IBM Q2 Deep Dive: Software Momentum and AI Adoption Offset Consulting Caution

Technology and consulting giant IBM (NYSE:IBM) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, with sales up 7.7% year on year to $16.98 billion. On the other hand, next quarter’s revenue guidance of $15.72 billion was less impressive, coming in 2.3% below analysts’ estimates. Its non-GAAP profit of $2.80 per share was 5.5% above analysts’ consensus estimates.

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StockStory’s Take

IBM’s second-quarter results for 2025 were met with a negative market reaction despite the company exceeding Wall Street’s revenue and profit expectations. Management attributed the strong performance to ongoing momentum in its software and infrastructure segments, highlighting robust growth from Red Hat and the recent launch of its z17 mainframe. CEO Arvind Krishna noted that “demand remains high for technology that improves productivity, reduces costs and fuels innovation,” with AI and hybrid cloud solutions leading the way. Consulting, however, continued to face headwinds from a cautious demand environment, tempering overall results.

Looking ahead, IBM’s guidance reflects both optimism and caution. Management cited accelerating software growth, continued AI adoption, and new product launches as key drivers for the rest of 2025, while acknowledging ongoing macroeconomic uncertainty and slower consulting demand. CFO James Kavanaugh stated, “We remain laser-focused on driving efficiency and cost savings by leveraging technology and embedding AI in our workflows.” The company expects software and infrastructure to offset softer consulting performance, with productivity initiatives supporting margin expansion and cash flow targets.

Key Insights from Management’s Remarks

Management credited double-digit software and infrastructure growth for the quarter’s outperformance, but acknowledged challenges in consulting and a dynamic demand environment.

• Red Hat and Automation growth: Red Hat saw 14% revenue growth, driven by demand for hybrid cloud and container platforms like OpenShift. Management highlighted successful integration of HashiCorp, which contributed to accelerating Automation segment growth and expanded product synergies.
• AI momentum across segments: IBM’s generative AI (GenAI) book of business reached $7.5 billion inception-to-date, with strong demand for AI agents, watsonx platform products, and consulting services to deploy AI solutions. CEO Arvind Krishna emphasized that adoption is “accelerating quarter-over-quarter.”
• Infrastructure strength: The launch of the z17 mainframe led to a 67% increase in IBM Z revenue, underlining client needs for scalable, secure, AI-enabled systems. The new Telum II processor and upcoming Spyre Accelerator were called out as advancements to support AI-driven workloads directly on mainframes.
• Consulting stabilization, but headwinds: Consulting revenue was flat, reflecting clients’ focus on cost-efficient, high-impact technology investments. Management noted green shoots, including a growing backlog and double-digit growth in GenAI-related consulting, but remained cautious given delayed decision-making and ongoing pricing pressures.
• Productivity initiatives and supply chain optimization: IBM continued to drive cost savings through internal AI adoption and supply chain transformation, including shifting Distributed Infrastructure manufacturing to strategic partners. These initiatives are intended to support both margin expansion and cash generation.

Drivers of Future Performance

IBM’s outlook centers on continued software and infrastructure expansion, ongoing AI adoption, and disciplined cost management, but tempered by consulting uncertainties and a mixed macroeconomic climate.

• Software-led growth: Management expects software to approach double-digit revenue growth for the year, fueled by Red Hat, automation, and AI-driven products. The integration of HashiCorp and DataStax is projected to deepen product synergies and boost recurring revenue.
• AI and infrastructure investment: AI adoption is expected to remain a significant growth vector, with new mainframe and Power platform launches supporting demand for secure, high-performance computing. IBM’s internal productivity gains from embedding AI in workflows are also anticipated to drive operating margin improvement.
• Consulting caution and backlog health: While consulting backlog is up and GenAI-related consulting is growing, management remains cautious due to a dynamic demand environment and delayed discretionary projects. The team emphasized the need for continued execution and responsiveness to shifting client priorities.

Catalysts in Upcoming Quarters

In future quarters, StockStory analysts will closely watch (1) the pace of AI-driven software adoption and recurring revenue growth, (2) the trajectory of infrastructure demand following new mainframe and Power platform launches, and (3) stabilization or reacceleration in consulting bookings and backlog quality. Execution on productivity initiatives and integration of recent acquisitions will also be key markers for IBM’s progress.

IBM currently trades at $260.58, down from $282.22 just before the earnings. At this price, is it a buy or sell? Find out in our full research report (it’s free).

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