IBM's third-quarter revenue and earnings per share both surpassed Wall Street expectations, while the company also raised its full-year free cash flow growth guidance.
After the U.S. market close on October 21, 2026 Eastern Time, IBM (NYSE: IBM) officially released its financial results for the third quarter of fiscal year 2026. The key third-quarter data is as follows:
Total revenue: $17.103 billion, up 5% year-over-year, or 6% at constant currency, exceeding the roughly $16.87 billion consensus estimate from Wall Street analysts.
Adjusted earnings per share: $2.95, up 11% year-over-year, above the expected $2.86.
Free cash flow: Free cash flow for the quarter reached $3.027 billion; cumulative free cash flow for the first nine months of the year totaled $8 billion, setting a record high for the same period in history.
In terms of performance across business segments:
Software business revenue was $7.804 billion, up 8% year-over-year, or 9% at constant currency. Among this, hybrid cloud revenue grew 11%. Data business surged 19% year-over-year, or 20% at constant currency.
Consulting business revenue was $5.335 billion, flat year-over-year, or up 2% at constant currency, indicating that enterprise clients remain relatively cautious about consulting spending.
Infrastructure business revenue was $3.707 billion, up 4% year-over-year, or 5% at constant currency. Distributed Infrastructure performed strongly, surging 31%. The IBM Z mainframe business declined 20% due to product cycle effects.
CEO Arvind Krishna said in a statement:
Clients are transforming their entire operating models with 'superintelligence,' rather than merely solving localized or novel problems.
IBM Chief Financial Officer James Kavanaugh said that the delayed signings issue that concerned investors last quarter has begun to improve, and the company has raised its full-year software revenue growth forecast from the previous 6% to 8% to approximately 7% to 8%.
At the same time, the company raised its full-year free cash flow growth guidance from "approximately $1 billion" to "more than $1 billion," while maintaining its full-year revenue growth guidance at 4% to 5% unchanged.
Barclays analyst Raimo Lenschow wrote in a client report that this earnings release should generate a positive market reaction, ending the shadow of last quarter's "unexpected misstep," and reiterated an overweight rating on IBM stock.
Results broadly beat expectations, with notable profit improvement
IBM's third-quarter revenue was $17.1 billion, up about 5% from $16.33 billion in the same period last year, better than the market's $16.82 billion expectation. Adjusted earnings per share of $2.95 came in above the $2.86 expected by LSEG and also above the $2.85 expected by analysts surveyed by FactSet.
It should be noted that $2.95 is an adjusted figure, excluding certain acquisition-related adjustments and other items, and is not equivalent to GAAP earnings per share. On a GAAP basis, IBM's third-quarter earnings per share was $2.30, a difference of $0.65 between the two. Therefore, this quarter's "earnings beat" is more accurately described as an outperformance relative to Wall Street's adjusted EPS expectations.
Profit improvement was relatively clear. IBM's net income rose from $1.74 billion in the same period last year to $2.19 billion, showing that the company's profitability remains supported even as revenue grows moderately.
However, on a sequential basis, third-quarter revenue was slightly below the previous quarter's $17.162 billion, while net income was slightly above the previous quarter's $2.165 billion. Given seasonality in IBM's business and differences in sales mix across quarters, sequential changes should not be overinterpreted.
Software business remains the main growth driver, with full-year guidance low end raised
The software division was the strongest part of this quarter's earnings. IBM's third-quarter software revenue was $7.8 billion, up 8% to 8.3% year-over-year, above Wall Street's expectation of roughly $7.64 billion to $7.66 billion.
This is particularly critical for IBM. Over the past few years, IBM has continued to strengthen its software and hybrid cloud portfolio through deals such as Red Hat, HashiCorp, and Confluent, attempting to break free from the valuation constraints of traditional hardware and low-growth services businesses.
Software revenue accounts for about 46% of total revenue, meaning its performance is increasingly critical to the company's overall growth and market pricing.
Management also released a more positive signal on software growth. CFO Jim Kavanaugh said the company plans to set its full-year software revenue growth guidance at 7% to 8%, with the low end raised from the previous 6% to 7%.
This change means that even if some previously delayed transactions do not all close, IBM still believes the software division has strong resilience.
Consulting business remains a weak spot, with AI not yet accelerating overall revenue
Compared with software and infrastructure, the consulting business performed modestly. IBM's third-quarter consulting revenue was $5.34 billion, essentially flat versus the same period last year, and slightly below some market expectations.
Management sought to use AI-related metrics to reinforce the consulting business's future growth potential. Kavanaugh said AI-related work accounted for about 30% of consulting revenue this quarter and 35% of the consulting backlog. Based on the roughly $5.34 billion in consulting revenue, about $1.6 billion in consulting revenue involved AI-related projects.
But this figure needs to be understood cautiously. It is only a static estimate based on management-disclosed proportions, not "AI revenue" separately disclosed by IBM. In addition, AI-related consulting projects may include software implementation, process transformation, data governance, deployment of automation tools, and many other elements, and cannot be simply equated with pure AI product revenue.
More importantly, the increase in AI share did not bring acceleration in the consulting division's overall revenue. Flat consulting revenue suggests that AI projects may be replacing or embedding into traditional consulting services rather than significantly expanding the overall revenue pool. The company also did not disclose the specific margins, delivery cycles, or backlog amounts of AI consulting projects, so the market still finds it difficult to judge AI's true profit contribution to the consulting business.
Stock price still in recovery phase, down more than 14% year-to-date
Despite the strong quarterly report, IBM's stock price is still down about 14% to 15% year-to-date, while the S&P 500 has risen about 13% over the same period.
The pressure on the stock this year stems from a rare sharp selloff in the summer. On July 14, IBM plunged 25% in a single day after releasing preliminary second-quarter results that fell short of expectations, marking its largest one-day drop in more than a century. Arvind Krishna acknowledged at the time that IBM "made a misstep" in responding to clients shifting spending from software to data center infrastructure.
In his report, Lenschow noted that investors' previous focus was on whether performance could restore predictability after the weak second quarter. "We believe management achieved this by exceeding consensus across metrics including total revenue, software revenue, earnings per share, and free cash flow," he said.
In May this year, IBM announced it had won a $1 billion federal quantum computing contract, driving a sharp rebound in the stock. The company is currently investing billions of dollars to compete for leadership in quantum computing, but the technology is still widely regarded as being in an early stage of development.
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