IBM (IBM) Q4 2025 Earnings Call — January 28, 2026

Date: January 28, 2026 | Source: Motley Fool (fool.com) Q4 2025 Earnings Call Transcript

Participants:Arvind Krishna (Chairman & CEO), James J. Kavanaugh (SVP & CFO), Olympia McNerney (VP of Investor Relations).

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Arvind Krishna, Chairman and CEO: Thank you for joining us today. Let me start by reflecting on our strong performance in 2025 and the execution of our Investor Day model. We are excited about the progress we made in 2025, delivering 6% revenue growth, our highest level of revenue growth in many years, and $14.7 billion of free cash flow, our highest level of cash generation in over a decade.

As we laid out at our Investor Day in February 2025, we are executing on our strategy to advance IBM as a software-led hybrid cloud and AI platform company. Today's software represents approximately 45% of our business, up from about 25% in 2018. Software grew 9%, our highest annual growth rate in history, with three of our four software sub-segments delivering double-digit growth rates. IBM Z was up 48% this year, achieving the highest annual revenue for Z in about twenty years.

I am proud of our achievements in 2025 as we exceeded all of our target metrics for revenue growth, profitability, and free cash flow that we laid out at our Investor Day.

Now turning to our execution in the fourth quarter. We delivered total revenue growth of 9%, our highest level in over three years. Software growth accelerated to 11% in the fourth quarter. Both data and automation are gaining strong momentum with clients, growing 19% and 14%, respectively. Consulting continued to grow, up 1%. Infrastructure delivered another robust quarter, growing 17%, driven by strength in Z17, which has been outpacing Z16 performance.

Our cumulative GenAI book of business now stands at over $12.5 billion, of which software is more than $2 billion and consulting is more than $10.5 billion, with both seeing their largest quarterly increase to date.

Our announced acquisition of Confluent is another pillar in this strategy, helping unify our hybrid cloud and automation solutions through a smart data platform. Confluent has the most capable technology to unlock the real-time value of data across applications, clouds, APIs — and as AI agents enter the enterprise, they will need access to that data in real-time.

In 2023, we set out on a goal to achieve $2 billion of productivity savings exiting 2024. Today, we are well ahead of that, exiting 2025 with $4.5 billion of annual run rate savings.

Project Bob is IBM's next-generation AI-based software development system. We have more than 20,000 IBMers using Project Bob, reporting productivity gains averaging 45%.

In infrastructure, clients such as CVS are turning to Z17's AI capabilities. We also announced new or deepened strategic partnerships through the year with AMD, Anthropic, AWS, Microsoft, OpenAI and Oracle, and a partnership between Red Hat and NVIDIA.

In quantum, we deployed our first 120-qubit IBM Quantum Nighthawk-based system in December, and we remain on track to deliver the first large-scale fault-tolerant quantum computer by 2029.

We enter 2026 with momentum and confidence in our ability to sustain 5% plus revenue growth and grow free cash flow by about $1 billion.

James Kavanaugh, SVP and CFO: Thanks, Arvind. As we enter 2025, we provided guidance of accelerating five-plus percent revenue growth, greater than a half point of operating pretax margin expansion, double-digit adjusted EBITDA growth, and about $13.5 billion of free cash flow. We exited 2025 beating all of these metrics — delivering 6% revenue growth, 100 basis points of operating pretax margin expansion, 17% adjusted EBITDA growth, and $14.7 billion of free cash flow, growing 16% over last year. This represents our highest free cash flow margin in reported history, and we delivered 12% growth in operating diluted earnings per share.

For the full year, software grew 9%, our highest annual growth rate in history, with three of our four sub-segments delivering double-digit growth. Infrastructure was up 10%, reflecting a record Z17 launch. Consulting inflected back to growth in the second half, with our GenAI book of business in consulting at more than $10.5 billion.

In Q4, software revenue growth accelerated to 11%. Our ARR was strong at $23.6 billion, up over $2 billion from 2024, with organic growth accelerating to over 7%. Data grew 19%; automation grew 14%, including another record bookings quarter for HashiCorp. Red Hat decelerated to 8%, driven partially by the wrap on last year's elevated consumption-based services and in-quarter yield on single-digit bookings growth driven by delays in US federal business related to the government shutdown. OpenShift is now a $1.9 billion ARR business, growing more than 30%. Transaction processing inflected back to growth of 4%.

Consulting revenue grew 1% in Q4, with intelligent operations up 3%. Our consulting generative AI book of business surpassed $2 billion in the quarter — our largest quarter of GenAI.

Infrastructure revenue grew 17%, with hybrid infrastructure up 24% and infrastructure support down 2%. Within hybrid infrastructure, IBM Z delivered its highest fourth-quarter revenue in more than two decades, up 61% year to year. Distributed infrastructure revenue was flat.

In 2025, we delivered our highest operating gross profit margin in reported history and highest operating pretax margin in a decade. Operating gross profit margin expanded 170 basis points, adjusted EBITDA margin 230 basis points, and operating pretax margin 100 basis points — despite absorbing more than $300 million of dilution from HashiCorp.

For the full year, we generated $14.7 billion of free cash flow, up $2 billion year over year, resulting in the highest free cash flow margin in reported history. We invested $8.3 billion in acquisitions and returned $6.3 billion to shareholders in the form of dividends. We exited 2025 with cash of $14.5 billion and a debt balance of $61.3 billion.

Now let me discuss our expectations for 2026. Consistent with our Investor Day model, we expect to sustain constant currency revenue growth of 5% plus in 2026, and free cash flow to be up about $1 billion year over year, growing high single digits. Our revenue expectations are underpinned by our durable and accelerating software business, which we expect to grow 10% this year.

We continue to expect Confluent will close by mid-2026, and we anticipate absorbing about $600 million of dilution from Confluent in 2026. We expect Confluent to be accretive to adjusted EBITDA within the first full year and to free cash flow in year two post-close.

For the full year, we expect IBM's operating pretax margin to expand by about a point. Our operating tax rate for the year should be in the mid-teens. We expect an incremental $1 billion of productivity savings this year, driving $5.5 billion of annual run rate savings by 2026.

This will be the last quarter in which we report the GenAI book of business metric separately — AI is now embedded across our business.

Questions & Answers

Brent Thill (Jefferies): Software growth accelerated to double-digit. Can you dig into the components and why you're excited for that organic-led initiative?

Arvind Krishna: We are incredibly pleased with how we got to the end of the year on software. Automation is on a secular demand increase. Data benefits from WatsonX and the AI pieces. Mainframe, given the very strong cycle, low to mid-single-digit growth is reasonable. Red Hat is finishing at a $7.5 billion run rate extrapolating to $8 billion, with OpenShift almost at $2 billion and running at a 30% growth rate. All of that gives me confidence on about 10% growth for the year.

Amit Daryanani (Evercore ISI): What drove the strength in free cash flow in 2025, and what are the puts and takes around the $15.7 billion number for 2026?

James Kavanaugh: We entered the year at $13.5 billion and posted $14.7 billion, up 16% — the highest free cash flow in over a decade and highest free cash flow margin on record. It was entirely driven by the fundamentals of the business: revenue acceleration and strong operating leverage, with adjusted EBITDA up 17%, an incremental $1 billion. For 2026, we guide confidently to $15.7 billion on high single-digit growth, and our job is to beat it.

Ben Reitzes (Melius Research): How do we bridge Red Hat from 8% to within your forecast and prior mid-teens goals?

James Kavanaugh: We entered 2026 with confidence around the momentum and diversification of the software portfolio, and we expect double-digit growth. Organic will be north of seven points this year and acquisitions about three points. Data is high teens, contributing about four points; hybrid cloud double digit; automation low double digit, leveraging HashiCorp synergies; TP back to model, low to mid-single digit.

Jim Schneider (Goldman Sachs): Can you outline the trajectory for consulting throughout the year?

James Kavanaugh: We're encouraged by the inflection we see in consulting, returning to durable growth in the second half at a little over 1%. Backlog is $32 billion, up 2% overall, with GenAI now over a third of bookings and over 25% of backlog, and over 15% of revenue on an exit run rate. We guide low to mid-single digits with another point and a half of margin improvement.

Eric Woodring (Morgan Stanley): A really strong infrastructure year. Is there some sustainability in the Z cycle not fully accounted for in the infrastructure guidance?

Arvind Krishna: Z17 has been the strongest start three quarters in, after Z16 being the strongest in about twenty years. There are at least three secular factors: sovereignty and on-premise control driving the lowest unit cost economics; Gen AI tools like Watson Code Assistant for Z removing the "hard platform" headwind; and our AI right in line with transactions via the spire (GenAI) cards. Expect that to take some months to play out but provide tailwinds.