IBM Q3 Deep Dive: AI and Hybrid Cloud Fuel Growth Amid Market Skepticism

Technology and consulting giant IBM (NYSE:IBM) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 9.1% year on year to $16.33 billion. Its non-GAAP profit of $2.65 per share was 8.3% above analysts’ consensus estimates.

Is now the time to buy IBM? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

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.

Looking forward, IBM’s guidance relies on ongoing momentum in artificial intelligence, automation, and hybrid cloud solutions. Management expects sustained growth in its software and consulting businesses, buoyed by a growing pipeline in generative AI and strong client interest in Red Hat and automation platforms. CEO Arvind Krishna stated that “the breadth of our AI offerings is a key differentiator,” while CFO Jim Kavanaugh highlighted a focus on margin expansion and disciplined capital allocation. The company also flagged potential headwinds from macroeconomic uncertainties and evolving demand trends in consulting, but believes its diversified portfolio positions it to capture new opportunities in 2026.

Key Insights from Management’s Remarks

Management attributed the quarter’s outperformance to accelerated adoption of AI-driven automation, robust infrastructure demand, and early synergies from recent acquisitions.

• AI-driven automation momentum: IBM highlighted significant growth in its automation portfolio, citing a 22% increase fueled by the integration of AI capabilities and the successful incorporation of HashiCorp products. Management noted that these solutions are helping clients optimize workflows and drive cost savings.
• Consulting returns to growth: The consulting segment posted a positive inflection, driven by heightened demand for AI services and digital transformation projects. Over 200 consulting projects leveraged digital workers, and more than 1,000 client engagements were tied to IBM’s own “client zero” internal transformation model.
• Infrastructure strength via z17: IBM’s infrastructure business saw robust performance, particularly from the z17 mainframe platform, which management described as their “strongest February launch in history.” The Spire Accelerator, set for release in the next quarter, aims to enhance AI and real-time inferencing capabilities for enterprise clients.
• Recurring revenue and Red Hat growth: High-value annual recurring revenue grew to $23.2 billion, up 9% year-over-year, with Red Hat bookings accelerating to about 20%. OpenShift annual recurring revenue exceeded $1.8 billion, growing over 30%, reflecting market share gains in hybrid cloud offerings.
• Productivity and margin expansion: IBM’s focus on deploying AI internally resulted in $4.5 billion in expected annual run-rate productivity savings, contributing to margin expansion across all business segments. Management sees further opportunity to drive efficiency and operating leverage moving forward.

Drivers of Future Performance

IBM’s outlook is anchored by continued investment in AI, automation, and hybrid cloud, balanced against anticipated consulting demand and macroeconomic risks.

• AI and automation as core growth engines: Management expects AI-infused offerings across software and consulting to drive revenue and margin expansion into 2026. IBM’s generative AI book of business exceeded $9.5 billion, with consulting projects and recurring software sales both benefiting from this momentum.
• Hybrid cloud and Red Hat adoption: Ongoing strength in hybrid cloud, especially through Red Hat and OpenShift, is forecast to contribute mid- to high-teens growth in software revenue. Management believes the large base of annuity-like contracts and continued product innovation will provide stability and upside.
• Persistent macro and consulting headwinds: While the pipeline for AI and automation remains robust, IBM acknowledged risks from macroeconomic uncertainty and mixed consulting signings. The company is monitoring the quality of new deals and the pace of backlog conversion, aiming to sustain growth despite these external pressures.

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 $268.76, down from $288.15 just before the earnings. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it’s free for active Edge members).

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