew 59 percent year-over-year. Distributed infrastructure; Power servers and storage hardware, grew 8 percent. CFO Jim Kavanaugh noted there was “broad-based growth across our Storage portfolio as clients scale capacity to meet rising data and AI demands.”

AI is a strong element of the Software segment, with Krishna saying: “In Software, demand for watsonx and Red Hat AI remains strong, with early momentum in our agentic platform, watsonx Orchestrate. Watsonx Orchestrate helps enterprises deploy AI by connecting agents, models, and workflows with governance and security. Orchestration will be critical as enterprises run a variety of models to optimize cost and performance.”

Software has four sub-segments: Automation, Hybrid Cloud, and Transaction Processing are each around 27 percent of the segment’s revenues, and grew 22, 12, and 3 percent respectively. Data, the fourth sub-segment, grew 7 percent year-over-year. Kavanaugh said: “Transaction Processing revenue declined by 3 percent reflecting another quarter of z17 outperformance as clients continued to prioritize hardware spend on our latest IBM Z system.” In fact, “IBM Z delivered its highest third-quarter revenue in nearly two decades.”

The quantum computing part of IBM’s portfolio is gaining momentum. Krishna said: “We are on a path to demonstrate the first error-corrected quantum computer by 2028, and continue to deliver key milestones in our quantum roadmap. As we collaborate with our ecosystem of over 280 partners, we are making tangible progress on near-term use cases. For example, HSBC achieved a notable improvement in bond trading predictions using IBM’s Heron quantum processor. Vanguard announced a breakthrough in optimizing portfolio construction, using IBM’s quantum computing as a service.”

“Just last week IBM and the Basque Government unveiled Europe’s first IBM Quantum System Two. This marks the second installation outside the United States and underscores our commitment to global leadership in quantum computing.”

Kavanaugh said AI was being used to improve IBM’s own efficiency and reduce costs. “Productivity is also a key driver of profit margin expansion, as we deploy AI at scale across IBM in areas including finance, supply chain, sales, HR, service delivery and customer support to improve efficiency and reduce costs. While we have made progress on this journey and expect $4.5 billion of run rate savings exiting this year, there is still significant opportunity ahead for us to drive even more efficiency and cost savings.”

Krishna added: “I believe we have significant opportunity ahead of us to continue to become even leaner and more nimble.”Leaner could mean job cuts.

By using AI to improve its own internal productivity and reduce its costs, IBM is providing a signal to its customer base that AI as a productivity-raiser and cost-cutter is real. This will help counter-balance worries that we are in a GenAI bubble.

Regarding IBM’s outlook, Krishna said: “Given these results and the momentum in our portfolio, we are raising expectations for revenue growth to more than 5 percent and free cash flow to about $14 billion for the year.”

Secure in its locked-in mainframe niche, IBM can cruise along comfortably, untroubled by competitive inroad attempts from the larger Dell ($29 billion per quarter) and HPE ($7.9 billion per quarter), and the hyperscale public cloud suppliers with their, relatively-speaking, pathetic attempts to move mainframe customers to their clouds. This week’s Amazon outage is a potent reminder of public cloud unreliability. The message from IBM is clear: its mainframe customer base isn’t going anywhere.