IBM delivered a third-quarter earnings beat on Wednesday, and more importantly, the company signaled that a batch of software deals that had slipped out of the previous quarter are now closing. That helped lift its full-year software growth outlook to about 7%-8%, up from a prior range of 6%-8%, and gave investors a clearer picture of demand beneath the surface.
The tech giant reported total revenue of $17.10 billion for the quarter, up 4.7% from a year earlier and ahead of the $16.99 billion analysts had expected, according to LSEG data. Software revenue rose 8.3% to $7.80 billion, topping the $7.62 billion consensus. Adjusted earnings came in at $2.95 per share, versus the $2.86 analysts had penciled in.
Why the software outlook matters
Software is IBM's most valuable and fastest-growing business, and it's the engine behind the company's push into hybrid cloud and artificial intelligence. So when management raises its software growth forecast, it's a signal that the core of the company's strategy is gaining traction.
Chief Financial Officer James Kavanaugh told Reuters that a batch of second-quarter software deals were delayed, not lost, and they are now being signed. That explanation matters because it addresses a concern raised by CEO Arvind Krishna in July, when he said IBM had stumbled as some customers shifted spending from software to data-center infrastructure.
The numbers back up the narrative. Within software, hybrid cloud revenue grew 11% in the quarter, while transaction processing—the legacy mainframe software that still throws off steady cash—rebounded to 9% growth. IBM said about a quarter of that transaction processing revenue came from deferred second-quarter deals, while three-quarters was net new business.
That split is crucial. When deals simply slide from one quarter to the next, a beat can be more about timing than demand. But with 75% of transaction processing revenue coming from new business, the quarter looks less like a catch-up and more like the pipeline is still filling. That makes analysts more likely to treat the higher software growth outlook as durable, rather than a one-off bump.
Infrastructure and the mainframe drag
Outside software, IBM's infrastructure segment rose 4.2% to $3.71 billion, helped by growth in servers and storage. That strength partially offset weakness in the company's Z mainframe line, which has been in a cyclical downturn as customers wait for the next upgrade cycle.
The infrastructure performance helped support the overall earnings beat, but the real focus for investors remains software. IBM has been repositioning itself as a hybrid cloud and AI company, and software is where the growth and margins are. The company's consulting business, which has been softer, wasn't highlighted in the release, but the software strength is what moves the needle.
What it means for investors
For everyday investors, the key takeaway is that IBM's software business appears to be on firmer footing than it looked a few months ago. The raised outlook suggests management has confidence that the delayed deals were indeed just delayed, and that underlying demand is intact.
That's important because IBM's valuation is increasingly tied to its software and AI potential. If investors believe the software growth is sustainable, they may be willing to assign a higher multiple to those businesses. If they see the quarter as a fluke driven by timing, the stock could be discounted.
The 75% net new split gives investors a reason to lean toward the optimistic view. It suggests that even without the catch-up deals, IBM's software pipeline is still generating new business. That's a more encouraging signal than a quarter that simply recovers lost ground.
Of course, challenges remain. The mainframe weakness is a reminder that IBM's hardware business is cyclical, and the consulting segment has been under pressure. But for now, the software story is the one that matters most, and it's pointing in the right direction.
Investors will be watching to see if the software momentum continues into the fourth quarter and whether the company can sustain the higher growth rate. The raised outlook sets a higher bar, but it also signals that management believes the trend is real.
For those following the broader tech landscape, IBM's results come amid a mixed earnings season. Some companies have struggled with guidance, as seen in consumer stocks dragged lower by weak outlooks, while others have found growth in AI and cloud. IBM's software strength suggests that enterprise tech spending on hybrid cloud and AI remains resilient, even as some areas of the market wobble.
Ultimately, IBM's quarter is a reminder that in tech, timing can be everything. But when a company can show that its growth is driven by new business rather than catch-up, it's a sign that the underlying demand is real. That's what makes the raised software outlook worth paying attention to.
