IBM beats earnings estimates and raises cash-flow outlook as consulting stays flat

IBM beat Wall Street’s third-quarter revenue and adjusted earnings expectations on October 21 and raised its full-year cash-flow outlook. But the results showed an uneven picture behind management’s AI ambitions: software sales grew, while consulting revenue stayed flat even as IBM said AI accounted for nearly a third of that business.

Revenue reached $17.10 billion, up about 5% from a year earlier and above the $16.82 billion LSEG analyst consensus. Adjusted earnings were $2.95 a share, compared with expectations of $2.86, according to CNBC’s account of the results.

Net income also increased, reaching $2.19 billion, or $2.30 a share, from $1.74 billion, or $1.84 a share, a year earlier. Those reported profit figures are distinct from adjusted earnings, which exclude acquisition-related adjustments. IBM shares climbed in extended trading after the announcement.

AI work inside a flat consulting business

Finance chief Jim Kavanaugh described AI as increasingly embedded in clients’ broader transformation projects. He said it represented about 30% of consulting revenue during the quarter and 35% of the unit’s backlog.

The consulting unit generated $5.34 billion in revenue, unchanged from a year earlier and slightly below the $5.37 billion StreetAccount consensus. The AI share and the flat sales result measure different things.

Consulting’s gross margin narrowed to 27.4% from 28.9% in the second quarter—a sequential comparison, unlike the year-over-year revenue figure.

We reinvested productivity gains into digital assets, accelerating our transition towards a services as software model to capture the growing AI opportunity,

Jim Kavanaugh, IBM finance chief, on the earnings call

CEO Arvind Krishna framed client adoption more broadly. In IBM’s earnings statement, he said customers were deploying what he called “Super Intelligence” to transform entire operating models, rather than address narrow or novel problems.

Software and infrastructure beat their benchmarks

Software delivered the fastest revenue growth among the three reported businesses. Sales rose 8% to $7.80 billion, exceeding the $7.66 billion StreetAccount consensus. It was also the largest of the three by quarterly revenue, ahead of consulting and infrastructure.

Infrastructure revenue increased 4% to $3.70 billion, above the $3.57 billion consensus.

IBM’s company-wide adjusted gross margin was 58.5%, below the 59.1% StreetAccount consensus.

A higher cash-flow target, not a higher sales forecast

IBM now expects full-year free cash flow to increase by more than $1 billion. In July, it had forecast an increase of approximately $1 billion. The revised outlook concerns the size of the annual increase, not a forecast that total free cash flow will be $1 billion.

The company left its 2026 constant-currency revenue-growth forecast at 4% to 5%.