IBM shares rose about 4% in extended trading Wednesday after the technology company posted third-quarter results that beat analyst estimates and raised its full-year outlook for software revenue, saying deals that had slipped earlier in the year are now being signed.
Revenue for the quarter ended Sept. 30 climbed 4.7% to $17.10 billion, ahead of the $16.82 billion average estimate compiled by LSEG. Adjusted earnings came in at $2.95 per share, topping the $2.86 consensus. Net income was $2.19 billion, or $2.30 per share, up from $1.74 billion, or $1.84 per share, a year earlier; the adjusted figures exclude acquisition-related items.
At the center of the update was software, the segment investors have watched most closely since July, when IBM disclosed that customers were shifting spending toward data-center infrastructure and its shares suffered their steepest one-day decline in more than a century. Chief Executive Arvind Krishna said at the time that the company had "faltered" in adapting to the change.
Software revenue rose 8.3% to $7.80 billion, beating the $7.62 billion analysts had projected. Hybrid cloud sales grew 11%, and transaction processing software revenue rose 9%, reversing an unexpected decline in the prior quarter.
Chief Financial Officer James Kavanaugh told Reuters that roughly a quarter of transaction processing revenue came from business deferred out of the second quarter, with "the remaining 75 per cent ... net new business." He said IBM now expects annual software revenue growth of about 7% to 8%, compared with a prior range of 6% to 8%.
On the mainframe side, Kavanaugh said about two-thirds of the large systems contracts that failed to close in the second quarter were completed in the third. Mainframes are high-performance machines used by banks and large corporations to process bulk data.
Note: Consensus figures are from LSEG and StreetAccount. Infrastructure revenue was reported at $3.70 billion in one company summary and $3.71 billion in another; the figures differ by rounding.
Infrastructure revenue increased 4.2% to $3.71 billion, helped by 31% growth in distributed infrastructure, which includes servers and storage, offsetting softness in the Z mainframe line. Consulting was the weak spot, with revenue flat at $5.34 billion and slightly below the $5.37 billion consensus. Adjusted gross margin narrowed to 58.5% from the 59.1% analysts expected.
On guidance, IBM said it expects full-year free cash flow to increase by more than $1 billion, compared with a July forecast of roughly $1 billion. It kept its 2026 constant-currency revenue growth target at 4% to 5%.
Krishna, in the earnings statement, said clients are "now deploying 'Super Intelligence' in ways that transform entire operating models, instead of simply addressing narrow or novel problems." The company has spent recent years buying software assets including Red Hat, HashiCorp and Confluent to offset slower growth in its legacy businesses, and has pointed to quantum computing as a longer-term driver. IBM said this month it had reached the final stage of a U.S. federal program to validate quantum computing performance.
During the quarter, IBM said it agreed to acquire HRL Laboratories, the former research division of Hughes Aircraft, from Boeing and General Motors for an undisclosed sum.
The results offer a partial recovery from the July selloff, when the stock fell 25% in a single session. Even after Wednesday's move, the shares remain down about 15% this year, while the S&P 500 has gained 13% over the same period, according to CNBC.
Analysts remain cautious. Morgan Stanley said the closing of delayed contracts was a positive, but that rising expectations for results and macroeconomic uncertainty could weigh on the stock.
For investors, the key question is whether the software pipeline keeps converting. The company's guidance implies that the third quarter's rebound was less a demand surge than the release of business that had been sitting unsigned, and the flat consulting line suggests corporate clients are still hesitant about new discretionary projects.