Source: Motley Fool transcript (published 04/22/2026); call date Wednesday, April 22, 2026 at 5:00 p.m. ET. Participants: Arvind Krishna (CEO), James Kavanaugh (CFO).
Arvind Krishna, CEO: Thank you for joining us today. Let me start with our first quarter results and then provide context on what we are seeing across the business. IBM is off to a strong start to 2026. Revenue in the first quarter grew 6%, and combined with strong margin expansion, drove 13% growth in free cash flow. These results reflect the durability of our portfolio, the mission-critical nature of the work we do for clients and the continued execution of our strategy.
While we are operating in a dynamic environment, Middle East developments didn't impact us in the first quarter. Enterprises are investing in capabilities that increase resiliency, productivity and accelerate growth. They are modernizing core systems. They are scaling AI and making deliberate choices about where workloads should run and who controls the infrastructure underneath them. These are structural priorities and they align directly with IBM's strengths.
Software revenue grew 8%, with Data and Red Hat growing double digits. We also had strong performance in Distributed Infrastructure as generative AI increases demand for our storage offerings. Consulting grew 1% with momentum in enterprise data and business application transformations.
On AI: enterprises are building portfolios — frontier models for some workloads, smaller models running on-premise for others and open source models where control and flexibility matter most. The core challenge is making all of this work together — orchestrating across models, agents and workflows, governing enterprise data and securing these systems at scale. That is exactly where IBM operates.
In automation, agents multiply applications, integrations and execution paths; our end-to-end automation portfolio manages that sprawl. IBM Concert identifies vulnerabilities proactively and automates remediation. Our data business is seeing similar AI tailwinds. Confluent, which we closed this past quarter, streams live, governed data to models and agents across the hybrid environment.
Infrastructure remains a critical differentiator as AI moves into the core of enterprise operations. IBM Z delivers the lowest unit cost architecture at scale for workloads that require end-to-end encryption, continuous availability and ultra-high throughput. Our Spyre accelerator lets clients run AI on 100% of the transaction volume without moving data off platform. Clients who have deployed watsonx Code Assistant for Z are growing MIPS capacity 3x faster than those who have not.
In consulting, AI is both a growth driver and a productivity engine. IBM Bob, our AI-based software development system, is now generally available; our entire developer workforce is using Bob with average productivity gains of 45%. We also introduced Sovereign Core software for running AI workloads under their own operational authority. During the quarter, we announced strategic collaborations with NVIDIA (GPU-native analytics) and ARM (expanding AI workloads across IBM infrastructure, enabling the ARM ecosystem within mission-critical environments like IBM Z).
On Quantum: we remain on track to deliver the first large-scale fault-tolerant quantum computer by 2029. We released a new blueprint for quantum-centric supercomputing. We strongly believe our partners will achieve the first examples of Quantum Advantage this year leveraging IBM hardware.
In closing, we are executing on our strategy of accelerating revenue growth and delivering higher profitability. Given our strong start to the year, we remain confident in our ability to sustain revenue growth of 5% plus and grow free cash flow by about $1 billion this year.
James Kavanaugh, CFO: In the first quarter, we delivered 6% revenue growth, 140 basis points of operating pretax margin expansion, 17% adjusted EBITDA growth, 19% diluted operating earnings per share growth and $2.2 billion of free cash flow, growing 13% year-to-year, representing our highest first quarter free cash flow in a decade and highest free cash flow margin in reported history.
Software revenue grew 8%, marking a strong start to the year. Our ARR was solid at $24.6 billion, up 10% since last year. Data revenue grew 16%, fueled by demand for our GenAI products, strengthened strategic partnerships and inorganic contribution from data stack and Confluent, which closed in mid-March. Red Hat growth accelerated 2 points sequentially to 10%. Automation grew 7%, with February marking the 1-year anniversary of the HashiCorp acquisition — record HashiCorp bookings and adjusted EBITDA accretion ahead of expectations. Transaction processing grew again, up 2% as we monetize a strong Z17 program.
In infrastructure, our revenue grew 12% this quarter, with hybrid infrastructure up 25% and infrastructure support down 6%. IBM Z grew 48% this quarter. Distributed infrastructure grew double digits with strength in both Power and Storage. In consulting, revenue grew 1%; signings returned to growth, up 6%, with strength across our application and data transformation offerings. Generative AI now represents about 30% of our consulting backlog.
On profitability: since 2023, productivity savings of $4.5 billion have driven expansion of operating gross profit margin by 110 basis points, adjusted EBITDA margin by 170 basis points and operating pretax margin by 140 basis points, all ahead of expectations. Segment profit margins expanded by 720 basis points in infrastructure and 60 basis points in software.
In the quarter, we generated $2.2 billion of free cash flow, up about $300 million year-over-year. We exited the quarter with cash of $11.8 billion. We invested $10.5 billion in acquisitions, driven by the closing of Confluent, and returned $1.6 billion to shareholders in dividends. Debt ending the quarter was $66.4 billion, including $12.8 billion for our financing business.
Looking forward, we expect constant currency revenue growth of 5-plus percent in 2026 and free cash flow growth of about $1 billion year-over-year. Given where we are in the year, we believe it is prudent to maintain our guidance even as the underlying performance and execution are off to an encouraging start. We now expect our software business to grow 10-plus percent this year (data up low-20s% including Confluent, delivering ~5 points of software growth). In consulting, quality backlog and GenAI momentum support an acceleration in revenue growth to low-to-mid single digits for the year. We remain confident this will be our strongest Z cycle. We continue to expect to expand operating pretax margins by about 1 point this year (net ~50 bps after Confluent dilution), with an operating tax rate in the mid-teens.
Operator: [Q&A — selected]
Amit Daryanani (Evercore): What's the mix between infrastructure and applications in software, and where does value accrue to IBM as AI scales?
Arvind Krishna: Only about 4% of our portfolio could be called an application (Maximo). The rest is enabling software — Red Hat, data, automation, mainframe. It's all consumption-tied. As people get serious about AI, they have to use data from their internal systems, which drives Red Hat and Confluent consumption, automation consumption, and mainframe consumption — we can see that in the mainframe numbers we printed in Q1. Value is going to decrease in the interaction layer as agents replace people; the agents interact much more with underlying data and business logic.
Wamsi Mohan (BofA): Greater than 10% software growth in 2026 — how does the rest of the portfolio grow, and is M&A appetite changing?
James Kavanaugh: Software exits Q1 feeling very confident. Data we're taking up for the year to low-20s% (Confluent contributes a bit north of 15 points of that growth, so very strong organic). Red Hat accelerated, delivering 2.5 points to IBM for the year; OpenShift ARR $2 billion, virtualization north of expectations. HashiCorp generated over $200 million in new incremental ARR.
Arvind Krishna: On M&A: the values out there right now are very attractive. We have been a disciplined acquirer; let us fully integrate Confluent first. As markets stay at these values, that does open up our appetite perhaps more than normal — maybe we can do something in the second half as we build up cash balances.
Ben Reitzes (Melius): Why not raise guidance after such a strong quarter, and why not raise FCF guidance?
Arvind Krishna / James Kavanaugh: We've never raised guidance in the first quarter — it's a discipline thing. The Middle East was our strongest growth in decades; Europe was also strong. There is no signal of slowdown in pipeline and demand. But only 3 months of the year have gone by, and there is more uncertainty than 90 days ago. Underneath, fundamentals are extremely strong — op margins up 140 bps, earnings up nearly 20%, FCF strongest in a decade at the highest margin in history.
Fatima Boolani (Citi): Quantify the mainframe AI inference opportunity and MIPS trajectory?
Arvind Krishna: Mainframe has driven 2 monetization paths — classic MIPS and sparse Linux. AI is adding a third: you can run a 20-30 billion parameter model right on the mainframe at milliseconds of latency, applied to every single transaction — fraud detection from 50 bps to 40 bps, for example. We have a fully populated system doing about 450 billion inferences a day on the mainframe. We monetize through both extra hardware and supporting software.
James Kavanaugh: Historically a 3x-4x stack multiplier for every hardware dollar. We just anniversaried our first full year of Z17 — hardware placement value up over $1 billion vs Z16's first full year. For 4 straight quarters on Z17 we've shipped over 100% growth of new MIPS.
Brent Thill (Jefferies): Software constant currency dropped 11% in Q4 to 8% in Q1 — is that seasonality?
James Kavanaugh: The entire 3-point drop is the mix of the portfolio (transactional component in Q1). The core annuity is actually accelerating — ARR exiting Q1 approaching $25 billion, up 10%. That, coupled with M&A growth synergies, GenAI momentum, and TP monetization, is why we raised software guidance to 10+%.
Erik Woodring (Morgan Stanley): How material is memory to the infrastructure base and how are you mitigating supply chain headwinds?
James Kavanaugh: Memory has a de minimis impact on us overall. We're a human-capital, IP-based business at 75% (software 45%, on its way to 50+%). Hardware is ~25% of revenue. We've been in existence 115 years — we drive supplier optimization and supply chain diversification. Hardware accelerated 15%, distributed infrastructure growing 17% (13% cc). The area we're watching is RHEL, tied to enterprise hardware placements.
Jim Schneider (Goldman Sachs): Did AI bookings accelerate, and what's the consulting outlook?
James Kavanaugh: We exited last year with over $12.5 billion of AI book of business, but now it's embedded across the portfolio. Software GenAI platform/agents/assistants/orchestration is north of $1.5 billion, growing north of 40%, contributing ~2 points of growth. Consulting: GenAI is about 40% of signings, 30% of backlog, over 20% of revenue; we eclipsed $4 billion ARR in Q1. Signings returned to growth; 400 new clients captured in Q1.
Matt Swanson (RBC): How is IBM set up to win the GenAI application layer?
Arvind Krishna: We made the decision about 3 years ago to be neutral — "Switzerland" — on frontier models. Clients want hybrid: multiple clouds plus private. We're building Project Bob (software development AI) — 200 people signed up without announcement. We help clients deploy models wherever they want to run them, and we think half the world is interested in that paradigm.
Operator: Thank you for participating on today's call. The conference has now ended. You may disconnect at this time.