International Business Machines (NYSE:IBM) reported third-quarter 2026 revenue growth of 6% at constant currency, led by accelerating software sales, infrastructure demand and modest consulting growth. The company said operating pre-tax margin expanded 70 basis points and diluted operating earnings per share rose 11%.
IBM Chairman, President and CEO Arvind Krishna said the results exceeded the base case outlined in July and reflected “acceleration across our segments,” including 9% software growth, 5% infrastructure growth and 2% consulting growth. The company raised its full-year free-cash-flow growth outlook to more than $1 billion while maintaining its expectation for 2026 revenue growth of 4% to 5%.
Software Growth Accelerates
Software revenue growth accelerated four percentage points sequentially to 9%, according to Chief Financial Officer Jim Kavanaugh. IBM’s annual recurring revenue base grew 8% to $24.9 billion, while three of its four software subsegments posted double-digit revenue growth.
Red Hat revenue rose 11%, with bookings returning to high-teens growth. OpenShift annual recurring revenue reached $2.4 billion and grew more than 30%. IBM said the performance reflected customer efforts to modernize applications and deploy AI workloads across hybrid environments.
Data revenue increased 20%, supported by Confluent, where bookings grew about 20%. Krishna said enterprises increasingly need real-time data capabilities to support AI applications, particularly because much of their data remains inside enterprise environments rather than in public clouds.
Transaction processing revenue grew 10%, reversing weakness seen in the prior quarter. Kavanaugh said approximately one-quarter of the software growth acceleration came from deals that had slipped from the second quarter, while roughly three-quarters came from new business. IBM closed around two-thirds of the large deals that slipped from the prior quarter.
During the question-and-answer session, executives said they expect transaction-processing growth to moderate after the third-quarter rebound. Kavanaugh said the company is forecasting flat transaction-processing growth for the full year, while pointing to increasing mainframe capacity as a future monetization opportunity.
- Red Hat revenue grew 11%, with bookings in the high teens.
- OpenShift ARR exceeded $2.4 billion and grew more than 30%.
- Data revenue rose 20%.
- Transaction processing revenue increased 10%.
- IBM said Lightwell, its open-source software security offering, has developed a pipeline approaching $700 million.
Infrastructure Strengthens as Storage Demand Rises
Infrastructure revenue rose 5%, driven by 32% growth in distributed infrastructure. IBM said storage delivered record revenue growth and gained market share across FlashSystem, Storage Fusion, Tape and IBM Z Storage offerings. Kavanaugh said the company exited the quarter with a sizable distributed-infrastructure backlog that supports continued fourth-quarter momentum.
IBM’s z17 mainframe cycle continued to outperform prior programs, according to management. Krishna said z17 has generated more than $1 billion in incremental revenue over six quarters compared with earlier programs. The company also reported its strongest mid-range IBM Z launch in nearly two decades following the introduction of new single-frame and rack-mount systems in July.
Kavanaugh said clients representing roughly 85% of installed MIPS capacity are maintaining or expanding capacity, while aggregate installed capacity has tripled over the last few mainframe programs.
Consulting and AI Strategy
Consulting revenue increased 2%, with strategy and technology revenue up 4%. IBM said cybersecurity delivered nearly double-digit growth in intelligent operations. AI-related work represented about 30% of consulting revenue during the quarter and 35% of backlog.
Krishna said clients are moving beyond AI experimentation and are focusing more closely on return on investment, workflow redesign, integration with existing systems and control of AI spending. He said enterprises are also increasingly focused on sovereign AI, including the ability to keep data, models and logs under their own control.
IBM highlighted its platforms for data, AI development and agent orchestration, identity and policy management, and hybrid-cloud operations. The company said it is expanding partnerships, including a new strategic relationship with OpenAI and an expanded relationship with Google Cloud.
Krishna also discussed the cost difference between frontier AI models and open-weight alternatives. He said open-weight models have become closer in performance to leading models and can potentially run at 10% to 25% of their token cost, depending on the deployment.
Margins, Cash Flow and Outlook
Adjusted EBITDA margin expanded 60 basis points, while operating pre-tax margin expanded 70 basis points. Software segment profit margin rose 210 basis points and infrastructure segment margin increased 120 basis points. Consulting margin declined modestly as IBM reinvested productivity gains into digital assets and its services-as-software model.
For the first nine months of 2026, IBM generated about $8 billion in free cash flow, up approximately $600 million, or 8%, from a year earlier. The company ended the quarter with $11.1 billion in cash and returned $4.8 billion to shareholders through dividends during the first nine months.
IBM expects full-year software growth of approximately 7% to 8%, with about 7% as its revised base case. It continues to forecast low-double-digit infrastructure revenue growth and low- to mid-single-digit consulting growth. The company also maintained its expectation for 100 basis points of full-year operating pre-tax margin expansion.
Looking further ahead, Kavanaugh said IBM plans to provide more detail on 2027 targets in January. He pointed to Red Hat demand, Confluent integration, Lightwell, virtualization, hybrid cloud opportunities and expected growth synergies from acquisitions as factors supporting the company’s longer-term software outlook.
About International Business Machines (NYSE:IBM)
International Business Machines Corporation (NYSE:IBM), commonly known as IBM, is a global technology and consulting company that helps organizations modernize their information technology and business operations. Its offerings include hybrid cloud solutions, artificial intelligence software and services, enterprise software, IT infrastructure, cybersecurity, data analytics, and technology consulting.
IBM provides products and services to businesses, governments, and other institutions across industries and regions worldwide.
