IBM’s third quarter outpaced Wall Street’s expectations for both revenue and profit, but the market reacted negatively, reflecting investor caution. Management credited the acceleration in growth to strong demand for automation software, robust consulting activity in artificial intelligence, and increased sales of IBM Z infrastructure. CEO Arvind Krishna emphasized that automation products, especially those infused with AI, saw significant customer uptake, while CFO Jim Kavanaugh called out gains from the company’s high-value annual recurring revenue base. Despite these highlights, concerns lingered around the sustainability of these trends and the quality of consulting signings, contributing to the market’s response.
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IBM (IBM) Q3 CY2025 Highlights:
- Revenue: $16.33 billion vs analyst estimates of $16.1 billion (9.1% year-on-year growth, 1.4% beat)
- Adjusted EPS: $2.65 vs analyst estimates of $2.45 (8.3% beat)
- Adjusted EBITDA: $4.62 billion vs analyst estimates of $4.10 billion (28.3% margin, 12.6% beat)
- Operating Margin: 16.8%, up from 12.5% in the same quarter last year
- Market Capitalization: $292.2 billion
While we enjoy listening to the management's commentary, our favorite part of earnings calls are the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention.
Our Top 5 Analyst Questions From IBM’s Q3 Earnings Call
- Amit Daryanani (Evercore ISI) asked about the sustainability of free cash flow growth into 2026 and whether there are any one-off items influencing results. CFO Jim Kavanaugh emphasized underlying business fundamentals and reiterated confidence in high-quality, recurring free cash flow generation.
- Wamsi Mohan (Bank of America) questioned the inflection point for AI-driven revenue and the impact of a potential government shutdown. CEO Arvind Krishna stated AI is a strong contributor to both software and consulting growth, while the shutdown’s impact is expected to be minimal.
- Ben Reitzes (Melius Research) probed the potential for sustained double-digit software growth as the HashiCorp acquisition cycles out. Krishna detailed expectations for continued growth in automation and Red Hat, with further upside from additional acquisitions.
- Eric Woodring (Morgan Stanley) asked about IBM’s opportunity in cloud infrastructure and the company’s relationship with hyperscalers. Krishna explained IBM’s strategy is to deploy its software and consulting services across various cloud platforms, benefiting from broader AI infrastructure investments.
- Jim Schneider (Goldman Sachs) inquired about IBM’s M&A strategy and willingness to pursue larger deals. Krishna reiterated a disciplined approach focused on strategic fit, synergy potential, and accretion to cash flow within two years.
Catalysts in Upcoming Quarters
In coming quarters, the StockStory team will closely monitor (1) the rollout and client adoption of the Spire Accelerator and next-generation AI capabilities in z17, (2) the pace of Red Hat and OpenShift recurring revenue growth and backlog realization, and (3) consulting backlog conversion, especially as AI-related projects shift from signings to revenue. Additional focus will be placed on new product launches and M&A activity that could alter IBM’s growth trajectory.
IBM currently trades at $312.60, up from $288.15 just before the earnings. Is there an opportunity in the stock?Find out in our full research report (it’s free for active Edge members).
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