IBM's third-quarter revenue rose 5 per cent to $17.1 billion, led by an 8 per cent rise in Software, while Consulting, its services arm, was flat at $5.3 billion, the company said on Wednesday.
The earnings release IBM filed with the SEC shows growth of 6 per cent at constant currency, which strips out exchange-rate moves. It also shows two earnings figures moving at very different speeds: GAAP earnings per share up 26 per cent, operating earnings per share up 11 per cent. The gap has a plain explanation, and it is not this quarter's business.
Why did GAAP earnings grow faster than operating earnings?
Because last year's GAAP number was held down by a tax charge. In the third quarter of 2025, IBM's GAAP results included $309 million of "tax reform impacts," worth $0.33 a share, which IBM excludes from its operating measure. GAAP diluted earnings from continuing operations were $1.84 a share then and $2.31 now. The effective GAAP tax rate fell to 11.9 per cent from 28.2 per cent.
This quarter there was no tax item, and the $0.64 gap between GAAP and operating earnings is two things. Acquisition-related adjustments, mostly amortization of intangible assets from companies IBM bought, added $0.57. Retirement-related costs added $0.07. Operating earnings were $2.95 a share against $2.65, and operating pre-tax income rose 9 per cent to $3.3 billion. That is the cleaner measure of the quarter.
How did each part of IBM do?
Software grew, Consulting did not, and mainframe sales fell by a fifth. The segment figures, which do add to the total once the two small lines are included:
| Segment | Q3 revenue | Change | Constant currency | Segment profit margin | |---|---|---|---|---| | Software | $7.804 billion | +8% | +9% | 35.0% (32.9%) | | Consulting | $5.335 billion | 0% | +2% | 12.2% (12.9%) | | Infrastructure | $3.707 billion | +4% | +5% | 19.3% (18.1%) | | Financing | $192 million | -4% | -3% | 56.1% (61.6%) | | Other | $66 million | | | | | Total | $17.103 billion | +5% | +6% | |
Year-earlier margins are in brackets. Software is now about 46 per cent of revenue, by this publication's arithmetic. Within it, Hybrid Cloud, which is mostly Red Hat, grew 11 per cent, Data 19 per cent and Transaction Processing 9 per cent, while Automation fell 3 per cent.
In Infrastructure, IBM Z, the mainframe line, fell 20 per cent and Distributed Infrastructure rose 31 per cent. The release does not explain the mainframe decline. In Consulting, Strategy and Technology rose 2 per cent and Intelligent Operations fell 2 per cent, and the segment's profit margin fell 0.7 points. Consulting is where IBM sells people's time. That it is the flat segment while clients buy AI tools is our reading, not IBM's; the release does not connect the two.
What did IBM say about the outlook?
It raised cash and held revenue. IBM said it "now" expects 2026 free cash flow to increase by more than $1 billion from last year, and still expects constant-currency revenue growth of 4 to 5 per cent. Free cash flow was $3.0 billion in the quarter, up $0.7 billion, and $7.8 billion in nine months. The quarter's 6 per cent constant-currency growth sits above the full-year range, which leaves room for a slower fourth quarter; IBM has not said it expects one.
"Disciplined execution throughout the quarter drove accelerated revenue growth and strong free cash flow," Arvind Krishna, chairman and chief executive, said in the release. He said clients "are now deploying Super Intelligence in ways that transform entire operating models." James Kavanaugh, chief financial officer, said "demand across our portfolio combined with strong operational execution led to accelerated growth and solid operating pre-tax margin expansion in the quarter."
What has IBM been buying?
Enough to show on the balance sheet. IBM spent $11.36 billion on acquisitions, net of cash acquired, in the first nine months, $884 million of it in the third quarter, so about 92 per cent came in the first half, by this publication's arithmetic. Goodwill rose to $74.9 billion from $67.7 billion at the end of 2025. Cash and marketable securities fell $3.4 billion to $11.1 billion and debt rose $2.6 billion to $63.8 billion. The release does not name the companies bought. For another large software purchase this week, see our report on Salesforce's offer for Braze.
What to watch
Two numbers in January. The first is Consulting: a second flat or negative quarter would make the segment's stall look structural. The second is Software growth without help from acquisitions, which the release does not break out. IBM's acquisition-related adjustment rose to $707 million before tax from $590 million a year earlier, which is the cost of buying growth showing up in the GAAP line.
All IBM figures, segment and sub-segment growth rates, the GAAP to operating reconciliation, tax rates, cash, debt, acquisition spending, the outlook and the Arvind Krishna and James Kavanaugh quotations come from IBM's third-quarter earnings release, Exhibit 99.1 to its Form 8-K filed with the SEC on 21 October 2026. The software share of revenue, the share of acquisition spending in the first half and the segment arithmetic are this publication's. The analysis is our own.
Topics technologyearningssoftwarefree cash flowacquisitions
