Q3 2025 International Business Machines Corp Earnings Call
Over to <unk>.
Olympia Mcnerney I.
Ibm's global head of Investor Relations Olympia you may begin.
Thank you I'd like to welcome you to IBM third quarter 2025 earnings presentation, I'm Olympian Mcnerney and I'm here today with Arvind Krishna Ibm's, Chairman, President and Chief Executive Officer, and Jim Kavanaugh, Ibm's Senior Vice President and Chief Financial Officer, We'll post today's prepared remarks on the IBM investor website within a couple of hours.
And a replay will be available by this time tomorrow to provide additional information to our investors. Our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation, which is posted to our investor web.
Site. Finally, some comments made in this presentation may be considered forward looking under the private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially additional information about these factors is included in the company's SEC filings, so with that I'll turn the call over to Arvind.
Thank you for joining us today.
In the third quarter IBM delivered strong results across revenue profit and free cash flow exceeding our expectations.
Revenue growth accelerated to 7% our highest growth in several years with all our segments accelerating sequentially.
These results underscore the strength of our business model and portfolio and the innovation, we are delivering to clients.
Clients continue to turn to IBM as a trusted partner to help them modernize embed AI and build resilient infrastructure.
Let me touch on the economy before I turn to our execution.
Last quarter I said, we had moved from a cautiously optimistic too optimistic technology.
<unk> remains a key driver of growth and competitive advantage.
AI adoption is accelerating and hybrid cloud remains the foundation of enterprise it.
Clients are leaning on enterprise technology to scale innovate and drive productivity.
Always macro uncertainties, but overall, we continue to see broad based demand from clients and remain optimistic.
Now turning to our execution this quarter.
Our strategy remains focused hybrid cloud and artificial intelligence.
Products and services fueled growth and productivity for our clients you can see this in our results for the quarter software growth accelerated to 9% led by strength in automation.
Automation was up 22% highlighting our end to end portfolio of leading solutions that optimize operations automated infrastructure and workflows build resiliency and drive cost efficiency for clients.
Many of our automation products are infused with AI enhancing their capabilities.
<unk> also continues to accelerate within IBM benefiting from our go to market distribution and joint product innovation, highlighting our synergy potential.
Consulting accelerated reflecting growing demand for AI services as clients need help designing deploying and governance AI at scale.
And infrastructure delivered robust performance growing 15% driven by continued strength in <unk> 17.
Strongest two quarter launch in history.
Aspire accelerator, which will be available in Q4.
We'll bring advanced generative AI and real time intrinsic capabilities inside IBM Z.
Redefining our enterprises capture AI value within their most mission critical environments.
In addition to being a demand driver AI is also a powerful productivity driver for IBM contributing to our strong financial performance.
In 2023, we set out on our goal to achieve $2 billion of productivity savings and.
And today, we are well ahead of that with an expectation of four and a half billion of annual run rate savings exiting this year.
I believe we have significant opportunity ahead of us to continue to become even leaner and more nimble.
Our client zero approach sets us apart as we are internally identified and address pain points on data readiness, siloed and vertical workflows application sprawl, using our own technology and domain expertise.
Clients see these results and look to us to help them on their own transformations driving over a thousand clients zero engagements this year.
The breadth of our AI offerings as a key differentiator.
Combining an innovative technology stack with consulting at scale and our client zero journey.
Our journey our book of business continues to show momentum at over $9 5 billion incept.
Inception to date.
In consulting we are embracing disruption and leading the way with our digital asset and services and software strategy.
While we are early in this journey, we have over 200 consulting projects using digital workers at scale.
In software demand for Watson X and Red hat <unk> remained strong with early momentum in our agenda platform. What's the next orchestrate.
What's the next orchestrate health enterprises deploy AI by connecting agent's models, and workflows with governance and security.
Orchestration will be critical as enterprises run a variety of models to optimize cost and performance.
Our hybrid approach to models enables clients to use the best option for each use case.
<unk> granite models third party models.
Our open models from hugging faced meta and Mistral.
We recently launched granted for <unk>. Our next generation family of open small language models granted four point to deliver high performance and cost efficiency, using 70% less memory and offering twice the inferencing speed of conventional models.
We also partnered with Entropic to infuse Claude into IBM products to unlock new Gen AI features and capabilities.
This week, we announced a partnership to Ron Watson, Exxon Grok, giving clients access to their infancy technology, which provides ultra high speed low latency AI capabilities at lower costs.
All this leads to real tangible value for clients.
These like Deutsche Telekom, and S&P Global are embedding Watson X into core workflows.
In infrastructure clients, such as nationwide State Street, and credit Agricole are turning to AI to manage increased workloads.
And use <unk> for its advanced AI inferencing capabilities and enhanced resiliency.
Innovation remains a core focus for IBM.
At a recent IBM deck exchange developer and builder conference. We showcased how we are helping clients and partners with innovation that blends enterprise strength and AI speed.
We had almost twice the number of participants as last year with speakers, including United Airlines T Mobile Prudential UBS Morgan Stanley with Horizon and Cigna.
We announced project, Bob facilitating AI powered software development, helping.
Helping teams ship higher quality code faster, we have more than 8000 developers within IBM that are using project, Bob reporting productivity gains averaging 45%.
Speaker #1: Of our clients, about not quite...
Speaker #1: Pretty good about that . Value . Valuation opportunity . Moving forward .
Speaker #1: On our transaction processing or mainframe software . We seen this happen multiple times in the first couple of quarters of news cycle . TPI tends to come down because people are very much focused on getting their hardware capacity as that hardware capacity gets deployed .
Speaker #1: And .
Speaker #2: Global are embedding Watson into core workflows in infrastructure clients such as Nationwide, State Street, and Crédit Agricole are turning to AI to manage increased workloads and use Z17 for its advanced AI inferencing capabilities and enhanced resiliency.
Speaker #1: At 25 , I think we positioned extremely well with regards to accelerating revenue growth throughout the year off of tougher comps . At the end of 24 , we got to remember that , and I think that's a reflection of the strength that portfolio , the diversity of our portfolio across the board and to the , you know , discipline execution .
Speaker #1: but
Speaker #2: Great . Operator let's take our next question .
Speaker #1: 20% of our overall book of
Speaker #1: business
Another powerful client zero use case.
Speaker #3: Your next question comes from Ben Reitzes with Melius Research . Please state your question .
Speaker #1: is
Speaker #1: Two. The strength and diversity of our portfolio. Not only has it been repositioned over the last 3 or 4 years to accelerate growth.
Speaker #1: technology close to and
Speaker #1: software
Speaker #1: . And
We also announced new automation capabilities, including our real time infrastructure graph connecting applications services and ownership through harshly Cup terraform.
Speaker #1: that is
Speaker #1: revenue
Speaker #1: as well as
Speaker #4: Hey , guys . Thanks a lot . Appreciate the question . Arvind , I appreciate that . Fourth quarter reported software growth is set to accelerate in your guidance .
Speaker #1: products that people are
Speaker #1: purchasing
Speaker #1: us . So
Speaker #1: What is happening more and more is our composition of software is now aligned to higher growth markets, which gives us a better vector of growth even as we go into '26.
Speaker #1: Then the TPI revenue begins to come up , along with some of the Ela cycle dynamics that are there . And we begin to see that .
Speaker #1: to
Speaker #1: add up .
Speaker #1: And
Speaker #1: that a
Speaker #1: fuel
As outlined at our Investor Day, we are on a path to demonstrate the first Eric collected quantum computer by 20 to 88.
Speaker #2: Accelerating innovation remains a core focus for Im . At our recent IBM Tech Exchange developer and Builder conference , we showcased how we're helping clients and partners with innovation that blends enterprise strength and AI speed .
Speaker #1: both
Speaker #1: our
Speaker #1: OpenShift
Speaker #1: growth
Speaker #4: Sounds like it's above 10%. I was just wondering about next year. You do wrap the acquisition in the spring, I think March.
Speaker #1: as
Speaker #1: our well
Speaker #1: automation
Speaker #1: So I expect to see TPI grow not quite in double digits to be to be clear , but let's call it low single digits for sure into into next year .
Speaker #1: growth our own
Speaker #1: Now , Around automation in many areas , we see that continue . So the market backdrop , we couldn't be more optimistic around 26 .
Speaker #1: is
Speaker #1: the
Speaker #1: AI capabilities
Speaker #1: Three our annuity portfolio , and I don't think we get a lot of value for this . And we keep bringing it up over a $23 billion RR book of business .
Speaker #1: that are
Speaker #1: infused
And continue to deliver key milestones in our quantum roadmap.
Speaker #1: inside
Speaker #1: those
Speaker #1: those
Speaker #1: products .
As we collaborate with our ecosystem of over 280 partners, we are making tangible progress on near term use cases.
Speaker #4: Do you are there signs that it can accelerate from here ? You know , obviously with Red hat decelerating a little , you know , I just think folks would like to know broadly if you can keep double digit next year or even accelerate based on the portfolio , realizing that you're wrapping the acquisitions in that time frame .
Speaker #1: sort
Speaker #1: of put
Speaker #1: first two pieces
Speaker #1: Automation has been growing in this last quarter at 22% . Yes , the Hashi are the HashiCorp acquired revenue was a piece of it .
Speaker #2: We had almost twice the number of participants as last year , with speakers including United Airlines , T-Mobile , Prudential , UPS , Morgan Stanley , Verizon and Cigna .
Speaker #1: together is a
Speaker #1: on
Speaker #1: the
Speaker #1: We feel we're going to exit the fourth quarter at double digits . That's a great indicator for 2026 , because that is 80% of our software portfolio overall for new innovation .
Speaker #1: government
Speaker #1: shutdown government
Speaker #1: and
Speaker #1: definitely the and I
Speaker #1: AI believe
Speaker #1: piece
For example, HSBC achieved a notable improvement in bond trading predictions using Ibm's heritage quantum processor.
Speaker #1: is a strong
Speaker #1: to
Speaker #1: the to grow
Speaker #1: software
Speaker #1: And as you point out , that will go away in the second quarter . However , the the acquired properties we have tend to provide continued growth for quite a while .
Speaker #1: I towards
Speaker #1: believe it's a big
Speaker #1: piece
Speaker #2: We announced project Bob , facilitating AI powered software development , helping teams ship higher quality code faster . We have more than 8000 developers within IBM that are using project Bob reporting productivity gains , averaging 45% .
Speaker #1: Of why believe is two years.
Speaker #1: consulting is beginning
Speaker #1: to return, as the book
Speaker #1: to begins to growth ,
Speaker #1: because
Speaker #1: called the
Speaker #1: play to move
Vanguard announced a breakthrough in optimizing portfolio construction using ibm's quantum computing as a service.
Speaker #1: towards AI
Speaker #4: Thanks so much, guys.
Speaker #1: almost
Speaker #1: two years . ago . So
Speaker #1: Gen I already talked about Gennai , the book of business and the acceleration we got . And all of the capital investment that's going into the infrastructure providers , I think , is just going to accelerate the innovation curve for enterprise AI overall .
Speaker #5: Yeah , Ben . Great question . So let me decompose it into the four parts of software that we talk about . And then we'll touch on acquisitions and their contribution .
Speaker #1: that book of business
Speaker #1: is built
Speaker #1: up , it
Speaker #1: overcoming
Speaker #1: the
Speaker #1: headwinds
Speaker #1: Because of the Hashi bookings , which are significantly . Ahead of where we had planned them to be . I expect we'll continue to see growth out of Hoshi through 2026 as well .
Speaker #1: staff
We recently announced a partnership with AMD to build quantum centric supercomputing architectures, leveraging ibm's quantum expertise and AMD Cpus Gpus and other accelerated technologies.
Speaker #1: augmentation
Speaker #1: projects going
Speaker #1: away
Speaker #1: and people away
Speaker #1: getting To amplify .
Speaker #1: discretionary
Speaker #1: spending in
Speaker #5: And then I'll ask Jim to try to put it all together back into the financial model for you. So let's take Red Hat.
Speaker #1: consulting . Jim ,
Speaker #2: Another powerful client zero use case . We also announced new automation capabilities , including a real time infrastructure graph connecting applications , services and ownership through HashiCorp , Terraform .
Speaker #1: I'll let you
Speaker #1: take the third
Speaker #2: Just to
Speaker #2: amplify the
Speaker #2: last piece
Speaker #2: , and then I'll get
Speaker #1: And we are a leader in enterprise AI, just given our tech stack, our software portfolio, and consulting, and that should deliver a few points.
Speaker #2: your
Speaker #2: question
Speaker #2: about software , organic and
Speaker #5: We talked about 20% signings growth this quarter. We had similar numbers in the previous quarter, as that becomes the bulk of the Red Hat book of business.
Speaker #1: Not quite as much as an acquired growth, but I do expect that we'll continue to see automation in the double digits for sure.
Speaker #2: TP
Speaker #2: to Arvind's
Speaker #2: point , you
Just last week IBM in the Basque government unveiled Europe's first IBM quantum system too.
Speaker #2: know , year
Speaker #2: to date from a
Speaker #2: perspective ,
Speaker #2: we're
Speaker #2: growing
Speaker #2: 8.5% overall ,
Speaker #1: Five Red hat you know , our bookings are three month or six month . Our nine month , our 12 month RPO shows accelerating growth .
Speaker #2: approaching
Speaker #1: If . But maybe not north of 20 , and we've continued to see the data on AI portfolio grow in the mid to high single digits .
Speaker #5: Entering 2026 . We do expect to see Red hat returning to mid-teens or close
Speaker #2: 9% right
Speaker #2: As outlined at our Investor Day . We are on a path to demonstrate the . First error corrected quantum computer by 2028 and continue to deliver key milestones in our quantum roadmap as we collaborate with our ecosystem of over 280 partners .
This marked the second installation outside the United States and underscores our commitment to global leadership in quantum computing.
Speaker #2: now realization
Speaker #2: about two points of that growth is coming out
Speaker #2: from our consulting
Speaker #2: of business . So we're getting
Speaker #2: very good
Speaker #2: realization
Speaker #2: and realization .
Speaker #2: penetration
Speaker #1: Coming off a 20% increase in bookings overall. By the way, we actually had more opportunity to do even better than that 20%. And that should fuel an inflected growth.
In closing.
Speaker #2: to
Speaker #2: Arvin's point on
Speaker #1: Now, that does put aside what other acquisitions we will do. Part of our model for software is that we'll get a couple of points of growth from acquired revenue, and we see a good market for targets.
Speaker #2: consulting point .
We are executing on our strategy of accelerating revenue growth and delivering higher profitability.
Speaker #2: north of
Speaker #2: $7.5 billion book of
Speaker #2: put that up
Speaker #2: consulting company right
Speaker #2: now .
Speaker #2: We are making tangible progress on near-term use cases. For example, HSBC achieved a notable improvement in bond trading predictions using IBM's Heron Quantum processor.
Speaker #2: We
Speaker #2: called that play
Given these results and the momentum in our portfolio, we are raising expectations for revenue growth to more than 5% and free cash flow to about $14 billion for the year.
Speaker #2: to
Speaker #2: Arvind's point that play to a few
Speaker #2: years almonds point
Speaker #1: Next , M&A . The point I would bring up on M&A , Arvind already talked about it's embedded in our model . We've said that all along .
Speaker #2: ago .
Speaker #2: We ago
Speaker #2: do think we have a
Speaker #2: differentiated
Speaker #2: competitive
Speaker #2: value strategic
Speaker #2: proposition of a
Speaker #1: Yes , that is yet to play out , but inherent regulatory environment combined with what we can see out there , we expect that we should be able to do that as well .
Speaker #2: a
Speaker #2: integrated
Speaker #1: But again, I think we've got to continue selling the investor narrative because that M&A drives a much higher organic growth engine, as those synergies play to those acquisitions.
Speaker #2: tech consulting stack ,
Speaker #2: plus scale
Speaker #2: strategic within
Speaker #2: partnership , AI
With that let me hand, it over to Jim to go through the financials.
Speaker #2: Vanguard announced a breakthrough in optimizing portfolio construction using IBM's quantum computing as a service . We recently announced a partnership with AMD to build quantum centric supercomputing architectures , leveraging IBM's quantum expertise and AMD CPUs , GPUs , and other accelerator technologies .
Speaker #2: plus a
Speaker #2: consulting business
Speaker #2: at scale
Thanks, Arvind and the third quarter, our revenue growth accelerated to 7% our highest growth in several years with all of our segments accelerating sequentially.
Speaker #2: part
Speaker #2: of part
Speaker #2: IBM
Speaker #1: So that was sort of giving you a color on the portfolio and the different pieces . I'll ask Jim to get into then closing it back up in terms of sort of what is the organic Because it delivers about three quarters of our profit .
Speaker #2: zero that
Speaker #2: drives zero that
Speaker #2: distinctive
Speaker #2: use engagement
Speaker #2: cases and
Speaker #2: references . We've
Speaker #1: That's how we pay for control premiums . That's how we get an accelerated top line growth . That's how we get an accelerated bottom line growth .
Speaker #2: already had over
Speaker #2: a thousand client
Speaker #2: engagements year to
Revenue scale mix and productivity drove 290 basis points of adjusted EBITDA margin expansion.
Speaker #2: date around AI
Speaker #2: from an enterprise software and
Speaker #1: And we get accretive value in free cash flow in two years. So our organic engine continues to grow. And then finally, TP modernization.
Speaker #2: consulting perspective .
Speaker #2: Overall ,
Speaker #2: in
Speaker #2: consulting , it's
Speaker #2: Just last week , IBM and the Basque government unveiled Europe's first IBM quantum System two . This marks the second installation outside the United States and underscores our commitment to global leadership in quantum computing .
Speaker #2: already north of
92% adjusted EBITDA growth and 15% operating earnings per share growth highlighting the significant operating leverage in our business model.
Speaker #2: 22% of
Speaker #2: our
Speaker #2: $31 billion backlog .
Speaker #2: quarter , we eclipsed
Speaker #1: Arvind wrapped up on it . Let's just remind all the investors TP gets monetized based on hardware installed MIP usage . I already said two quarters in , albeit early .
Speaker #2: double
Speaker #2: digit composition of our
Speaker #2: revenue .
Speaker #2: 12% of our Competitive
Speaker #2: growing
And through the first nine months, we generated $7 $2 billion of free cash flow, our highest nine month free cash flow margin and reported history.
Speaker #2: In closing , we are executing on our strategy of accelerating revenue growth and delivering higher profitability . Given these results and the momentum in our portfolio , we are raising expectations for revenue growth to more than 5% and free cash flow to about 14 billion for the year .
Speaker #1: We're 130% program to program on Z17 off of a Z16 . Was that was the most successful program in the history of IBM .
We exceeded our expectations on revenue.
Profitability adjusted EBITDA earnings per share and free cash flow, reflecting the strength of our portfolio and the disciplined execution across our business.
Speaker #1: We're at 130%. So, I do my math and calculation. Higher capacity opportunity creates higher monetization opportunity, which creates higher price opportunity, resulting in higher value creation opportunities.
Speaker #2: With that , let me hand it over to Jim to go through the financials .
Software revenue grew 9% fueled by accelerating organic growth up a few points since last quarter and continued contribution from our high value annual recurring revenue base, which grew to $23 $2 billion up 9% since last year.
Speaker #3: Thanks , Arvind . In the third quarter , our revenue growth accelerated to 7% . Our highest growth in several years . With all of our segments accelerating sequentially .
Speaker #1: So I think when you look at it , we feel pretty good about delivering our model and software .
Speaker #2: Operator, let's take the next question.
Speaker #3: Revenue scale, mix, and productivity drove 290 basis points of adjusted EBITDA margin expansion, to 22%. Adjusted EBITDA growth and 15% operating earnings per share growth highlight the significant operating leverage in our business model. Through the first nine months, we generated $7.2 billion of free cash flow.
Speaker #3: Your next question comes from Eric Woodring with Morgan Stanley. Please state your question.
Growth in automation accelerated to 22% driven by strength in the organic portfolio and early synergies with Hashi Corp, which maintained momentum and delivered its highest bookings quarter in history.
Speaker #4: Hey , guys . Thank you very much for taking my question . Just one quick clarification question there , Arvind . The growth rates , you just provided in the response to that question for 2026 or into 2026 .
Speaker #4: I just wanted to confirm those were all organic growth rates or whether they included M&A embedded in them . And then and then my question just taking a step back , Arvind , is we've seen cloud providers experience exceptional growth recently , particularly in infrastructure services and large scale AI workloads .
Red hat bookings growth accelerated to about 20% and revenue grew 12%.
Speaker #3: Our highest nine month free cash flow margin in recorded history . We exceeded our expectations on revenue , profitability , adjusted EBITDA , earnings per share and free cash flow , reflecting the strength of our portfolio and the discipline execution across our business .
This performance was driven by a softening in consumption based services and Ralph turning back towards single digit growth as we wrap on last year's exceptional double digit performance.
Speaker #4: How does IBM view that trend , and do you see a similar opportunity for IBM cloud to capture long term , infrastructure driven demand ?
Demand for our hybrid cloud products remains strong in all three of our major subscription offerings gained market share again this quarter with growth accelerating for both open shift and ansible.
Speaker #4: Thanks .
Speaker #5: Okay. The growth rates that we talked about, we tend not to do much M&A or any in both our mainframe or TPS, as well as in some of the other areas.
Speaker #3: Software revenue grew 9% , fueled by accelerating organic growth up a few points since last quarter and continued contribution from our high value annual recurring revenue base , which grew to $23.2 billion , up 9% since last year .
Open shift <unk> is now $1 $8 billion growing over 30%.
Speaker #5: The growth rates I mentioned in our call are largely organic, without having any significant M&A. But talking small M&A, they are probably all included in there, Eric.
Data was up 7% driven by continued strength in our AI portfolio and.
Speaker #3: Growth in automation accelerated to 22%, driven by strength in the organic portfolio and early synergies with HashiCorp, which maintained momentum and delivered its highest bookings quarter in history.
And transaction processing revenue declined by 3%, reflecting another quarter of Z 17 outperformance as clients continue to prioritize hardware spend on our latest IBM Z system. While this dynamic impacts near term revenue, we're encouraged by a healthy pipeline.
Speaker #5: But if we do anything substantial , it would help accelerate those those growth rates . Let's just put it that way . I'll also let Jim comment on it after I talk about the cloud opportunity .
Speaker #3: Red hat bookings growth accelerated to about 20% and revenue grew 12% . This performance was driven by a softening in consumption based services and Rel trending back toward single digit growth .
Speaker #5: We actually partnered deeply with all the hyperscalers , a thing that we haven't talked about , but I certainly know secret . For example , we are one of core weaves , a large clients .
Line that positions us well for future demand.
Infrastructure delivered another strong quarter growing 15%.
Speaker #3: As we wrap on last year's exceptional double digit performance . Demand for our hybrid cloud products remains strong , and all three of our major subscription offerings gained market share .
Speaker #5: We also tend to use a lot of infrastructure at AWS , at Azure , as well as GCP . So as opposed to that , it's an opportunity for us .
Hybrid infrastructure grew 26% and infrastructure support was flat.
Within hybrid infrastructure IBM Z delivered its highest third quarter revenue in nearly two decades up 59% year to year fueled by the early success of our <unk> 17 platform.
Speaker #3: Again , this quarter , with growth accelerating for both OpenShift and Ansible . OpenShift , AR is now $1.8 billion , growing over 30% .
Speaker #5: Eric , is the flip . We got a huge opportunity to do both consulting projects as well as deploy our software on those infrastructures for our clients .
Purpose built for AI and hybrid cloud with breakthrough capabilities and real time, inferencing quantum safe security and AI driven operational efficiency.
Speaker #3: Data was up 7% , driven by continued strength in our AI portfolio and transaction processing . Revenue declined by 3% , reflecting another quarter of Z17 outperformance as clients continue to prioritize hardware spend on our latest IBM Z system .
Speaker #5: As an example, if I take one of our very large health insurance clients, as they think through where they're going to deploy their AI models, they do not like deploying in a public instance, but they are perfectly fine getting a private instance in a cloud and deploying models.
Clients are investing in <unk> 17, not only for its reliability and scalability, but because it enables secure high performance computing at the core of their digital transformation strategies.
Speaker #5: There , deploying our software stacks . There and getting growth . So we tend to do that . We also tend to , in some cases , for example , with Groq , we are deploying grok in people's own data centers .
Speaker #3: While this dynamic impacts near-term revenue , we're encouraged by a healthy pipeline that positions us well for future demand . Infrastructure delivered another strong quarter , growing 15% .
Distributed infrastructure up 8% reflects broad based growth across our storage portfolio.
Speaker #5: So that's a big opportunity that comes there that'll show up in revenue for us both in consulting as well as in software. Because on top of the Grok infrastructure, we tend to put our software stacks in some instances.
As clients scale capacity to meet rising data and AI demands.
Speaker #3: Hybrid infrastructure grew 26% and infrastructure support was flat within hybrid infrastructure . IBM's delivered its highest third quarter revenue in nearly two decades , up 59% year to year , fueled by the early success of our Z17 platform , purpose built for AI and hybrid cloud with breakthrough capabilities in real time .
Consulting returned to growth in the third quarter with revenue up 2%, improving sequentially and marking a positive inflection point and performance.
Speaker #5: So it's less about us getting an opportunity in our cloud . Only . But much more that that's a growth vector that we are able to ride and that helps increase our overall growth rate in both software as well as in consulting .
Intelligent operations was up 4%, while strategy and technology revenue stabilized, where both lines of business showing quarter over quarter momentum.
This growth reflects solid demand for our strategic offerings business application transformation application modernization and migration.
Speaker #3: Inferencing , quantum safe security and AI driven operational efficiency . Clients are investing in z17 , not only for its reliability and scalability , but because it enables secure , high performance computing at the core of their digital transformation strategies .
Speaker #5: And lastly , let's not forget our biggest beneficiary of AI infrastructure is our mainframe and our storage portfolio . At this time , the latest generation mainframe , we will surprise you with some of the numbers this quarter .
And application operations as clients focus investments on solutions that accelerate AI transformation and maximize return.
Speaker #5: A fully populated single system is capable of doing 450 billion inferences per day as clients purchase that capability. That will be both a further accelerant to mainframe infrastructure growth, but it also comes with a software stack that helps them do all of that inferencing.
As Arvind mentioned, we are embracing AI disruption and leading with our software driven services delivery model.
Speaker #3: Distributed infrastructure, up 8%, reflects broad-based growth across our storage portfolio as clients scale capacity to meet rising data and AI demands.
We are transforming into a hybrid model of people plus software that delivers efficiency and scale.
Speaker #3: Consulting returned to growth in the third quarter, with revenue up 2%, improving sequentially and marking a positive inflection point in performance.
This approach is already driving internal productivity reflected in a 220 basis points of segment profit margin expansion year to date.
Speaker #5: If I look at our storage portfolio , as many people have realized , you need a lot of storage to be able to do AI training , and we are going to be beneficiaries of that inside our storage portfolio .
Speaker #3: Intelligent operations was up 4% , while strategy and technology revenue stabilized with both lines of business showing quarter over quarter momentum . This growth reflects solid demand for our strategic offerings .
And resonating with clients seeking to operationalize AI strategies.
Speaker #5: As people deploy that, I would much more say we are actually the direct beneficiaries of the hyperscaler growth of AI capability.
By combining domain expertise with scalable technology platforms, we reinforce our role as a strategic provider of choice in this evolving landscape.
Speaker #5: And capacity as enterprises use this capability, and we will be a beneficiary in our mainframe and storage stack in a direct way.
Speaker #3: Business application transformation application modernization , and migration , and application operations . As clients focus investments on solutions that accelerate AI transformation and maximize return .
Our consulting generative AI book of business accelerated to over $1 $5 billion in the quarter.
Speaker #5: I think that that would address that part of the question.
With the number of projects more than doubling year to year underscoring our momentum.
Speaker #1: Yeah , Eric . And just to the numbers piece , I mean , first of all , we are all focused here to execute a very important fourth quarter to finish a very successful 2025 for IBM .
While total signings declined this quarter the quality of signings continues to strengthen.
Speaker #3: As Arvind mentioned , we are embracing AI disruption and leading with the software driven services delivery model . We are transforming into a hybrid model of people plus software that delivers efficiency and scale .
With more strategic wins from new clients and expanded engagements within existing ones.
Speaker #1: But we're both Arvind and I are giving some color about 26 about the confidence we have in our portfolio . But let me just take a step back and remind you on software , our model showed an investor day approaching double digits .
Turning to profitability, we have delivered nine consecutive quarters of operating pre tax margin expansion.
Speaker #3: This approach is already driving internal productivity , reflected in the 220 basis points of segment profit margin expansion year to date and resonating with clients seeking to operationalize AI strategies by combining domain expertise with scalable technology platforms .
Highlighting the evolution of our portfolio mix and our laser focus on productivity, which again played out this quarter.
Speaker #1: That is all in that has 2 to 3 points . Take each year , maybe a point , maybe a point less depending on discipline , capital allocation on M&A of inorganic contribution and 6 to 7 points of organic .
Revenue scale mix and productivity drove expansion of operating gross profit margin by 120 basis points.
Speaker #1: When you look at 2025 , you go do the math . You're going to be approaching six plus percent organic growth overall . And we're going to have somewhere 3 to 4 points this year because we took advantage of a very strategic opportunity .
Speaker #3: We reinforce our role as a strategic provider of choice in this evolving landscape . Our consulting generative AI Book of Business accelerated to over $1.5 billion in the quarter , with the number of projects more than doubling year to year , underscoring our momentum .
Adjusted EBITDA margin by 290 basis points and operating pre tax margin by 200 basis points.
Head of our expectations and well above our model.
Speaker #1: But HashiCorp this year , but when you take a look at 2026 , the TP growth model , you that I talked the Red hat accelerated growth profile , that's on our revenue under contract annuity growth file .
Segment profit margin expanded by 420 basis points in infrastructure.
270 basis points in software and 200 basis points in consulting.
With consulting margins at the highest level in three years.
Speaker #1: That is , you know , approaching or now double digits . The exiting the year . Each of those are going to fuel that organic growth engine overall .
Revenue scale and mix contribution from IBM Z is a significant source of profitability and free cash flow.
Speaker #3: Turning to profitability , While we have delivered nine consecutive quarters of operating pre-tax margin expansion , highlighting the evolution of our portfolio mix and our laser focus on productivity , which again played out this quarter .
Speaker #1: So, I think big picture, the model is pretty much what we kind of look at right now for 2026.
And combined with the three to Forex stack multiplier helps fuel our investment in innovation and drive growth.
Speaker #2: Great . Let's take the next question .
Productivity is also a key driver of profit margin expansion.
Speaker #3: Revenue scale mix and productivity drove expansion of operating gross profit margin by 120 basis points . Adjusted EBITDA margin by 290 basis points and operating pre-tax margin by 200 basis points ahead of our expectations and well above our model .
Speaker #3: Next question comes from Jim Schneider with Goldman Sachs. Please state your question.
As we deploy AI at scale across IBM in areas, including finance supply chain sales HR service delivery and customer support to improve efficiency and reduce costs. While we have made progress on this journey and.
Speaker #6: Good evening. Thanks for taking my question. Arvind, I wonder if you could maybe elaborate a little bit on how you're thinking about M&A from a target perspective.
Speaker #6: You've previously stated that you're looking to accelerate growth and you're looking for things that fit strategically with the portfolio . But on the margin , anything in any way you're thinking about differently about either the portfolio or the product piece of it or the potential size of transaction , you might like to undertake .
Speaker #3: Segment profit margins expanded by 420 basis points in Infrastructure, 270 basis points in Software, and 200 basis points in Consulting, with Consulting margins at the highest level in three years.
Expect $4 $5 billion of run rate savings exiting this year.
There is still significant opportunity ahead for us to drive even more efficiency and cost savings.
Speaker #6: And specifically when you consider undertaking a somewhat larger , more transformative transaction , maybe not quite as big as you did with Red hat , but of sort of similar scale relative to your overall portfolio .
Through the third quarter, we generated $7.2 billion of free cash flow.
Speaker #3: Revenue scale and mix contribution from IBM's is a significant source of profitability and free cash flow and combined with a 3 to 4 x stack multiplier , helps fuel our investment in innovation and drive growth .
Up about $600 million year over year.
Speaker #6: Thank you .
Speaker #5: Yeah . Jim , thanks for that question . Look , M&A is extremely important part of our strategy . So I want to just perhaps reiterate because this has come up on prior calls as well .
Resulting in our highest year to date free cash flow margin and reported history.
The largest driver of this growth is adjusted EBITDA up $1 $8 billion year over year par.
Speaker #3: Productivity is also a key driver of profit margin expansion as we deploy AI at scale across IBM in areas including finance , supply chain , sales , HR , service delivery and customer support .
Speaker #5: We look at it always in a multi-year window . So we kind of look at what is our excess cash flow over a few years .
Partially offset by proceeds from the Palo Alto Q radar transaction, which resulted in a reduction in capex in the third quarter of last year and working capital dynamics.
Speaker #5: And once we have that window , that means we can sort of buy ahead , which means we can sort of lean in , or if we don't find a good target , like we didn't , for example , I think in 2023 , then we actually spent much less than we could have .
Our strong liquidity position solid investment grade balance sheet and disciplined capital allocation policy remain a focus for us.
Speaker #3: To improve efficiency and reduce costs, while we have made progress on this journey and expect $4.5 billion of run-rate savings exiting this year, there is still significant opportunity ahead for us to drive even more efficiency and cost savings through the third quarter.
Speaker #5: So that's just a backdrop to the amount of financial flexibility that we have , which if I remember at our Investor Day earlier this year , we laid out that we have somewhere in the mid 20s , perhaps a bit more flexibility over a three year window .
We ended the quarter with cash of $14.9 billion.
Our debt balance ending the quarter was $63 $1 billion, including $11.3 billion of debt for our financing business with.
Speaker #3: We generated $7.2 billion of free cash flow , up about $600 million year over year , resulting in our highest year to date free cash flow margin in recorded history .
Speaker #5: That's kind of a way to sort of look at it next. We are very focused on the areas that we have already explained as a strategy.
With the receivables portfolio that is over 75% investment grade.
Speaker #5: Very top level . We say hybrid cloud and artificial intelligence . That translates into our hybrid portfolio , our automation portfolio and our data and AI portfolio .
In addition year to date, we've returned $4 $7 billion to shareholders in the form of dividends.
Speaker #3: The largest driver of this growth is adjusted EBITDA , up $1.8 billion year over year , partially offset by proceeds from the Palo Alto , Qradar , transaction , which resulted in a reduction in CapEx in the third quarter of last year and working capital dynamics .
Now, let me talk about what we see going forward.
Speaker #5: And you've seen us do acquisitions in there. For example, we bought an AI company that does BLM, but it fit into our hybrid portfolio because it's a direct part of the Red Hat and OpenShift portfolios.
For the first nine months of the year, we delivered 5% revenue growth.
17% adjusted EBITDA growth.
10% operating earnings per share growth and 9% free cash flow growth.
Speaker #3: Our strong liquidity position , solid investment grade balance sheet and disciplined capital allocation policy remain a focus for us . We ended the quarter with cash of $14.9 billion .
Speaker #5: We did a course directly to automation . We did stack , which fits into data . When I look at the target list , there is , I think , a pretty rich list of opportunities that are out there .
The strength and diversity of our portfolio disciplined capital allocation and relentless focus on productivity continue to drive the durability of our revenue and free cash flow performance.
Speaker #3: Our debt balance ending the quarter was $63.1 billion , including $11.3 billion of debt for our finance business . With the receivables portfolio that is over 75% investment grade .
Given the strength of this performance, we are raising our expectations for revenue adjusted EBITDA and free cash flow.
Speaker #5: In the private markets, in the PE world, and the public markets, across those opportunities that we think will serve us, some of them will be actionable.
We now expect to deliver revenue growth of more than 5% adjusted EBITDA growth of mid teens and free cash flow of about $14 billion for 2025.
Speaker #5: It's hard to predict upfront which are which are not. So I think if I do that, and just to be clear, anything that is of size has to fit three criteria.
Speaker #3: In addition , year to date , we returned $4.7 billion to shareholders in the form of dividends . Now , let me talk about what we see going forward .
Let me focus on full year growth for the segments.
Speaker #5: It has to fit with the strategy we just laid out. There has to be synergy, aka the growth rate inside IBM will be above what it was as a standalone entity.
We continue to expect software revenue growth of approaching double digits for the full year.
Speaker #3: Through the first nine months of the year, we delivered 5% revenue growth, 17% adjusted EBITDA growth, 10% operating earnings per share growth, and 9% free cash flow growth.
Through the first nine months, we delivered growth above our model of 17% in automation and inline Mato growth of 7% in data.
Speaker #5: Some of that comes from our geography spread. We have a sales team in most countries in the world. Some of it comes from the ability to bundle more attractive offerings together, and it comes from faster deployment.
Speaker #3: The strength in the diversity of our portfolio, disciplined capital allocation, and relentless focus on productivity continue to drive the durability of our revenue and free cash flow performance.
And these trends should continue.
And we continue to expect mid teens growth for Red hat, albeit at the low end.
Speaker #5: For example , leveraging our consulting team or the rest of our sales team . All three will be able to add to more to a faster growth rate .
This is underpinned by strong bookings growth in the third quarter of about 20% and our revenue under contract which is growing in the mid teens.
Speaker #3: Given the strength of this performance , we are raising our expectations for revenue . Adjusted EBITDA and free cash flow . We now expect to deliver revenue growth of more than 5% .
Speaker #5: Third , if it is a of size , then we are very disciplined . Also that we like it to become accretive to cash by the end of the second year .
As we wrap on elevated growth in consumption based services last year, we expect double digit revenue growth in the fourth quarter with an accelerated growth profile heading into 2026.
Speaker #3: Adjusted EBITDA growth of mid-teens and free cash flow of about $14 billion for 2025 . Let me focus on full year growth for the segments we continue to expect software revenue growth of approaching double digits for the full year through the first nine months .
Speaker #5: So those are the criteria . But as you've seen , we have found plenty in the last few years that do fit that whole criteria .
While transaction processing was down 1% year to date as clients prioritize spend on our high value innovation C 17, the strength of the new cycle provides future monetization value across disease stack we.
Speaker #5: So I hope that that gives you a sense . Now , your question on larger , I'll just use that word larger . We will never rule anything out .
Speaker #5: But it has to meet all the criteria that we just laid out. It is not for size alone. Our Red Hat allowed us to enter a new space and helped accelerate IBM's overall growth rate.
Speaker #3: We delivered growth above our model of 17% in automation and in-line model growth of 7% in data , and these trends should continue , and we continue to expect mid-teens growth for Red hat , albeit at the low end .
We are seeing the strength in our pipeline as we enter the fourth quarter, which we expect will return to growth.
With continued strength in C 17, we now expect infrastructure to contribute over one and a half points to ibm's revenue growth this year.
Speaker #5: By the way , both in software and in consulting . So that was the sort of the synergy piece that was there . And you many people forget Red hat also had a very attractive free cash flow profile that we have been able to leverage since the acquisition .
Speaker #3: This is underpinned by strong bookings growth in the third quarter of about 20% , and our revenue under contract , which is growing in the mid-teens .
In consulting we are encouraged by our return to growth this quarter and continued progress in our journey I book of business and now we see an inflection in growth going forward.
Speaker #3: As we wrap on elevated growth in consumption based services last year , we expect double digit revenue growth in the fourth quarter with an accelerated growth profile heading into 2026 .
Speaker #2: Great. Operator, let's take one final question.
With fourth quarter revenue performance similar to our third quarter growth.
Speaker #3: Thank you. And that question comes from Brian Essex with J.P. Morgan. Please state your question.
Now turning to profitability.
Speaker #7: Hi . Good afternoon . Thank you for taking the question . Five to partition your exposure here . But could you generalize what you're seeing with regard to mixes and prizes ?
We started this year expecting over 50 basis points of operating pre tax margin expansion.
Speaker #3: While transaction processing was down 1% year to date as clients prioritize spend on our high value innovation , Z17 , the strength of the new cycle provides future monetization value across the Z stack .
And through the first nine months of this year, we delivered 130 basis points of expansion well ahead of our expectations.
Speaker #7: Focus on AI readiness . Our cloud native ISV , ISV based applications maybe targeted at point solution automation or low hanging fruit to prove ROI for pursuing self-hosted projects .
This performance is driven by our revenue scale.
Speaker #3: We are seeing this strength in our pipeline as we enter the fourth quarter , which we expect will return to growth with continued strength in Z17 .
Portfolio mix and progress with productivity initiatives, enabling operating leverage while providing investment flexibility.
Speaker #7: And then maybe , you know , within the IT budgets , where's the spending coming from ? What's at risk of getting trimmed as companies focused on focus on adopting AI based technology ?
We are raising ibm's full year operating pre tax margin expansion to over eight point.
Speaker #3: We now expect infrastructure to contribute over one and one half points to IBM's revenue growth this year . In consulting , we are encouraged by our return to growth this quarter and continued progress in our Genai book of business .
And our operating tax rate expectation for the year remains in the mid teens.
Speaker #5: So , Brian , let me address the first part of your question with a bit of depth . I actually think that these are an and or people going to leverage ISV otherwise I'll call it SaaS applications for getting exposure to AI and agents , either as part of those entities or as added value onto them .
For the fourth quarter, we are comfortable with consensus estimates for constant currency revenue growth and profitability.
Speaker #3: And now we see an inflection in growth going forward with fourth quarter revenue performance similar to our third quarter growth . Now turning to profitability .
Let me conclude by saying we are pleased with our continued disciplined execution and look forward to capturing growth opportunities ahead of us.
Speaker #3: We started this year expecting over 50 basis points of operating pre-tax margin expansion . And through the first nine months of this year , we delivered 130 basis points of expansion .
Arvind and I are now happy to take your questions Olympia, let's get started.
Speaker #5: And there are hundreds, if not thousands, of little boutique companies that provide some of those agents that are out there. I think they will absolutely do that.
Thank you Jim before we begin Q&A I'd like to mention a couple of items first supplemental information is provided at the end of the presentation and then second as always I'd ask you to refrain from multi part questions. Operator, let's please open it up for questions.
Speaker #5: They'll kick the tires on it . They'll get some value . But at the end of the day , to get real value from AI , people have to be able to integrate their existing applications .
Speaker #3: Well ahead of our expectations . This performance is driven by our revenue scale , portfolio mix and progress with productivity initiatives enabling operating leverage while providing investment flexibility .
Speaker #5: How do they tie what is happening in their payroll system and HR system to perhaps something that is happening in the CRM system to perhaps something that is happening in their ERP system as people begin to want to build much more profound agents , that that is where a lot of the action that we see is happening as people try to build those agents out , then they get deeply concerned about what is that data ?
Thank you.
And at this time, we'll begin the question and answer session of the conference. If you would like to ask a question. Please press star one on.
Speaker #3: We are raising IBM's full year operating pre-tax margin expansion to over a point , and our operating tax rate expectation for the year remains in the mid-teens .
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Speaker #3: For the fourth quarter, we are comfortable with consensus estimates for constant currency revenue growth and profitability. Let me conclude by saying we are pleased with our continued disciplined execution and look forward to capturing growth opportunities ahead of us.
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Speaker #5: Where is that data going? And they're going to deploy those either in their own data centers or in a private instance. Note that a private instance on the cloud is quite protected, and people do deploy a lot of critical applications that are there.
And our first question comes from Amit <unk> with Evercore ISI. Please state your question.
Speaker #3: Arvind and I are now happy to take your questions. Olympia, let's get started.
Speaker #5: But if I think about our clients in the regulated industries, banking and insurance still are very much a data center as well as a cloud picture.
Yeah. Thanks, a lot good afternoon, everyone.
Maybe I'm.
I'm going to focus on free cash flow also I really appreciate the quantification of free cash flow of $14 million for the year and if I get my math right that sort of implies free cash was up double digits in 'twenty five and your conversion rate around 125% give or take can you touch on if there's any one off dynamics that we should be aware of that are healthy and free cash flow in 'twenty.
Speaker #4: Thank you . Jim . Before we begin Q&A , I'd like to mention a couple of items . First , supplemental information is provided at the end of the presentation .
Speaker #5: If I look at healthcare , healthcare , data tends not to go out very much from their own data centers . If I look at telecom , most people build their own backbones and their data and applications reside there are marketing well reside in the public cloud .
Speaker #4: And then second , as always , I'd ask you to refrain from multi-part questions . Operator . Let's please open it up for questions .
Speaker #5: Thank you . And at this time , we'll begin the question and answer session of the conference . If you would like to ask a question , please press Star One on your telephone keypad .
Five and really just trying to think that as we get into 'twenty six and if your growth is in line to our longer term models is there anything that would preclude free cash flow growing a few points higher than sales growth out of the way you folks have talked about it I'd love to hear kind of spend a little bit of time on free cash flow and if anything all goes on the capital allocation as well. Thank you.
Speaker #5: So as we begin to look upon all that , I believe that we are at the very beginning , I would action is that if I was to use the baseball analogy , we are still in the first innings of enterprise AI rollout , and I expect that we will be seen and we will see more SaaS AI usage .
Speaker #5: A confirmation tone will indicate that your line is in the question queue . You may press star two if you would like to remove your question from the queue .
Speaker #5: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from Amit Daryanani with Evercore ISI.
Thanks, gentlemen, I appreciate the question.
It's right at the heart of how Arvin is.
Speaker #5: We will see more public AI usage, and we will begin to see a lot more private AI usage, as we will begin to get into more critical applications and agents on the IT budgets.
We position this company around the two key measures one accelerating revenue growth and two is driving that free cash flow engine, that's going to fuel the investments for us to continue to make to drive long term sustainable competitive advantage, but if you take a step back first as we said.
Speaker #5: Please state your question .
Speaker #6: Yep . Thanks a lot . Good afternoon everyone . You know , I guess maybe just I want to focus on free cash flow .
Speaker #5: Look , IT budgets have been growing ahead of GDP . It's simply an observation . I think this began 4 or 5 years ago , but IT budgets are growing typically 2 to 3 points ahead of GDP growth .
Speaker #6: So I really appreciate the quantification of free cash flow at 14 billion for the year . And if I get my math right , this sort of implies free cash flow is up double digits in 25 .
Prepared remarks, we're very pleased with our free cash flow engine starting out the next evolution of our journey coming off the midterm model year to date $7.2 billion up $600 million year over year highest free cash flow margin reported history through three quarters for our.
Speaker #6: And your conversion rates around 125% , give or take . Can you just touch on if there's any one off dynamics that we should be aware of that are helping you in free cash flow in 25 ?
Speaker #5: You combine that then with inflation because GDP , after all , is real , not nominal . I see it budgets staying healthy .
Speaker #6: And really just trying to think that as we get into 26 . And if your growth is in line to your longer term models , is there anything that could preclude free cash flow , growing a few points higher than sales growth , sort of the way you folks have talked about it ?
Speaker #5: So, a lot of the growth comes from the fact that the IT budgets are growing, as opposed to the cost of something else.
Company and I'll, just state that underneath it we overcame in the third quarter, a 500 million dollar headwind from last year as a result of the Palo Alto Q radar transaction that was recorded as a asset sell a reduction in capex. So we got through 'twenty 'twenty fives.
Speaker #5: That said, I think people are getting very, very effective at trying to run and maintain with lower costs and putting more money towards newer projects.
Speaker #6: I’d love to just spend a little bit of time on free cash flow. And if anything alters on the capital allocation as well.
Speaker #6: Thank you .
Speaker #5: Five , ten years ago , that ratio used to be 70 , 30 , 70 are running what is 30 or new . I think that is shifting more towards the 60 over 40 spread .
Speaker #3: Thanks , Simon . I appreciate the question . And it's right at the heart of how Arvind is repositioned . This company around the two key measures .
Headwind around that what's driving that free cash flow probably the most important thing is the underlying fundamentals of our business and accelerating top line revenue growth profile and operating leverage engine that is driving productivity like we haven't seen in a long period of time I think.
Speaker #3: One , accelerating revenue growth and two is driving that free cash flow engine that's going to fuel the investments for us to continue to make , to drive long term , sustainable , competitive advantage .
Speaker #5: And where it will go is where we'll get the benefit. That is why our automation portfolio and our hybrid portfolio get a lot more growth, because people are using that.
Speaker #3: But if you take a step back first, as we said in prepared remarks, we're very pleased with our free cash flow engine starting out the next evolution of our journey.
Speaker #5: So it's sort of substituting for labor and, in some cases, for services by letting those capabilities move into software.
Nine quarters in a row of driving operating leverage and significant margin productivity. So I would tell you high quality high sustainable free cash flow and that's what gave us the confidence for the second quarter in a row to take up our free cash flow estimate for the year now.
Speaker #3: Coming off the midterm model year to date , $7.2 billion , up $600 million year over year . Highest free cash flow margin reported history through three quarters for our company .
Speaker #2: Great. Operator, I think we have time for one last question.
Speaker #3: Thank you. And the next question comes from Mark Newman with Bernstein. Please state your question.
Speaker #8: Hi. Thanks for taking my question. Very good to see the growing AI book of business, and thanks for those comments just now.
Speaker #3: And I'll just state that underneath it . We overcame in the third quarter a $500 million headwind from last year . As a result of the Palo Alto , Qradar , transaction that was recorded as a asset sale and reduction in CapEx .
About $14 billion why do we do that we took up revenue we took up operating margin. We took up adjusted EBITDA, we took up our profitability and all that leads to free cash flow. When you take a look at what's driving that $14 billion toone.
Speaker #8: Arvind, I don't think you've given any specific breakdown yet on the breakdown between software and consulting of the AI book of business.
Speaker #3: So we got through 2025 headwind around that . What's driving that free cash flow ? Probably the most important thing is the underlying fundamentals of our business and accelerating top line revenue growth profile and an operating leverage engine that is driving productivities like we haven't seen in a long period of time .
Speaker #8: Is there any clarity on that? I think it used to be 80 over 20. I just want to clarify, is there any clarity you've given on that today?
Two and a half billion dollars give or take year to year growth in adjusted EBITDA mid teens growth well above our model.
And underneath that you take a look at some of the dynamics, we've been talking about since back in January yes, higher profitable based and Jim will pay a higher cash tax yes, we're investing long term for this business. We are going to have higher capex outside of the key radar transaction and yes, we made a <unk>.
Speaker #8: And then a follow-up on consulting. I think there's been two quarters in a row now where we're seeing the book-to-bill ratio a touch below one.
Speaker #3: I think we're nine quarters in a row of driving , operating leverage and significant margin productivity . So I would tell you , high quality , high sustainable free cash flow , and that's what gave us the confidence for the second quarter in a row to take up our free cash flow estimate for the year .
Speaker #8: I know you point in the earnings to a book to bill ratio greater than one . If you're looking at the trailing 12 months , but I'd just like to understand more on the shorter term basis .
Significant strategic acquisition, we've got acquisition related charges and foregone interest all of that is embedded in 2025 guidance now you take a step back to the heart of your question of 'twenty 'twenty six 'twenty 'twenty six I would tell you what is our free cash flow generation engine flywheel.
Speaker #8: Last six months . It seems like the book to bill ratio is below one . And if you could explain kind of why , you know , maybe why that's the case , why we shouldn't be worried , especially considering I think around 30% of signings you mentioned are AI , which I believe are longer duration .
Speaker #3: Now , about $10 billion . Why do we do that ? We took up revenue . We took up operating margin . We took up adjusted EBITDA .
It's accelerated revenue growth the five plus percent. This company is driving operating leverage and it's leveraging an efficient balance sheet, we see all of that continuing to play out in 2026, and those underlying fundamentals, yes, they deliver a sustainable realization number by the way in the mid <unk>.
Speaker #3: We took up our profitability and all that leads to free cash flow . When you take a look at what's driving that 14 billion , $2.5 billion , give or take year to year growth in adjusted EBITDA , mid-teens growth , well above our model .
Speaker #8: So just a little bit of clarity around consulting and how AI plays into the to the book . Bill ratio . And that recent number being below one would be appreciated .
Speaker #8: Thanks very much .
Speaker #1: Okay , Mark , this Jim , I'll take both of those . Let's start with the second one first , and then I'll come back to your clarification clarification question on AI .
Speaker #3: And underneath that , you take a look at some of the dynamics we've been talking about since back in January . Yes , higher profitable based engine will pay higher cash tax .
To high 100, Twentyish kind of to your question by the way we've been there for four years in a row already so we can handle that so you bring that all together I think it talks to the statement in the confidence of our focused portfolio, our disciplined capital allocation the diversity of our business model.
Speaker #1: And in particular around the software portfolio overall . And I want to dive a little bit deeper in that . But you know , when we take a look at consulting , let's dial back 90 days ago I think we surprised many just compared to what many other consulting companies have been talking about publicly .
Speaker #3: Yes . We're investing long term for this business . We are going to have higher CapEx outside of the Qradar transaction . And yes , we made a significant strategic acquisition .
And the relentless focus of us driving productivity and operating leverage that gives us the investment flexibility to continue driving long term sustainable competitive advantage. So thank you very much for the question.
Speaker #3: Weve got acquisition related charges and foregone interest . All of that is embedded in 2025 guidance . Now you take a step back to the heart of your question of 20 26 , 2026 .
Speaker #1: We talked about green shoots that we saw entering the second half, but I think at that time we were prudently cautious about how we were going to monitor client buying behaviors.
Speaker #3: I would tell you what is our free cash flow generation engine , flywheel . It's accelerated revenue growth . The five plus percent in this company is driving operating leverage .
Great operator, let's take our next question.
Speaker #1: And we didn't expect growth in the second half , although we saw many green shoots overall , now we posted , I think , a marked inflection point of consulting back to growth up 2% .
Thank you and your next question comes from Wamsley Mohan with Bank of America. Please state your question.
Yes. Thank you so much.
Speaker #3: And it's a leveraging and efficient balance. We see all that continuing to play out in 2026, and those underlying fundamentals, yeah, they deliver a sustainable realization.
Arvind you said AI adoption is accelerating right at the top of the call and I'm wondering if you can maybe help us think through the financial impact and maybe revenue terms for IBM, how we should think about the progression for that or are we hitting some kind of.
Speaker #1: And it's been driven by what we're seeing is continued opportunity for growth as clients accelerate investment in AI driven transformation . What we've been talking about on many of these questions here , why companies are looking to unlock efficiency , business model , innovation and growth , growth , growth in AI is accelerating .
Speaker #3: Number by the way in the mid to high one 20s kind of to your question by the way , we've been there for four years in a row already .
Inflection that we should see.
Speaker #3: So we can handle that . So you bring that all together . I think it's talks to the statement and the confidence of our focus portfolio , our disciplined capital allocation , the diversity of our business model and the relentless focus of us driving productivity and operating leverage that gives us the investment flexibility to continue driving long term , sustainable , competitive advantage .
Meaningful upside into 26 on the AI front.
Speaker #1: Overall, when we take a look at right now, the fourth quarter, and more importantly, the early parts of 2026, we again see momentum around those key metrics.
And maybe quickly.
Your quick thoughts on maybe the impact of the federal government shutdown, if there's any materiality to that to IBM.
Speaker #1: Our backlog position is healthy, at $31 billion, growing at 4% right now—our best ever erosion. We are focusing on our AI book, strategic partnerships, and productivity.
The fourth quarter.
And if I could Jim if you could just clarify the organic growth in software and third quarter and expectations for transaction processing.
Going into the end of the year. Thank you so much.
Speaker #3: So thank you very much for the question .
Bob Thanks for those questions.
Speaker #4: Great . Operator let's take our next question .
Speaker #1: And I think multiple years. What does that say? Clients' commitment to IBM Consulting. The quality of our delivery and the value of our differentiated offerings are doing extremely well.
Let me try and unpack it let me go with the easiest one first the easiest one is on the current government shutdown.
Speaker #5: Thank you. And your next question comes from Wamsi Mohan with Bank of America. Please state your question.
I would tell you that we see de Minimis impact to IBM.
Speaker #7: Yes . Thank you so much . Arvind . You said AI adoption is accelerating right at the top of the call . And I'm wondering if you can maybe help us think through the financial impact in maybe revenue terms for IBM , how we should think about the progression for that ?
Speaker #1: Now, to your point about signings: signings were down 5%. By the way, signings have been down for five of the last six quarters, something like that.
Always hard to say zero, because something could happen, we still got two months ago in the quarter, but so far we have not seen any impact from the shutdown and the reason for that is the makeup of our business. Our technology business is largely comprised of hardware as well as software software most VNS.
Speaker #1: But as I've said many times before, why do I always start with backlog? That, to me, is the most critical component.
Speaker #1: That's closest to the outcome . Measure the outcome measure is revenue , revenue growth , revenue growth is our always likes to say in this conference room with our operating team , indicators are backlog , indicators are signings .
Speaker #7: Or are we hitting some kind of inflection that we should see , you know , meaningful upside into 26 on on the AI front and maybe quickly , your quick thoughts on maybe the impact of the federal government shutdown , if there's any materiality to that , to IBM here in the fourth quarter .
Subscription basis. These are running critical systems payments for social security.
Our benefits for the VA all of these are considered essential so I don't really see that address.
Speaker #1: But signings are not all equal. And those signing numbers have been driven down. I think we posted down 5% based on lower large deal renewal volume.
Speaker #7: And if I could , Jim , if you could just clarify the organic growth in software in third quarter and expectations for transaction processing going into the end of the year .
A little bit over half the business is consulting projects, but the consulting we do is offer similar nature.
Speaker #1: By the way, I would argue that's at best no revenue realization and probably worse, dilutive revenue because renewals typically drive more price and more productivity.
RP benefits, helping people reduce.
Speaker #7: Thank you so much .
Speaker #2: Thanks for those questions . Let me try and unpack it . Let me go with the easiest one . First . The easiest one is on the current government shutdown .
Paper reduce errors.
The payments. These are all considered essential and that is the reason that we may be in the minority of not see any direct impact.
Speaker #1: But underneath that, what are we seeing? We're seeing a tremendous improvement in the quality of our signings and our net new business penetration.
Speaker #2: I would tell you that we see a de minimis impact to IBM . It's always hard to say zero because something could happen .
So far now I just leave it at that because so far we have not nobody has come to us about any of these projects and so that's the first question that is straightforward next you asked about AI.
Speaker #1: Again, another quarter in a row up double digits year to year, with a penetration over 300 new clients year to date, fueling our backlog.
Speaker #2: We still got two months to go in the quarter , but so far we have not seen any impact from the shutdown . And the reason for that is the makeup of our business , our technology business is largely comprised of hardware as well as software .
Speaker #1: Our backlog realizations are up over four points year over year. When we take a look at our backlog runout, it's pretty healthy.
Our book of business, we talked about it being over nine and a half.
Billion dollars adjust the consulting piece was a billion and a half in the quarter itself.
Speaker #1: Growing at market level . Growth rates here over the next three , six , nine , 12 months . A lot of work still to do to sell and build within quarter , but a lot of good indicators .
Speaker #2: Software , mostly on a subscription basis . These are running critical systems , payments for Social Security benefits for the VA . All of these are considered essential .
Is a very real numbers, so as those consulting projects.
Start to get executed and as that backlog builds up certainly the contribution to consulting is going to be very real we talked about another number tied there which is not a different number is the 200 projects in consulting which are already using digital workers, which effectively are the AIA agents that we have.
Speaker #1: And that Gennai to your point , over 22% of our backlog , 30% of our signings , 12% of our revenue , that's what's inflecting the growth overall .
Speaker #2: So I don't really see that at risk a little bit . Over half the business is consulting projects , but the consulting we do is of a similar nature .
Speaker #1: So we feel pretty good, and that's why we called the market inflection. We said we're going to grow consulting here in the fourth quarter.
Speaker #2: ERP benefits help people reduce paper, reduce errors back to payments. These are all considered essential, and that is the reason that we may be in the minority of not seeing any direct impact so far.
Speaker #1: And we feel pretty good about getting back to market growth levels in 2026. Now, Jen, I the over $9.5 billion book of business.
Will that get deployed by our consultants on behalf of our clients.
About <unk>.
Not quite but close to 20% of our overall book of business is technology and software and there that is mostly subscription revenue as well as products that people are purchasing from us. So those numbers certainly begin to add up and I would tell you that a big fuel behind both our open shift.
Speaker #1: Arvind already talked about over $7.5 billion in consulting , well over a billion and a half dollars almost approaching 2 billion in software .
Speaker #2: Now I just leave it at that because so far we have not nobody has come to us about any of these projects . And so that's the first question that is straightforward .
Speaker #1: You know, we're what, 7 or 8 quarters in here? That number might vary quarter by quarter as far as the composition.
Speaker #2: Next , you asked about AI . Look , our book of business , we talked about it being over nine and a half billion dollars .
Speaker #1: But what we're still pretty damn close to that 2080 overall . But the underpinnings behind that of the software book in the generation , you know , you see that play out how it's accelerating automation growth , but also Red hat I know there's been a lot of questions around Red hat .
As well as our automation growth is due to the AI capabilities that are infused inside those.
Speaker #2: Just the consulting piece was a billion and a half in the quarter itself . These are very real numbers . So as those consulting projects start to get executed and as that backlog builds up , certainly the contribution to consulting is going to be very real .
Those products, so if I sort of put the first two pieces together de minimis on the government shutdown and definitely the AIP is a strong contributor to the software growth and.
Speaker #1: Let me just spend a minute just to close the call on Red hat . Red hat . We delivered 12% growth . We were down a couple points quarter to quarter .
Speaker #2: We talked about another number to tie it there, which is not a different number. It's the 200 projects in consulting that are already using digital workers, which effectively are the AI agents that we have built that get deployed by our.
I believe it's a big piece of why consulting as big the return to growth because we called the players move towards AI almost two years ago. So as that book of business has built up it is overcoming the headwinds from staff augmentation projects going away and people are getting rid of discretionary spending and consulting Jim I'll, let you take the third.
Speaker #1: And year to date, we're at 13%, in the low teens, right? Let me break down some of the performance from a position of strength.
Speaker #1: And Arvind talked about a few points. OpenShift is up nearly 40%. Bookings are at $1.8 billion, up mid 30s year over year.
Speaker #2: consultants
Speaker #2: on behalf of
Speaker #2: our close to clients
Speaker #2: about
Speaker #2: not
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Speaker #2: 20% of our overall book of
Speaker #2: business is
Speaker #2: technology
Speaker #2: and software . there
Yes, just to amplify the last piece and then I'll get into your question about software organic in TP.
Speaker #1: Accelerating profile virtualization. Now we've closed total contract value of bookings over $400 million. We have a $700 million pipeline over the next five plus quarters, and Ansible had 20% bookings in the quarter, accelerating to the high teens.
Speaker #2: And
Speaker #2: that is mostly close to
Speaker #2: 20% of our subscription revenue
Speaker #2: , as well as
Speaker #2: technology
Speaker #2: purchasing from there . That is , those
Arvin's point.
Year to date from a software perspective, we're growing eight 5% overall approaching 9% right now.
Speaker #2: numbers
Speaker #2: Certainly, numbers begin to add up.
Speaker #2: Revenue . And I would
Speaker #2: tell you those
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Speaker #2: people are certainly begin
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Speaker #2: OpenShift
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About two points of that growth is coming out from our journey I book of business. So we're getting very good realization in penetration.
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Speaker #1: So, what happened on the sequential decline? One, as we knew, we were facing tougher compares on the consumption-based services that impacted us by about a point.
Speaker #2: as
Vince pointed out consulting north of a $7 $5 billion book of business I put that up against any consulting company right. Now we call that played Arvin's point, a few years ago. We do think we have a differentiated competitive value proposition of a company with a integrated tech stack plus strategic.
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Speaker #2: shutdown .
Speaker #1: And we rely about 50% of our portfolio. We've been talking about it. We've been growing well, abnormally in the mid-teens. We reverted back to our model, growing 6%, and had about a point.
Speaker #2: So So if I
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Our ship AI plus a saw a consulting business at scale with an integral part of IBM client zero that drives distinctive use.
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Speaker #1: Now, taking a step back, Red Hat models mid-teens. And when you look at it, our 80% subscription business, we got to grow the low end of that high teens.
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Use cases and references we have already had over a thousand client engagements year to date around Jenny I from an enterprise software and consulting perspective overall in consulting it's already north of 22% of our $31 billion backlog and then this quarter, we eclipsed double digit.
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Speaker #2: consulting from
Speaker #2: from Jim
Speaker #2: I'll let you take
Speaker #2: the third project going
Speaker #1: The consumption base we got to Thank you for participating on today's call . The conference has now ended . You may disconnect at this time .
Speaker #2: .
Speaker #2: People getting rid .
Speaker #3: Of rid of
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Speaker #3: we're growing 8.5%
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Speaker #3: 9% year to date
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Composition of our revenue 12% of our revenue.
Speaker #3: about two points of
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Speaker #3: out overall
Growing very nicely at still a two to three point competitive advantage in terms of margin overall and by the way you see that play out in our consulting margins.
Speaker #3: , business
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Speaker #3: I put that
Speaker #3: up against any
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Year to date up 220 basis points, the highest margins we've had in a long time now to your point about software software, we're very pleased growing 9% in the quarter, we accelerated about three three.
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<unk> three points organically quarter to quarter. This wasn't an inorganic contribution factor in the inorganic contribution came down as we've wrapped on some of these it's being driven by the strong contribution of our high value recurring revenue now a book of business $23 billion up 9% and when you look on.
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T P. T P right now get just given the strength of the mainframe cycle driving cycle dynamics, we're very encouraged.
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Speaker #3: north
Speaker #3: of
Speaker #3: $31 billion backlog . And
Speaker #3: in
Speaker #3: this quarter we
Speaker #3: consulting it's already
Speaker #3: north to
Speaker #3: 32% of our of
Around the future monetization value opportunity and as you heard in prepared remarks, we're calling a return to growth in GP in the fourth quarter with the strong pipeline, we got by the way if you map it back to the Z 16 cycle, what happen in 'twenty, two or T. P revenue was flat.
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Speaker #3: $1 billion of
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Speaker #3: growing quarter very this
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Speaker #3: composition of our revenue .
Speaker #3: Advantage, revenue in terms of.
Speaker #3: margin
In 'twenty three we grew high single digit in 'twenty four we grew double digit.
You look at twenty-five right now, we're calling back to growth probably a quarter early compared to our historical cycle. We feel very good about that growth profile and given the strong Z 17, where we've shipped over 100% more mips in the P. 16 are the Z 16 cycle.
So we're actually feeling pretty good about that values valuation opportunity moving forward.
Operator, let's take our next question.
Your next question comes from Ben Reitzes with Melleous Research. Please state your question.
Hey, guys. Thanks, a lot I appreciate the question.
Arvind I appreciate that fourth quarter reported software growth is set to accelerate in your guidance it sounds like above 10%.
I was just wondering about next year you do wrap the harshly acquisition in the spring I think March.
Do you are there signs that it can accelerate from here you know, obviously with red hat decelerating a little.
Just think folks would like to know broadly if you can keep double digit next year or even accelerate based on the portfolio realizing that you're wrapping the acquisitions in that timeframe. Thanks, so much guys.
Great question, So let me decompose it into the four parts of software that we talk about and then we will touch on acquisitions and their contribution and then I'll ask Jim to try to put it altogether back into the financial model for you. So let's take right at we talked about 20% signings growth this quarter we had.
Similar numbers in the previous quarter.
As that becomes the bulk of the Red hat book of business entering 2026.
Do expect to see Red hat, returning to mid teens or close to mid teens growth. So that would be an acceleration from where we are this quarter.
Then next we talked about and in the last question Jim touched on transaction processing, our mainframe software. We have seen this happened multiple times in the first couple of quarters of a new cycle TB tends to come down because people are very much focused on getting their hardware capacity as at <unk>.
The capacity gets deployed than the PPA revenue begins to come up.
Along with some of the Elas cycle dynamics that are there and we began to see that so I expect to see T. P. R.
No not quite in double digits to be to be clear.
Call it low single digits for sure into into next year.
Automation has been growing in this last quarter at 22%, yes, the Hershey.
<unk>.
Wired revenue was a piece of it and as you pointed out that will go away.
In the second quarter however, the.
The acquired properties, we have tend to provide continued growth for quite a while because of the Hershey bookings, which are significantly ahead of where we had planned them to be I expect to continue to see growth out of Archie through 2026, as well or not.
Quite as much as and acquired growth, but I do expect that we'll continue to see automation in the double digits for sure.
But maybe not all of 'twenty.
And we've continued to see the data and AI portfolio grow in the mid to high single digits now that does put aside what other acquisitions. We will do all of our model for software is that we will get a couple of points of growth from acquired revenue.
And we see a good market for targets, yes that has yet to play out but in the current regulatory environment combined with.
What we can see out there we expect that we should be able to do that as well. So that was sort of giving you color on the portfolio and the different pieces I'll ask Jim to get into then closing it back up in terms of sort of what is the organic and inorganic and overall software numbers, yes. Thanks, Ben for the question overall I mean.
Software, where our software centric platform company overall, so it's at the heart of both our topline growth factor profile and also more importantly from a Cree cash flow generation engine overall, because it delivers about three quarters of our profit and you take a look at 25, I think we positioned extremely well.
With regards to accelerating revenue growth throughout the year.
Off of tougher comps at the end of 'twenty four we got to remember that and I think that's a reflection of the strength of our portfolio the diversity of our portfolio across the board and to the disc.
Disciplined execution now when you look at twenty-six early indicators I'll put them in some big buckets urban went into some of the detail first I think we shouldn't forget in urban called this out 90 days ago, which I think surprised many of you were operating at an attractive Tam and a positive backdrop from a technology perspective.
Overall, we feel very good about technology being a source of competitive advantage and youre seeing that play out in areas around hybrid cloud modernization around AI around automation in many areas. We see that continue so the market backdrop, we couldn't be more optimistic around 26 to the strength and diversity of <unk>.
Our portfolio not only has it been repositioned over the last three or four years to accelerate growth what is happening more and more of our composition of software is now aligned to higher growth end markets, which gives us a better vector of growth even as we go into 'twenty six.
Three our annuity portfolio and I don't think we get a lot of value for this and we keep bringing it up over $23 billion. Our book of business, we feel we're going to exit.
Fourth quarter at double digits, that's a great indicator for 2026, because that is 80% of our software portfolio overall.
For new innovation journey, I already talked about Ginnie, either book of business and the acceleration, we got and all of the capital investment that's gone into the infrastructure providers. I think is just going to accelerate the innovation curve for enterprise AI overall, and we are a leader in enterprise AI just.
Given our tech stack, our software portfolio and consulting and that should deliver a few points five red hat.
Our bookings are three months or six months or nine months or 12 months or P. O shows accelerating growth coming off of 20% bookings overall by the way, we actually had more opportunity to do even better than that 20% and that shouldnt fuel and inflected growth.
Next M&A no point I would bring up on M&A arbitrary talked about it's embedded in our model. We've said that all along but again I think we've got to continue selling the investor narrative, because that M&A drives a much higher organic growth engine because those synergies.
<unk> play to those acquisitions, that's how we pay for control premiums that's how we get an accelerated top line growth. That's how we get an accelerated bottom line growth and we'd get accretive value and free cash flow in two years. So our organic engine continues to grow and then finally TP modernization arvin wrapped up on.
Let's just remind all the investors GP gets monetized based on hardware installed Mips.
Usage.
I already said two quarters in albeit early.
130% program the program and Z 17 off of <unk> 16 was that was the most successful program in the history of IBM, we're at 130%. So I do my math and calculation.
Your capacity opportunity creates higher modernization opportunity creates higher price opportunity creates higher value creation opportunities. So I think when you look at it we feel pretty good about delivering our model in software.
Operator, we'll take the next question.
Your next question comes from Erik Woodring with Morgan Stanley. Please state your question.
Hey, guys. Thank you very much for taking my question. Just one quick clarification question. There Arvind the growth rates you just provided and the response to that question for 2026 or into 2026 I. Just wanted to confirm those were all organic growth rates or whether they included M&A embedded in them.
And then my question just taking a step back Arvind is.
We've seen cloud providers experience exceptional growth recently, particularly in infrastructure services and large scale AI workloads.
How does IBM view that trend and do you see a similar opportunity for IBM cloud to capture long term infrastructure driven demand. Thanks.
Okay.
<unk>.
The growth rates that we talked about we tend not to do much M&A or any.
In both.
Our mainframe.
TPS as well as in some of the other areas.
The growth rates I mentioned I would call it.
<unk> are largely organic without having any significant M&A tuck in small M&A are probably all included in there Eric but if we do anything substantial it would help accelerate those those growth rates. So, let's just put it that way I'll also let.
Jim comment on it after I talk about the cloud opportunity.
We actually partner deeply with all of the Hyperscale is.
A thing that we haven't talked about it but certainly no secret.
For example, we are one of all weaves large clients with older tend to use a lot of infrastructure.
<unk>.
<unk> AWS.
At Azure as well as the GCB.
So as opposed to that it's an opportunity for us.
Eric.
We got a huge opportunity to ruble consulting projects as well as deploy our software on those infrastructures for our clients as an example, if I take one of our very large health insurance clients.
They think through where they're going to deploy their AI models.
Do not like deploying in a public instance.
Over defined getting a private instance, in a cloud and deploying models, they're deploying our software stacks, there and getting growth. So we tend to do that.
We also tend to in some cases.
For example, with Brock we're deploying Brock.
Peoples.
Owned data centers. So that's a big opportunity that comes there that will show up in revenue for Us Bolton.
Consulting as well as in our software because on top of the rock infrastructure, we tend to put our software stacks in some instances so it's less about.
I was getting an opportunity in our cloud only but much more that's a growth vector that we are able to ride and that helped increase overall growth rate in both software as well as in consulting and lastly, let's not forget our biggest beneficiary of AI infrastructure is our main.
Frame and our storage portfolio at this time.
Latest generation mainframe.
He will surprise you with some of the numbers.
This quarter.
Early populated single system is.
Is capable of doing 450 billion influences spud date.
As clients purchased that capability that'll be border further accelerant to mainframe infrastructure growth, but.
It also comes with a software stack that helps them do all of that influencing if I look at our storage portfolio as many people have realized you need a lot of storage to be able to do AI training and we are going to be beneficiaries of that inside our storage portfolio as people deploy that so much more say.
We are actually the direct beneficiary of the hyperscale or growth of AI capability and capacity as enterprises use this capability and do we will be a beneficiary and our mainframe and storage stack in a direct way.
I think that that road I hope Erik address that part of the question.
Eric and just to the number of space I mean first of all.
We are all focused here.
Execute a very important fourth quarter to finish a very successful 2025 for IBM, but we both Arvind and I are given some color about 26 about the confidence we have in our portfolio, but let me just take a step back in Romania and software our software model shared at Investor day approaching double digit.
That is all in that has two to three points give or take it each year may be a point more than maybe a point less depending on our disciplined capital allocation around M&A of inorganic contribution and six to seven to eight points of organic when you look at 2025, you go do the math.
We're probably going to be approaching six plus percent organic growth overall, and we're going to have some more three to four points. This year, because we took advantage of a very strategic opportunity with Hershey Corp. This year.
But when you take a look at 'twenty.
26.
The GP growth monetization value that I talked about the red hat accelerated growth profile. That's on our revenue under contract. The annuity growth profile that is approaching are now going to be double digits at the exiting the year.
Each of those are going to fuel that organic growth engine. Overall, so I think big picture. The model is pretty much what we kind of look at right now for 2026.
Okay, operator, let's take the next question.
Your next question comes from Jim Schneider with Goldman Sachs. Please state your question.
Good evening. Thanks for taking my question Arvind I was wondering if you could maybe elaborate a little bit on how you're thinking about M&A from a target perspective. You've previously stated that you are looking to accelerate growth and you're looking for things that fit strategically with our portfolio.
But on the margin anything in any way youre thinking about differently about the portfolio or the product piece of it or the potential size of transaction you might like to undertaken specifically when you consider undertaking a somewhat larger more transformative transaction.
Maybe not quite as big as you did with Red hat, but I'll sort of a similar scale relative to your overall portfolio. Thank you.
Yeah.
Jim Thanks for the question look M&A is extremely important part of our strategy. So I want to just.
Perhaps reiterate because this has come up on prior calls as well.
We look at it always in a multi year window. So we've got to look at what is our excess cash flow over a few years and once we have that window that means we can sort of buy ahead, which means we can sort of lean in or if we don't find a good target like we Didnt for example, I think in 2023.
Then we actually spent much less than we could have that.
Just a backdrop to the amount of financial flexibility that we have which if I remember at our Investor day earlier. This year, we laid out that we have somewhere in the mid twenties, perhaps a bit more flexibility over a three year window, that's kind of a way to sort of look at it.
<unk>.
We are very focused on the areas that we have already explained as a strategy a very top level, we say hybrid cloud and artificial intelligence that translate into.
Our hybrid portfolio, our automation portfolio, and our data and AI portfolio and you've seen us.
Do acquisitions in there.
For example, we bought a company that does BLM, but it fit into our hybrid portfolio because it's a direct part of the red hat and <unk> portfolios.
We did.
Hershey Cup, which fits directly into automation, we the data stacks, which fits into data.
When I look at the target lists there is I think a pretty rich list of opportunities that are out there in the private markets in the <unk> world in the public markets across those opportunities that we think.
Well.
Some of them will be actionable, it's hard to predict upfront, which are and which are not so I think that if I put it that way and just to be clear.
Anything that is of size has to fit three criteria.
It has to fit with the strategy, we just laid out.
There has to be synergy.
The growth rate inside IBM will be above what it was as a standalone entity some of that come from our geography spread we have a sales team in most countries in the world. Some of it comes by the ability to bundle more attractive offerings together.
And it comes from faster deployment for example, leveraging our consulting team or the rest of our sales team all three will be able to add.
Two more to a faster growth rate third if it is of size and we are very disciplined also that we are likely to become accretive.
So cash by the end of the second year. So those other criteria, but as you've seen we've found plenty in the last few years that do fit that.
That all criteria, so I hope that that.
Gives you a sense now your question on larger I'll, just use that word larger.
We will never rule anything out, but it has to meet all the criteria that we just laid out it is not precise alone.
Red hat allowed us to enter a new space helped accelerate ibm's overall growth rate.
Both in software and consulting.
So that was the start of the synergy piece that was there and you. Many people forget that also had a very attractive free cash flow profile that we have been able to leverage since the acquisition.
Great Opera.
Let's take one final question.
Thank you and that question comes from Brian Essex with J P. Morgan. Please state your question.
Hi, good afternoon, and thank you for taking the question Arvind maybe as a follow up as part of Eric's question and I. Appreciate your heart hybrid exposure here, but can you could you generalize what youre seeing with regard to mix as enterprises focus on AI readiness, our cloud native Isps Isd based <unk> applications.
We targeted a task and point solution automation are those low hanging fruit to prove ROI before pursuing self hosted projects and then maybe.
Within the it budgets where is the spending coming from what's at risk of getting trimmed as companies focused on and focus on adopting AI based technology.
So Brian let me address the first part of your question was a bit of.
Deb.
I actually think that these are in and are people going to leverage RSV otherwise.
I'll call. It SaaS applications, who are getting exposure to AI and agents either as part of those entities or as added value onto them and there are hundreds if not thousands of little boutique companies that provide some of those agents that are out there I think they will absolutely do that they kicked the tires on it they'll get some value.
But at the end of the day.
To get real value from AI people have to be able to integrate their existing applications. How do the tidewater operating their payroll system and HR system to perhaps something that is happening in the CRM system to perhaps something that is happening in their ERP system as people begin to want to build more.
Much more profound agents that is where a lot of the action that we see is happening as people try to build those agents out there and they get deeply concerned about what does that data, whereas the data going and they're going to apply those either in their own data centers or in a private instance.
Not a private instance of the cloud is quite protected and people do deploy a lot of critical applications that are there, but if I think about our clients.
On the regulated industries banking and insurance still is very much a data center as well as the cloud picture if I look at healthcare.
Health care data it tends not to go out very much.
Their own data centers, if you look at telecom most people build their own backbones and their data and applications reside there, but certain other things like marketing may will reside in the public cloud. So as we begin to look upon all of that I believe that we are at the very beginning I would actually characterize as Brian.
That if I was to use the baseball analogy, we are still in the first innings of enterprise AI rollout and I expect that we'll be seeing and we will see more.
SaaS AI users, we will see more public.
Public cloud usage, and we will begin to see a lot more.
Private usage as people begin to get into more critical applications and agents on.
On the IC budgets.
So ivy budgets have been growing ahead of GDP, that's simply an observation.
I think this began four or five years ago, but Iot budgets are growing typically two to three points ahead of GDP growth you.
You combine that then with inflation because GDP. After all is real not nominal ICI budget stay healthy. So a lot of the growth comes from the fact that the budgets are growing as opposed to other cost or something else that said I think people are getting very very effective at trying to run and maintain.
With lower costs, and putting more money towards the oil projects.
10 years ago that ratio used to be 70, 30, 70 or running what is new I think that is shifting more towards a 60 40.
Spread and where it'll go is where we'll get the benefit that is why our automation portfolio and our hybrid portfolio get a lot more.
Growth because people are using that so it's.
Sort of substituting for labor and in some cases for services.
Letting those capabilities moving to software.
<unk>.
Great Operator, I think we have time for one last question.
Thank you and the next question comes from Mark Newman with Bernstein. Please state your question.
Alright, Thanks for taking my question.
Good to see the growing book of business and.
Thanks for those comments just now of interest I don't think you've given any specific breakdown yet on the breakdown between software and consulting.
Client book of business is there any.
Clarity on that I think it used to be 80, 20, I just wanted to clarify there is any.
Clarity you have given on that today.
And then a follow up on consulting.
I think there's two quarters in a row now.
We are seeing the book to Bill ratio a touch below one.
I know you point in the earnings to a book to Bill ratio greater than one if you're looking at the trailing 12 months.
But I would just like to understand more on a shorter term basis last six months. It seems like the book to Bill ratio is below one and if you could explain kind of.
Why maybe why that's the case why we shouldnt be worried.
Especially considering I think around 30% of signings you mentioned, our AI, which I believe are longer duration, such as little bit of clarity around consulting and how <unk> plays into the to the book to Bill ratio in that recent number being below one would be appreciate it thanks very much.
Okay. Marc this is Jim I'll take both of those well, let's start with the second one first and then I'll come back to your Claire for quick clarification question on Jennie O and in particular around the software portfolio overall, and I want to dive a little bit deeper than that but.
We take a look at consulting, let's dial back 90 days ago.
I think we surprised many just compared to what many other consulting companies have been talking about publicly we talked about green shoots that we saw entering second half.
But I think at that time, we were prudently cautious about how we were going to monitor client buying behaviors and we didn't expect growth in the second half. Although we saw many green shoots overall now we posted I think a marked inflection point of consulting back to growth up 2%.
And it's been driven by what we're seeing is continued opportunity for growth as clients accelerated investment in AI driven transformation, what we've been talking about on many of these questions here why companies are looking to unlock efficiency business model innovation and growth gross growth and AI is accelerating over.
We're all when we take a look at right now fourth quarter and more importantly, early parts of 'twenty six we again see momentum around those key metrics our backlog position.
Our journey I book strategic partnerships and around productivity.
Backlog $31 billion healthy growing 4% right now our best ever.
Erosion and I think multiple years, what does that say clients commitment to IBM consulting the quality of our delivery and the value of our differentiated offerings are doing extremely well now to your point about signings signings were down 5% by the way things went down.
Five of the last six quarters, something like that but as I've said many times before why don't I start with backlog that to me is the most.
Critical component that's closest to the outcome measure the outcome measure is revenue revenue grow revenue growth deserving always likes to say in this conference room with our operating team indicators, our backlog indicators, our signings signings are not all equal in those signings numbers had been driven down.
We posted down 5% based on lower large deal renewal volume by the way I would argue that's.
At best no revenue realization and probably worst.
Dilutive for revenue because your renewals typically drive more price and more productivity, but underneath that what are we seeing we're seeing a tremendous improvement in the quality of our signings our net new business penetration again, another quarter in a row up double digits year to year on a penetration over 300 new.
Year to date fueling our backlog our backlog realizations up over four points year over year.
And when we take a look at our backlog run out it's pretty healthy growing at market level growth rates here over the next 369 12 months a lot of work still to do to sell and bill within quarter, but a lot of good indicators in that journey I to your point.
Over 22% of our backlog, 30% of our signings, 12% of our revenue that's what's inflect in the growth overall, so we feel pretty good and that's why we called the market inflection and we said we're going to grow consulting here in the fourth quarter, and we feel pretty good about getting back to market growth levels in 'twenty.
26, now Gen AI.
Over $9 $5 billion book of business Arvin already talked about over $7 $5 billion in consulting well over a billion and a half dollars almost approaching $2 billion in software.
We're what seven eight quarters in here that number might vary quarter by quarter as far as the composition.
But we're still pretty damn close to that 2080 overall, but the underpinnings behind that of the software book in that generation.
You see that play out and how it's accelerating automation growth, but also red hat I know theres been a lot of questions around Red hat, Let me just spend a minute just to close the call and Red hat Red hat, we delivered 12% growth we were down a couple of points quarter to quarter and year to date, we're at 13% low teens right, let me breakdown.
Some of the performance one from a position of strength in Arvin talked about a few points open shift up nearly 40% bookings.
Our <unk>, one $8 billion up mid thirties year over year accelerating profile virtualization now we've closed total contract value of bookings over $400 million, we got a $700 million pipeline over the next five plus quarters.
Ansible, 20% bookings in the quarter accelerating to high teens. So what happened on the sequential decline. One is we knew we were facing tougher comparison on the consumption based services that impacted us by about a point and ROE above 50% of our portfolio we have.
Talking about we've been growing ROE abnormally in the mid teens.
We reverted back to our model growing 6% and had about a point now taken a step back.
Red hat models mid teens, and when you look at it or 80% subs business, we got to grow low end of that high teens.
Consumption base, we got to grow high single digits. When you look at our year to date in Arvin talked about our bookings year to date, we're well position on net subscription base a business growing high teens already on bookings.
And when you look at that six 912 month revenue under contract we're accelerating net growth as we go into 26 that gives us confidence in that acceleration comment that Arvind talked about and I talked about is qualitative statements about confidence in 'twenty six and when.
You look at fourth quarter, let's put this in perspective, we're going to accelerate red hat growth in 25, it's going to be a nice acceleration on the subs and we got about a two point headwind on consumption based services, we knew about that because last year, we grew consumption based services high teens.
And when you look at fourth quarter, we're going to wrap on that we've known about that all year long. So when we look at fourth quarter double digit solid double digit growth in red hat low teen growth for the year nice composition of where that acceleration is but the most important thing we're well positioned for 2026.
So with that I'll turn it back over to Arvind to close out the call. Thanks, Jim.
To close out we are pleased with our performance this quarter.
All of our segments accelerated sequentially.
Our portfolio strength business model.
And relentless focus on productivity reinforce our confidence in.
Great.
Look forward to sharing our progress as we close out the year. Thank you Arvind operator, let me turn it back to you to close out the call.
Thank you for participating on today's call. The conference has now ended you may disconnect at this time.
Operator: Thank you for participating on today's call. The conference is now ended. You may disconnect at this time.
Operator: Now I will turn the meeting over to Olympia McNerney, IBM's Global Head of Investor Relations. Olympia, you may begin.
Operator: Now I will turn the meeting over to Olympia McNerney, IBM's Global Head of Investor Relations. Olympia, you may begin.
Olympia McNerney: Thank you. I'd like to welcome you to IBM's Q3 2025 earnings presentation. I'm Olympia McNerney, and I'm here today with Arvind Krishna, IBM's Chairman, President, and Chief Executive Officer, and Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. We'll post today's prepared remarks on the IBM Investor website within a couple of hours, and a replay will be available by this time tomorrow. To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation, which is posted to our Investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995.
Olympia McNerney: Thank you. I'd like to welcome you to IBM's Q3 2025 earnings presentation. I'm Olympia McNerney, and I'm here today with Arvind Krishna, IBM's Chairman, President, and Chief Executive Officer, and Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. We'll post today's prepared remarks on the IBM Investor website within a couple of hours, and a replay will be available by this time tomorrow. To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation, which is posted to our Investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995.
Olympia McNerney: These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filings. So with that, I'll turn the call over to Arvind.
These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filings. So with that, I'll turn the call over to Arvind.
Arvind Krishna: Thank you for joining us today. In Q3, IBM delivered strong results across revenue, profit, and free cash flow, exceeding our expectations. Revenue growth accelerated to 7%, our highest growth in several years, with all our segments accelerating sequentially. These results underscore the strength of our business model and portfolio, and the innovation we are delivering to clients. Clients continue to turn to IBM as a trusted partner to help them modernize, embed AI, and build resilient infrastructure. Let me touch on the economy before I turn to our execution. Last quarter, I said we had moved from being cautiously optimistic to optimistic. Technology remains a key driver of growth and competitive advantage. AI adoption is accelerating, and hybrid cloud remains the foundation of enterprise IT. Clients are leaning on enterprise technologies to scale, innovate, and drive productivity.
Arvind Krishna: Thank you for joining us today. In Q3, IBM delivered strong results across revenue, profit, and free cash flow, exceeding our expectations. Revenue growth accelerated to 7%, our highest growth in several years, with all our segments accelerating sequentially. These results underscore the strength of our business model and portfolio, and the innovation we are delivering to clients. Clients continue to turn to IBM as a trusted partner to help them modernize, embed AI, and build resilient infrastructure. Let me touch on the economy before I turn to our execution. Last quarter, I said we had moved from being cautiously optimistic to optimistic. Technology remains a key driver of growth and competitive advantage. AI adoption is accelerating, and hybrid cloud remains the foundation of enterprise IT. Clients are leaning on enterprise technologies to scale, innovate, and drive productivity.
Arvind Krishna: There are always macro uncertainties, but overall, we continue to see broad-based demand from clients and remain optimistic. Now turning to our execution this quarter, our strategy remains focused: hybrid cloud and artificial intelligence. Our products and services fuel growth and productivity for our clients. You can see this in our results for the quarter. Software growth accelerated to 9%, led by strength in automation. Automation was up 22%, highlighting our end-to-end portfolio of leading solutions that optimize operations, automate infrastructure and workflows, build resiliency, and drive cost efficiency for clients. Many of our automation products are infused with AI, enhancing their capabilities. HashiCorp also continues to accelerate within IBM, benefiting from our go-to-market distribution and joint product innovation, highlighting our synergy potential. Consulting accelerated, reflecting growing demand for AI services as clients need help designing, deploying, and governing AI at scale.
There are always macro uncertainties, but overall, we continue to see broad-based demand from clients and remain optimistic. Now turning to our execution this quarter, our strategy remains focused: hybrid cloud and artificial intelligence. Our products and services fuel growth and productivity for our clients. You can see this in our results for the quarter. Software growth accelerated to 9%, led by strength in automation. Automation was up 22%, highlighting our end-to-end portfolio of leading solutions that optimize operations, automate infrastructure and workflows, build resiliency, and drive cost efficiency for clients. Many of our automation products are infused with AI, enhancing their capabilities. HashiCorp also continues to accelerate within IBM, benefiting from our go-to-market distribution and joint product innovation, highlighting our synergy potential. Consulting accelerated, reflecting growing demand for AI services as clients need help designing, deploying, and governing AI at scale.
Arvind Krishna: Infrastructure delivered robust performance, growing 15%, driven by continued strength in Z17, our strongest Q2 launch in history. The Spyre accelerator, which will be available in Q4, will bring advanced generative AI and real-time inferencing capabilities inside IBM Z, redefining how enterprises capture AI value within their most mission-critical environments. In addition to being a demand driver, AI is also a powerful productivity driver for IBM, contributing to our strong financial performance. In 2023, we set out on a goal to achieve $2 billion of productivity savings, and today we are well ahead of that with an expectation of $4.5 billion of annual run rate savings exiting this year. I believe we have significant opportunity ahead of us to continue to become even leaner and more nimble.
Infrastructure delivered robust performance, growing 15%, driven by continued strength in Z17, our strongest Q2 launch in history. The Spyre accelerator, which will be available in Q4, will bring advanced generative AI and real-time inferencing capabilities inside IBM Z, redefining how enterprises capture AI value within their most mission-critical environments. In addition to being a demand driver, AI is also a powerful productivity driver for IBM, contributing to our strong financial performance. In 2023, we set out on a goal to achieve $2 billion of productivity savings, and today we are well ahead of that with an expectation of $4.5 billion of annual run rate savings exiting this year. I believe we have significant opportunity ahead of us to continue to become even leaner and more nimble.
Arvind Krishna: Our Client-zero approach sets us apart, as we have internally identified and addressed pain points on data readiness, siloed and vertical workflows, application and IT sprawl, using our own technology and domain expertise. Clients see these results and look to us to help them on their own transformations, driving over 1,000 Client-zero engagements this year. The breadth of our AI offerings is a key differentiator, combining an innovative technology stack with consulting at scale and our Client-zero journey. Our GenAI book of business continues to show momentum at over $9.5 billion inception to date. In consulting, we are embracing disruption and leading the way with our digital asset and services as software strategy. While we are early in this journey, we have over 200 consulting projects using digital workers at scale.
Our Client-zero approach sets us apart, as we have internally identified and addressed pain points on data readiness, siloed and vertical workflows, application and IT sprawl, using our own technology and domain expertise. Clients see these results and look to us to help them on their own transformations, driving over 1,000 Client-zero engagements this year. The breadth of our AI offerings is a key differentiator, combining an innovative technology stack with consulting at scale and our Client-zero journey. Our GenAI book of business continues to show momentum at over $9.5 billion inception to date. In consulting, we are embracing disruption and leading the way with our digital asset and services as software strategy. While we are early in this journey, we have over 200 consulting projects using digital workers at scale.
Arvind Krishna: In software, demand for watsonx and Red Hat AI remains strong, with early momentum in our agentic platform, watsonx Orchestrate. watsonx Orchestrate helps enterprises deploy AI by connecting agents, models, and workflows with governance and security. Orchestration will be critical as enterprises run a variety of models to optimize cost and performance. Our hybrid approach to models enables clients to use the best option for each use case. I've used Granite models, third-party models, or open models from Hugging Face, Meta, and Mistral. We recently launched Granite 4.0, our next-generation family of open small language models. Granite 4.0 delivers high performance and cost efficiency using 70% less memory and offering twice the inferencing speed of conventional models. We also partnered with Anthropic to infuse Claude into IBM products to unlock new GenAI features and capabilities.
In software, demand for watsonx and Red Hat AI remains strong, with early momentum in our agentic platform, watsonx Orchestrate. watsonx Orchestrate helps enterprises deploy AI by connecting agents, models, and workflows with governance and security. Orchestration will be critical as enterprises run a variety of models to optimize cost and performance. Our hybrid approach to models enables clients to use the best option for each use case. I've used Granite models, third-party models, or open models from Hugging Face, Meta, and Mistral. We recently launched Granite 4.0, our next-generation family of open small language models. Granite 4.0 delivers high performance and cost efficiency using 70% less memory and offering twice the inferencing speed of conventional models. We also partnered with Anthropic to infuse Claude into IBM products to unlock new GenAI features and capabilities.
Arvind Krishna: This week, we announced a partnership to run watsonx and Groq, giving clients access to their inferencing technology, which provides ultra-high-speed, low-latency AI capabilities at lower costs. All this leads to real, tangible value for clients. Companies like Deutsche Telekom and S&P Global are embedding watsonx into core workflows. In infrastructure, clients such as Nationwide, State Street, and Credit Agricole are turning to AI to manage increased workloads and use Z17 for its advanced AI inferencing capabilities and enhanced resiliency. Accelerating innovation remains a core focus for IBM. At our recent IBM Tech Exchange Developer and Builder Conference, we showcased how we are helping clients and partners with innovation that blends enterprise strength and AI speed. We had almost twice the number of participants as last year, with speakers including United Airlines, T-Mobile, Prudential, UPS, Morgan Stanley, Verizon, and Cigna.
This week, we announced a partnership to run watsonx and Groq, giving clients access to their inferencing technology, which provides ultra-high-speed, low-latency AI capabilities at lower costs. All this leads to real, tangible value for clients. Companies like Deutsche Telekom and S&P Global are embedding watsonx into core workflows. In infrastructure, clients such as Nationwide, State Street, and Credit Agricole are turning to AI to manage increased workloads and use Z17 for its advanced AI inferencing capabilities and enhanced resiliency. Accelerating innovation remains a core focus for IBM. At our recent IBM Tech Exchange Developer and Builder Conference, we showcased how we are helping clients and partners with innovation that blends enterprise strength and AI speed. We had almost twice the number of participants as last year, with speakers including United Airlines, T-Mobile, Prudential, UPS, Morgan Stanley, Verizon, and Cigna.
Arvind Krishna: We announced Project BOB, facilitating AI-powered software development, helping teams ship higher-quality code faster. We have more than 8,000 developers within IBM that are using Project BOB, reporting productivity gains averaging 45%, another powerful client-zero use case. We also announced new automation capabilities, including a real-time infrastructure graph connecting applications, services, and ownership through HashiCorp Terraform. As outlined at our Investor Day, we are on a path to demonstrate the first error-corrected quantum computer by 2028 and continue to deliver key milestones in our quantum roadmap. As we collaborate with our ecosystem of over 280 partners, we are making tangible progress on near-term use cases. For example, HSBC achieved a notable improvement in bond trading predictions using IBM's Heron quantum processor. Vanguard announced a breakthrough in optimizing portfolio construction using IBM's Quantum Computing as a Service.
We announced Project BOB, facilitating AI-powered software development, helping teams ship higher-quality code faster. We have more than 8,000 developers within IBM that are using Project BOB, reporting productivity gains averaging 45%, another powerful client-zero use case. We also announced new automation capabilities, including a real-time infrastructure graph connecting applications, services, and ownership through HashiCorp Terraform. As outlined at our Investor Day, we are on a path to demonstrate the first error-corrected quantum computer by 2028 and continue to deliver key milestones in our quantum roadmap. As we collaborate with our ecosystem of over 280 partners, we are making tangible progress on near-term use cases. For example, HSBC achieved a notable improvement in bond trading predictions using IBM's Heron quantum processor. Vanguard announced a breakthrough in optimizing portfolio construction using IBM's Quantum Computing as a Service.
Arvind Krishna: We recently announced a partnership with AMD to build quantum-centric supercomputing architectures leveraging IBM's quantum expertise and AMD's CPUs, GPUs, and other accelerator technologies. Just last week, IBM and the Basque Government unveiled Europe's first IBM Quantum System Two. This marks the second installation outside the United States and underscores our commitment to global leadership in quantum computing. In closing, we are executing on our strategy of accelerating revenue growth and delivering higher profitability. Given these results and the momentum in our portfolio, we are raising expectations for revenue growth to more than 5% and free cash flow to about $14 billion for the year. With that, let me hand it over to Jim to go through the financials.
We recently announced a partnership with AMD to build quantum-centric supercomputing architectures leveraging IBM's quantum expertise and AMD's CPUs, GPUs, and other accelerator technologies. Just last week, IBM and the Basque Government unveiled Europe's first IBM Quantum System Two. This marks the second installation outside the United States and underscores our commitment to global leadership in quantum computing. In closing, we are executing on our strategy of accelerating revenue growth and delivering higher profitability. Given these results and the momentum in our portfolio, we are raising expectations for revenue growth to more than 5% and free cash flow to about $14 billion for the year. With that, let me hand it over to Jim to go through the financials.
James Kavanaugh: Thanks, Arvind. In Q3, our revenue growth accelerated to 7%, our highest growth in several years, with all of our segments accelerating sequentially. Revenue scale, mix, and productivity drove 290 basis points of adjusted EBITDA margin expansion, 22% adjusted EBITDA growth, and 15% operating earnings per share growth, highlighting the significant operating leverage in our business model. Through the first nine months, we generated $7.2 billion of free cash flow, our highest nine-month free cash flow margin in reported history. We exceeded our expectations on revenue, profitability, adjusted EBITDA, earnings per share, and free cash flow, reflecting the strength of our portfolio and the disciplined execution across our business. Software revenue grew 9%, fueled by accelerating organic growth, up a few points since last quarter, and continued contribution from our high-value annual recurring revenue base, which grew to $23.2 billion, up 9% since last year.
Jim Kavanaugh: Thanks, Arvind. In Q3, our revenue growth accelerated to 7%, our highest growth in several years, with all of our segments accelerating sequentially. Revenue scale, mix, and productivity drove 290 basis points of adjusted EBITDA margin expansion, 22% adjusted EBITDA growth, and 15% operating earnings per share growth, highlighting the significant operating leverage in our business model. Through the first nine months, we generated $7.2 billion of free cash flow, our highest nine-month free cash flow margin in reported history. We exceeded our expectations on revenue, profitability, adjusted EBITDA, earnings per share, and free cash flow, reflecting the strength of our portfolio and the disciplined execution across our business. Software revenue grew 9%, fueled by accelerating organic growth, up a few points since last quarter, and continued contribution from our high-value annual recurring revenue base, which grew to $23.2 billion, up 9% since last year.
James Kavanaugh: Growth in automation accelerated to 22%, driven by strength in the organic portfolio and early synergies with HashiCorp, which maintained momentum and delivered its highest bookings quarter in history. Red Hat bookings growth accelerated to about 20%, and revenue grew 12%. This performance was driven by a softening in consumption-based services and rel trending back towards single-digit growth as we wrap on last year's exceptional double-digit performance. Demand for our hybrid cloud products remains strong, and all three of our major subscription offerings gained market share again this quarter, with growth accelerating for both OpenShift and Ansible. OpenShift ARR is now $1.8 billion, growing over 30%. Data was up 7%, driven by continued strength in our AI portfolio, and transaction processing revenue declined by 3%, reflecting another quarter of Z17 outperformance as clients continue to prioritize hardware spend on our latest IBM Z system.
Growth in automation accelerated to 22%, driven by strength in the organic portfolio and early synergies with HashiCorp, which maintained momentum and delivered its highest bookings quarter in history. Red Hat bookings growth accelerated to about 20%, and revenue grew 12%. This performance was driven by a softening in consumption-based services and rel trending back towards single-digit growth as we wrap on last year's exceptional double-digit performance. Demand for our hybrid cloud products remains strong, and all three of our major subscription offerings gained market share again this quarter, with growth accelerating for both OpenShift and Ansible. OpenShift ARR is now $1.8 billion, growing over 30%. Data was up 7%, driven by continued strength in our AI portfolio, and transaction processing revenue declined by 3%, reflecting another quarter of Z17 outperformance as clients continue to prioritize hardware spend on our latest IBM Z system.
James Kavanaugh: While this dynamic impacts near-term revenue, we're encouraged by a healthy pipeline that positions us well for future demand. Infrastructure delivered another strong quarter, growing 15%. Hybrid infrastructure grew 26%, and infrastructure support was flat. Within hybrid infrastructure, IBM Z delivered its highest third-quarter revenue in nearly two decades, up 59% year to year, fueled by the early success of our Z17 platform, purpose-built for AI and hybrid cloud, with breakthrough capabilities in real-time inferencing, quantum-safe security, and AI-driven operational efficiency. Clients are investing in Z17 not only for its reliability and scalability, but because it enables secure, high-performance computing at the core of their digital transformation strategies. Distributed infrastructure, up 8%, reflects broad-based growth across our storage portfolio as clients scale capacity to meet rising data and AI demands. Consulting returned to growth in Q3, with revenue up 2%, improving sequentially and marking a positive inflection point in performance.
While this dynamic impacts near-term revenue, we're encouraged by a healthy pipeline that positions us well for future demand. Infrastructure delivered another strong quarter, growing 15%. Hybrid infrastructure grew 26%, and infrastructure support was flat. Within hybrid infrastructure, IBM Z delivered its highest third-quarter revenue in nearly two decades, up 59% year to year, fueled by the early success of our Z17 platform, purpose-built for AI and hybrid cloud, with breakthrough capabilities in real-time inferencing, quantum-safe security, and AI-driven operational efficiency. Clients are investing in Z17 not only for its reliability and scalability, but because it enables secure, high-performance computing at the core of their digital transformation strategies. Distributed infrastructure, up 8%, reflects broad-based growth across our storage portfolio as clients scale capacity to meet rising data and AI demands. Consulting returned to growth in Q3, with revenue up 2%, improving sequentially and marking a positive inflection point in performance.
James Kavanaugh: Intelligent operations was up 4%, while strategy and technology revenue stabilized, with both lines of business showing quarter-over-quarter momentum. This growth reflects solid demand for our strategic offerings: business application transformation, application modernization and migration, and application operations as clients focus investments on solutions that accelerate AI transformation and maximize return. As Arvind mentioned, we are embracing AI disruption and leading with a software-driven services delivery model. We are transforming into a hybrid model of people plus software that delivers efficiency and scale. This approach is already driving internal productivity, reflected in a 220 basis points of segment profit margin expansion year to date, and resonating with clients seeking to operationalize AI strategies. By combining domain expertise with scalable technology platforms, we reinforce our role as a strategic provider of choice in this evolving landscape.
Intelligent operations was up 4%, while strategy and technology revenue stabilized, with both lines of business showing quarter-over-quarter momentum. This growth reflects solid demand for our strategic offerings: business application transformation, application modernization and migration, and application operations as clients focus investments on solutions that accelerate AI transformation and maximize return. As Arvind mentioned, we are embracing AI disruption and leading with a software-driven services delivery model. We are transforming into a hybrid model of people plus software that delivers efficiency and scale. This approach is already driving internal productivity, reflected in a 220 basis points of segment profit margin expansion year to date, and resonating with clients seeking to operationalize AI strategies. By combining domain expertise with scalable technology platforms, we reinforce our role as a strategic provider of choice in this evolving landscape.
James Kavanaugh: Our consulting generative AI book of business accelerated to over $1.5 billion in Q4, with the number of projects more than doubling year to year, underscoring our momentum. While total signings declined this quarter, the quality of signings continued to strengthen, with more strategic wins from new clients and expanded engagements within existing ones. Turning to profitability, we have delivered nine consecutive quarters of operating pre-tax margin expansion, highlighting the evolution of our portfolio mix and our laser focus on productivity, which again played out this quarter. Revenue scale, mix, and productivity drove expansion of operating gross profit margin by 120 basis points, adjusted EBITDA margin by 290 basis points, and operating pre-tax margin by 200 basis points, ahead of our expectations and well above our model.
Our consulting generative AI book of business accelerated to over $1.5 billion in Q4, with the number of projects more than doubling year to year, underscoring our momentum. While total signings declined this quarter, the quality of signings continued to strengthen, with more strategic wins from new clients and expanded engagements within existing ones. Turning to profitability, we have delivered nine consecutive quarters of operating pre-tax margin expansion, highlighting the evolution of our portfolio mix and our laser focus on productivity, which again played out this quarter. Revenue scale, mix, and productivity drove expansion of operating gross profit margin by 120 basis points, adjusted EBITDA margin by 290 basis points, and operating pre-tax margin by 200 basis points, ahead of our expectations and well above our model.
James Kavanaugh: Segment profit margins expanded by 420 basis points in infrastructure, 270 basis points in software, and 200 basis points in consulting, with consulting margins at the highest level in three years. Revenue scale and mix contribution from IBM Z is a significant source of profitability and free cash flow, and combined with a 3 to 4x stack multiplier, helps fuel our investment in innovation and drive growth. Productivity is also a key driver of profit margin expansion as we deploy AI at scale across IBM in areas including finance, supply chain, sales, HR, service delivery, and customer support to improve efficiency and reduce costs. While we have made progress on this journey and expect $4.5 billion of run rate savings exiting this year, there is still significant opportunity ahead for us to drive even more efficiency and cost savings.
Segment profit margins expanded by 420 basis points in infrastructure, 270 basis points in software, and 200 basis points in consulting, with consulting margins at the highest level in three years. Revenue scale and mix contribution from IBM Z is a significant source of profitability and free cash flow, and combined with a 3 to 4x stack multiplier, helps fuel our investment in innovation and drive growth. Productivity is also a key driver of profit margin expansion as we deploy AI at scale across IBM in areas including finance, supply chain, sales, HR, service delivery, and customer support to improve efficiency and reduce costs. While we have made progress on this journey and expect $4.5 billion of run rate savings exiting this year, there is still significant opportunity ahead for us to drive even more efficiency and cost savings.
James Kavanaugh: Through Q3, we generated $7.2 billion of free cash flow, up about $600 million year over year, resulting in our highest year-to-date free cash flow margin in reported history. The largest driver of this growth is adjusted EBITDA, up $1.8 billion year over year, partially offset by proceeds from the Palo Alto QRadar transaction, which resulted in a reduction in CapEx in Q3 of last year and working capital dynamics. Our strong liquidity position, solid investment-grade balance sheet, and disciplined capital allocation policy remain a focus for us. We ended the quarter with cash of $14.9 billion. Our debt balance ending the quarter was $63.1 billion, including $11.3 billion of debt for our financing business, with a receivables portfolio that is over 75% investment-grade. In addition, year to date, we returned $4.7 billion to shareholders in the form of dividends. Now, let me talk about what we see going forward.
Through Q3, we generated $7.2 billion of free cash flow, up about $600 million year over year, resulting in our highest year-to-date free cash flow margin in reported history. The largest driver of this growth is adjusted EBITDA, up $1.8 billion year over year, partially offset by proceeds from the Palo Alto QRadar transaction, which resulted in a reduction in CapEx in Q3 of last year and working capital dynamics. Our strong liquidity position, solid investment-grade balance sheet, and disciplined capital allocation policy remain a focus for us. We ended the quarter with cash of $14.9 billion. Our debt balance ending the quarter was $63.1 billion, including $11.3 billion of debt for our financing business, with a receivables portfolio that is over 75% investment-grade. In addition, year to date, we returned $4.7 billion to shareholders in the form of dividends. Now, let me talk about what we see going forward.
James Kavanaugh: Through the first nine months of the year, we delivered 5% revenue growth, 17% Adjusted EBITDA growth, 10% operating earnings per share growth, and 9% free cash flow growth. The strength and diversity of our portfolio, disciplined capital allocation, and relentless focus on productivity continue to drive the durability of our revenue and free cash flow performance. Given the strength of this performance, we are raising our expectations for revenue, Adjusted EBITDA, and free cash flow. We now expect to deliver revenue growth of more than 5%, Adjusted EBITDA growth of mid-teens, and free cash flow of about $14 billion for 2025. Let me focus on full-year growth for the segments. We continue to expect software revenue growth of approaching double digits for the full year.
Through the first nine months of the year, we delivered 5% revenue growth, 17% Adjusted EBITDA growth, 10% operating earnings per share growth, and 9% free cash flow growth. The strength and diversity of our portfolio, disciplined capital allocation, and relentless focus on productivity continue to drive the durability of our revenue and free cash flow performance. Given the strength of this performance, we are raising our expectations for revenue, Adjusted EBITDA, and free cash flow. We now expect to deliver revenue growth of more than 5%, Adjusted EBITDA growth of mid-teens, and free cash flow of about $14 billion for 2025. Let me focus on full-year growth for the segments. We continue to expect software revenue growth of approaching double digits for the full year.
James Kavanaugh: Through the first nine months, we delivered growth above our model of 17% in automation and in-line model growth of 7% in data, and these trends should continue. We continue to expect mid-teens growth for Red Hat, albeit at the low end. This is underpinned by strong bookings growth in Q3 of about 20% and our revenue under contract, which is growing in the mid-teens. As we lap elevated growth in consumption-based services last year, we expect double-digit revenue growth in Q4, with an accelerated growth profile heading into 2026. While transaction processing was down 1% year to date as clients prioritized spend on our high-value innovation Z17, the strength of the new cycle provides future monetization value across the Z stack. We are seeing this strength in our pipeline as we enter Q4, which we expect will return to growth.
Through the first nine months, we delivered growth above our model of 17% in automation and in-line model growth of 7% in data, and these trends should continue. We continue to expect mid-teens growth for Red Hat, albeit at the low end. This is underpinned by strong bookings growth in Q3 of about 20% and our revenue under contract, which is growing in the mid-teens. As we lap elevated growth in consumption-based services last year, we expect double-digit revenue growth in Q4, with an accelerated growth profile heading into 2026. While transaction processing was down 1% year to date as clients prioritized spend on our high-value innovation Z17, the strength of the new cycle provides future monetization value across the Z stack. We are seeing this strength in our pipeline as we enter Q4, which we expect will return to growth.
James Kavanaugh: With continued strength in Z17, we now expect infrastructure to contribute over 1.5 points to IBM's revenue growth this year. In consulting, we are encouraged by our return to growth this quarter and continued progress in our GenAI book of business. Now we see an inflection in growth going forward, with Q4 revenue performance similar to our Q3 growth. Now, turning to profitability, we started this year expecting over 50 basis points of operating pre-tax margin expansion. Through the first nine months of this year, we delivered 130 basis points of expansion, well ahead of our expectations. This performance is driven by our revenue scale, portfolio mix, and progress with productivity initiatives, enabling operating leverage while providing investment flexibility. We are raising IBM's full-year operating pre-tax margin expansion to over a point, and our operating tax rate expectation for the year remains in the mid-teens.
With continued strength in Z17, we now expect infrastructure to contribute over 1.5 points to IBM's revenue growth this year. In consulting, we are encouraged by our return to growth this quarter and continued progress in our GenAI book of business. Now we see an inflection in growth going forward, with Q4 revenue performance similar to our Q3 growth. Now, turning to profitability, we started this year expecting over 50 basis points of operating pre-tax margin expansion. Through the first nine months of this year, we delivered 130 basis points of expansion, well ahead of our expectations. This performance is driven by our revenue scale, portfolio mix, and progress with productivity initiatives, enabling operating leverage while providing investment flexibility. We are raising IBM's full-year operating pre-tax margin expansion to over a point, and our operating tax rate expectation for the year remains in the mid-teens.
James Kavanaugh: For Q4, we are comfortable with consensus estimates for constant currency revenue growth and profitability. Let me conclude by saying we are pleased with our continued disciplined execution and look forward to capturing growth opportunities ahead of us. Arvind and I are now happy to take your questions. Olympia, let's get started. Thank you, Jim. Before we begin Q&A, I'd like to mention a couple of items. First, supplemental information is provided at the end of the presentation. Then second, as always, I'd ask you to refrain from multi-part questions. Operator, let's please open it up for questions. Thank you. At this time, we'll begin the question and answer session of the conference. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.
For Q4, we are comfortable with consensus estimates for constant currency revenue growth and profitability. Let me conclude by saying we are pleased with our continued disciplined execution and look forward to capturing growth opportunities ahead of us. Arvind and I are now happy to take your questions. Olympia, let's get started.
Olympia McNerney: Thank you, Jim. Before we begin Q&A, I'd like to mention a couple of items. First, supplemental information is provided at the end of the presentation. Then second, as always, I'd ask you to refrain from multi-part questions. Operator, let's please open it up for questions.
Operator: Thank you. At this time, we'll begin the question and answer session of the conference. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. Our first question comes from Amit Daryanani with Evercore ISI. Please state your question.
James Kavanaugh: You may press Star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. Our first question comes from Amit Daryanani with Evercore ISI. Please state your question. Yep. Thanks a lot. Good afternoon, everyone. You know, I guess maybe just I want to focus on free cash flow. So I really appreciate the quantification of free cash flow at $14 billion for the year. And if I get my math right, this sort of implies free cash flow is up double digits in 2025 and your conversion rate's around 125%, give or take. Can you just touch on, you know, if there's any one-off dynamics that we should be aware of that are helping in free cash flow in 2025?
Amit Daryanani: Yep. Thanks a lot. Good afternoon, everyone. You know, I guess maybe just I want to focus on free cash flow. So I really appreciate the quantification of free cash flow at $14 billion for the year. And if I get my math right, this sort of implies free cash flow is up double digits in 2025 and your conversion rate's around 125%, give or take. Can you just touch on, you know, if there's any one-off dynamics that we should be aware of that are helping in free cash flow in 2025? I'm really just trying to think that as we get into 2026 and if your growth is in line to your longer-term models, is there anything that could preclude free cash flow growing a few points higher than sales growth, sort of the way you folks have talked about it? I'd love to just kind of spend a little bit of time on free cash flow and if anything, all depends on the capital allocation as well. Thank you.
James Kavanaugh: I'm really just trying to think that as we get into 2026 and if your growth is in line to your longer-term models, is there anything that could preclude free cash flow growing a few points higher than sales growth, sort of the way you folks have talked about it? I'd love to just kind of spend a little bit of time on free cash flow and if anything, all depends on the capital allocation as well. Thank you. Thanks, Amit. I appreciate the question. It's right at the heart of how Arvind has repositioned this company around the two key measures. One, accelerating revenue growth, and two, is driving that free cash flow engine that's going to fuel the investments for us to continue to make to drive long-term sustainable competitive advantage.
Jim Kavanaugh: Thanks, Amit. I appreciate the question. It's right at the heart of how Arvind has repositioned this company around the two key measures. One, accelerating revenue growth, and two, is driving that free cash flow engine that's going to fuel the investments for us to continue to make to drive long-term sustainable competitive advantage.
James Kavanaugh: But if you take a step back first, as we said in prepared remarks, we're very pleased with our free cash flow engine starting out the next evolution of our journey coming off the mid-term model. Year to date, $7.2 billion, up $600 million year over year, highest free cash flow margin in reported history through Q3 for our company. And I'll just state that underneath it, we overcame in Q3 a $500 million headwind from last year as a result of the Palo Alto QRadar transaction that was recorded as an asset sale and reduction in CapEx. So we got through 2025's headwind around that. What's driving that free cash flow? Probably the most important thing is the underlying fundamentals of our business: an accelerating top-line revenue growth profile and an operating leverage engine that is driving productivities like we haven't seen in a long period of time.
But if you take a step back first, as we said in prepared remarks, we're very pleased with our free cash flow engine starting out the next evolution of our journey coming off the mid-term model. Year to date, $7.2 billion, up $600 million year over year, highest free cash flow margin in reported history through Q3 for our company. And I'll just state that underneath it, we overcame in Q3 a $500 million headwind from last year as a result of the Palo Alto QRadar transaction that was recorded as an asset sale and reduction in CapEx. So we got through 2025's headwind around that. What's driving that free cash flow? Probably the most important thing is the underlying fundamentals of our business: an accelerating top-line revenue growth profile and an operating leverage engine that is driving productivities like we haven't seen in a long period of time.
James Kavanaugh: I think we're nine quarters in a row of driving operating leverage and significant margin productivity. So I would tell you, high quality, high sustainable free cash flow. That's what gave us the confidence for the second quarter in a row to take up our free cash flow estimate for the year, now about $14 billion. Why did we do that? We took up revenue, we took up operating margin, we took up adjusted EBITDA, we took up our profitability, and all that leads to free cash flow. When you take a look at what's driving that $14 billion, $2.5 billion, give or take, year-to-year growth in adjusted EBITDA, mid-teens growth, well above our model. Underneath that, you take a look at some of the dynamics we've been talking about since back in January. Yes, a higher profitable-based engine will pay higher cash tax.
I think we're nine quarters in a row of driving operating leverage and significant margin productivity. So I would tell you, high quality, high sustainable free cash flow. That's what gave us the confidence for the second quarter in a row to take up our free cash flow estimate for the year, now about $14 billion. Why did we do that? We took up revenue, we took up operating margin, we took up adjusted EBITDA, we took up our profitability, and all that leads to free cash flow. When you take a look at what's driving that $14 billion, $2.5 billion, give or take, year-to-year growth in adjusted EBITDA, mid-teens growth, well above our model. Underneath that, you take a look at some of the dynamics we've been talking about since back in January. Yes, a higher profitable-based engine will pay higher cash tax.
James Kavanaugh: Yes, we're investing long-term for this business. We are going to have higher CapEx outside of the QRadar transaction. And yes, we made a significant strategic acquisition. We've got acquisition-related charges and foregone interest. All of that is embedded in 2025's guidance. Now, you take a step back to the heart of your question of 2026. 2026, I would tell you, what is our free cash flow generation engine flywheel? It's accelerated revenue growth, the 5+% in this company, it's driving operating leverage, and it's leveraging an efficient balance sheet. We see all that continuing to play out in 2026. And those underlying fundamentals, yeah, they deliver a sustainable realization number, by the way, in the mid- to high 120s, kind of to your question. And by the way, we've been there for four years in a row already, so we can handle that.
Yes, we're investing long-term for this business. We are going to have higher CapEx outside of the QRadar transaction. And yes, we made a significant strategic acquisition. We've got acquisition-related charges and foregone interest. All of that is embedded in 2025's guidance. Now, you take a step back to the heart of your question of 2026. 2026, I would tell you, what is our free cash flow generation engine flywheel? It's accelerated revenue growth, the 5+% in this company, it's driving operating leverage, and it's leveraging an efficient balance sheet. We see all that continuing to play out in 2026. And those underlying fundamentals, yeah, they deliver a sustainable realization number, by the way, in the mid- to high 120s, kind of to your question. And by the way, we've been there for four years in a row already, so we can handle that.
James Kavanaugh: So you bring that all together, I think it talks to the statement and the confidence of our focused portfolio, our disciplined capital allocation, the diversity of our business model, and the relentless focus of us driving productivity and operating leverage that gives us the investment flexibility to continue driving long-term sustainable competitive advantage. So thank you very much for the question. Great. Operator, let's take our next question. Thank you. And your next question comes from Wamsi Mohan with Bank of America. Please state your question. Yes, thank you so much. Arvind, you said AI adoption is accelerating right at the top of the call. And I'm wondering if you can maybe help us think through the financial impact in maybe revenue terms for IBM, how we should think about the progression for that.
So you bring that all together, I think it talks to the statement and the confidence of our focused portfolio, our disciplined capital allocation, the diversity of our business model, and the relentless focus of us driving productivity and operating leverage that gives us the investment flexibility to continue driving long-term sustainable competitive advantage. So thank you very much for the question.
Olympia McNerney: Great. Operator, let's take our next question.
Operator: Thank you. And your next question comes from Wamsi Mohan with Bank of America. Please state your question.
Wamsi Mohan: Yes, thank you so much. Arvind, you said AI adoption is accelerating right at the top of the call. And I'm wondering if you can maybe help us think through the financial impact in maybe revenue terms for IBM, how we should think about the progression for that. Are we hitting some kind of inflection that we should see, you know, meaningful upside into 2026 on the AI front? And maybe quickly, your quick thoughts on maybe the impact of the federal government shutdown, if there's any materiality to that to IBM here in the fourth quarter. And if I could, Jim, if you could just clarify the organic growth in software in Q3 and expectations for transaction processing going into the end of the year. Thank you so much.
James Kavanaugh: Are we hitting some kind of inflection that we should see, you know, meaningful upside into 2026 on the AI front? And maybe quickly, your quick thoughts on maybe the impact of the federal government shutdown, if there's any materiality to that to IBM here in the fourth quarter. And if I could, Jim, if you could just clarify the organic growth in software in Q3 and expectations for transaction processing going into the end of the year. Thank you so much. Wamsi, thanks for those questions. Let me try and unpack it. Let me go with the easiest one first. The easiest one is on the current government shutdown. I would tell you that we see a de minimis impact to IBM. It's always hard to say zero because something could happen.
Arvind Krishna: Wamsi, thanks for those questions. Let me try and unpack it. Let me go with the easiest one first. The easiest one is on the current government shutdown. I would tell you that we see a de minimis impact to IBM. It's always hard to say zero because something could happen.
James Kavanaugh: We still got two months to go in the quarter, but so far, we have not seen any impact from the shutdown. The reason for that is the makeup of our business. Our technology business is largely comprised of hardware as well as software, software mostly on a subscription basis. These are running critical systems: payments for Social Security, benefits for the VA. All of these are considered essential, so I don't really see that at risk. A little bit over half the business is consulting projects, but the consulting we do is of a similar nature: ERP, benefits, helping people reduce paper, reduce errors, back to payments. These are all considered essential, and that is the reason that we, maybe in the minority of not seeing any direct impact so far.
We still got two months to go in the quarter, but so far, we have not seen any impact from the shutdown. The reason for that is the makeup of our business. Our technology business is largely comprised of hardware as well as software, software mostly on a subscription basis. These are running critical systems: payments for Social Security, benefits for the VA. All of these are considered essential, so I don't really see that at risk. A little bit over half the business is consulting projects, but the consulting we do is of a similar nature: ERP, benefits, helping people reduce paper, reduce errors, back to payments. These are all considered essential, and that is the reason that we, maybe in the minority of not seeing any direct impact so far.
James Kavanaugh: Now, I just leave it at that because so far, we have not. Nobody has come to us about any of these projects. So that's the first question that is straightforward. Next, you asked about AI. Look, our book of business, we talked about it being over $9.5 billion. Just the consulting piece was a billion and a half in the quarter itself. These are very real numbers. So as those consulting projects start to get executed and as that backlog builds up, certainly the contribution to consulting is going to be very real. We talked about another number to tie it there, which is not a different number, is the 200 projects in consulting which are already using digital workers, which effectively are the AI agents that we have built that get deployed by our consultants on behalf of our clients.
Now, I just leave it at that because so far, we have not. Nobody has come to us about any of these projects. So that's the first question that is straightforward. Next, you asked about AI. Look, our book of business, we talked about it being over $9.5 billion. Just the consulting piece was a billion and a half in the quarter itself. These are very real numbers. So as those consulting projects start to get executed and as that backlog builds up, certainly the contribution to consulting is going to be very real. We talked about another number to tie it there, which is not a different number, is the 200 projects in consulting which are already using digital workers, which effectively are the AI agents that we have built that get deployed by our consultants on behalf of our clients.
James Kavanaugh: About not quite, but close to 20% of our overall book of business is technology and software. And there, that is mostly subscription revenue as well as products that people are purchasing from us. So those numbers certainly begin to add up. And I would tell you that a big fuel behind both our OpenShift growth as well as our automation growth is due to the AI capabilities that are infused inside those products. So if I sort of put the first two pieces together, de minimis on the government shutdown and definitely the AI piece is a strong contributor to the software growth. And I believe it's a big piece of why consulting is beginning to return to growth because we called the play to move towards AI almost two years ago.
About not quite, but close to 20% of our overall book of business is technology and software. And there, that is mostly subscription revenue as well as products that people are purchasing from us. So those numbers certainly begin to add up. And I would tell you that a big fuel behind both our OpenShift growth as well as our automation growth is due to the AI capabilities that are infused inside those products. So if I sort of put the first two pieces together, de minimis on the government shutdown and definitely the AI piece is a strong contributor to the software growth. And I believe it's a big piece of why consulting is beginning to return to growth because we called the play to move towards AI almost two years ago.
James Kavanaugh: So as that book of business is built up, it is overcoming the headwinds from staff augmentation projects going away and people getting rid of discretionary spending in consulting. Jim, I'll let you take the third piece. Yeah. Just to amplify the last piece, and then I'll get into your question about software organic and TP. To Arvind's point, you know, year to date from a software perspective, we're growing 8.5% overall, approaching 9% right now. About two points of that growth is coming out from our GenAI book of business. So we're getting very good realization and penetration. To Arvind's point on consulting, north of a $7.5 billion book of business, I'd put that up against any consulting company right now. We called that play, to Arvind's point, a few years ago.
So as that book of business is built up, it is overcoming the headwinds from staff augmentation projects going away and people getting rid of discretionary spending in consulting. Jim, I'll let you take the third piece.
Jim Kavanaugh: Yeah. Just to amplify the last piece, and then I'll get into your question about software organic and TP. To Arvind's point, you know, year to date from a software perspective, we're growing 8.5% overall, approaching 9% right now. About two points of that growth is coming out from our GenAI book of business. So we're getting very good realization and penetration. To Arvind's point on consulting, north of a $7.5 billion book of business, I'd put that up against any consulting company right now. We called that play, to Arvind's point, a few years ago.
James Kavanaugh: We do think we have a differentiated competitive value proposition of a company with an integrated tech stack plus strategic partnership AI plus a consulting business at scale with an integral part of IBM client zero that drives distinctive use cases and references. We've already had over 1,000 client engagements year to date around GenAI from an enterprise software and consulting perspective overall. In consulting, it's already north of 22% of our $31 billion backlog. And in this quarter, we eclipsed double-digit composition of our revenue, 12% of our revenue, growing very nicely at still a 2 to 3-point competitive advantage in terms of margin overall. And by the way, you see that play out in our consulting margins, you know, year to date up 220 basis points, the highest margins we've had in a long time.
We do think we have a differentiated competitive value proposition of a company with an integrated tech stack plus strategic partnership AI plus a consulting business at scale with an integral part of IBM client zero that drives distinctive use cases and references. We've already had over 1,000 client engagements year to date around GenAI from an enterprise software and consulting perspective overall. In consulting, it's already north of 22% of our $31 billion backlog. And in this quarter, we eclipsed double-digit composition of our revenue, 12% of our revenue, growing very nicely at still a 2 to 3-point competitive advantage in terms of margin overall. And by the way, you see that play out in our consulting margins, you know, year to date up 220 basis points, the highest margins we've had in a long time.
James Kavanaugh: Now, to your point about software, software, you know, we're very pleased growing 9% in the quarter. We accelerated about three points organically quarter to quarter. This wasn't an inorganic contribution. In fact, our inorganic contribution came down as we wrapped on some of these. It's being driven by the strong contribution of our high-value recurring revenue. Now, a book of business, $23 billion, up 9%. And when you look underneath it, you know, TP, TP right now, just given the strength of the mainframe cycle driving cycle dynamics, we're very encouraged around the future monetization value opportunity. And as you heard in prepared remarks, we're calling a return to growth in TP in the fourth quarter with the strong pipeline we got. By the way, if you map it back to the Z16 cycle, what happened? In 2022, our TP revenue was flat.
Now, to your point about software, software, you know, we're very pleased growing 9% in the quarter. We accelerated about three points organically quarter to quarter. This wasn't an inorganic contribution. In fact, our inorganic contribution came down as we wrapped on some of these. It's being driven by the strong contribution of our high-value recurring revenue. Now, a book of business, $23 billion, up 9%. And when you look underneath it, you know, TP, TP right now, just given the strength of the mainframe cycle driving cycle dynamics, we're very encouraged around the future monetization value opportunity. And as you heard in prepared remarks, we're calling a return to growth in TP in the fourth quarter with the strong pipeline we got. By the way, if you map it back to the Z16 cycle, what happened? In 2022, our TP revenue was flat.
James Kavanaugh: In 2023, we grew high single digit. In 2024, we grew double digit. You look at 2025 right now, we're calling back to growth, probably a quarter early compared to a historical cycle. We feel very good about that growth profile. And given the strong Z17, where we've shipped over 100% more MIPS than the Z16 or the Z16 cycle, we're actually feeling pretty good about that valuation opportunity moving forward. Great. Operator, let's take our next question. Your next question comes from Ben Reitzes with Melius Research. Please state your question. Hey, guys. Thanks a lot. Appreciate the question. Arvind, I appreciate that fourth quarter reported software growth is set to accelerate in your guidance. Sounds like above 10%. I was just wondering about next year. You do wrap the HashiCorp acquisition in the spring, I think March. Are there signs that it can accelerate from here?
In 2023, we grew high single digit. In 2024, we grew double digit. You look at 2025 right now, we're calling back to growth, probably a quarter early compared to a historical cycle. We feel very good about that growth profile. And given the strong Z17, where we've shipped over 100% more MIPS than the Z16 or the Z16 cycle, we're actually feeling pretty good about that valuation opportunity moving forward.
Olympia McNerney: Great. Operator, let's take our next question.
Operator: Your next question comes from Ben Reitzes with Melius Research. Please state your question.
Ben Reitzes: Hey, guys. Thanks a lot. Appreciate the question. Arvind, I appreciate that fourth quarter reported software growth is set to accelerate in your guidance. Sounds like above 10%. I was just wondering about next year. You do wrap the HashiCorp acquisition in the spring, I think March. Are there signs that it can accelerate from here? You know, obviously with Red Hat decelerating a little, you know, I just think folks would like to know broadly if you can keep double-digit next year or even accelerate based on the portfolio, realizing that you're wrapping the acquisitions in that time frame. Thanks so much, guys.
James Kavanaugh: You know, obviously with Red Hat decelerating a little, you know, I just think folks would like to know broadly if you can keep double-digit next year or even accelerate based on the portfolio, realizing that you're wrapping the acquisitions in that time frame. Thanks so much, guys. Yeah, Ben, great question. So let me decompose it into the four parts of software that we talk about, and then we'll touch on acquisitions and their contribution. Then I'll ask Jim to try to put it all together back into the financial model for you. So let's take Red Hat. We talked about 20% signings growth this quarter. We had similar numbers in the previous quarter. As that becomes the bulk of the Red Hat book of business entering 2026, we do expect to see Red Hat returning to mid-teens or close to mid-teens growth.
Arvind Krishna: Yeah, Ben, great question. So let me decompose it into the four parts of software that we talk about, and then we'll touch on acquisitions and their contribution. Then I'll ask Jim to try to put it all together back into the financial model for you. So let's take Red Hat. We talked about 20% signings growth this quarter. We had similar numbers in the previous quarter. As that becomes the bulk of the Red Hat book of business entering 2026, we do expect to see Red Hat returning to mid-teens or close to mid-teens growth.
James Kavanaugh: So that would be an acceleration from where we are this quarter. Then next, we talked about, and in the last question, Jim touched on transaction processing or mainframe software. We have seen this happen multiple times. In the first couple of quarters of a new cycle, TP tends to come down because people are very much focused on getting their hardware capacity. As that hardware capacity gets deployed, then the TP revenue begins to come up along with some of the ELA cycle dynamics that are there, and we begin to see that. So I expect to see TP grow, not quite in double digits, to be clear, but let's call it low single digits for sure into next year. Automation has been growing in this last quarter at 22%.
So that would be an acceleration from where we are this quarter. Then next, we talked about, and in the last question, Jim touched on transaction processing or mainframe software. We have seen this happen multiple times. In the first couple of quarters of a new cycle, TP tends to come down because people are very much focused on getting their hardware capacity. As that hardware capacity gets deployed, then the TP revenue begins to come up along with some of the ELA cycle dynamics that are there, and we begin to see that. So I expect to see TP grow, not quite in double digits, to be clear, but let's call it low single digits for sure into next year. Automation has been growing in this last quarter at 22%.
James Kavanaugh: Yes, the HashiCorp acquired revenue was a piece of it, and as you point out, that'll go away in the second quarter. However, the acquired properties we have tend to provide continued growth for quite a while. Because of the Hashi bookings, which are significantly ahead of where we had planned them to be, I expect we'll continue to see growth out of Hashi through 2026 as well. Now, not quite as much as an acquired growth, but I do expect that we'll continue to see automation in the double digits for sure, but maybe not north of 20. We've continued to see the data and AI portfolio grow in the mid to high single digits. Now, that does put aside what other acquisitions we will do.
Yes, the HashiCorp acquired revenue was a piece of it, and as you point out, that'll go away in the second quarter. However, the acquired properties we have tend to provide continued growth for quite a while. Because of the Hashi bookings, which are significantly ahead of where we had planned them to be, I expect we'll continue to see growth out of Hashi through 2026 as well. Now, not quite as much as an acquired growth, but I do expect that we'll continue to see automation in the double digits for sure, but maybe not north of 20. We've continued to see the data and AI portfolio grow in the mid to high single digits. Now, that does put aside what other acquisitions we will do.
James Kavanaugh: Part of our model for software is that we'll get a couple of points of growth from acquired revenue, and we see a good market for targets. Yes, that has yet to play out, but in the current regulatory environment, combined with what we can see out there, we expect that we should be able to do that as well. So that was sort of giving you a color on the portfolio and the different pieces. I'll ask Jim to get into then closing it back up in terms of sort of what is the organic and inorganic and overall software numbers. Yeah. Thanks, Ben, for the question overall. I mean, obviously software, we are a software-centric platform company overall.
Part of our model for software is that we'll get a couple of points of growth from acquired revenue, and we see a good market for targets. Yes, that has yet to play out, but in the current regulatory environment, combined with what we can see out there, we expect that we should be able to do that as well. So that was sort of giving you a color on the portfolio and the different pieces. I'll ask Jim to get into then closing it back up in terms of sort of what is the organic and inorganic and overall software numbers.
Jim Kavanaugh: Yeah. Thanks, Ben, for the question overall. I mean, obviously software, we are a software-centric platform company overall.
James Kavanaugh: So it's at the heart of both our top-line growth vector profile and also, more importantly, from a free cash flow generation engine overall because it delivers about three quarters of our profit. You take a look at 2025, I think we positioned extremely well with regards to accelerating revenue growth throughout the year off of tougher comps at the end of 2024. We got to remember that. I think that's a reflection of the strength of that portfolio, the diversity of our portfolio across the board, and the disciplined execution. Now, when you look at 2026, early indicators, and I'll put them in some big buckets. Arvind went into some of the detail. First, I think we shouldn't forget, and Arvind called this out 90 days ago, which I think surprised many of you.
So it's at the heart of both our top-line growth vector profile and also, more importantly, from a free cash flow generation engine overall because it delivers about three quarters of our profit. You take a look at 2025, I think we positioned extremely well with regards to accelerating revenue growth throughout the year off of tougher comps at the end of 2024. We got to remember that. I think that's a reflection of the strength of that portfolio, the diversity of our portfolio across the board, and the disciplined execution. Now, when you look at 2026, early indicators, and I'll put them in some big buckets. Arvind went into some of the detail. First, I think we shouldn't forget, and Arvind called this out 90 days ago, which I think surprised many of you.
James Kavanaugh: We're operating in an attractive TAM and a positive backdrop from a technology perspective overall. We feel very good about technology being a source of competitive advantage. And you're seeing that play out in areas around hybrid cloud modernization, around AI, around automation in many areas. We see that continued. So the market backdrop, we couldn't be more optimistic around 2026. Two, the strength and diversity of our portfolio; not only has it been repositioned over the last three or four years to accelerate growth, what is happening? More and more of our composition of software is now aligned to higher growth and markets, which gives us a better vector of growth even as we go into 2026. Three, our annuity portfolio. And I don't think we get a lot of value for this, and we keep bringing it up.
We're operating in an attractive TAM and a positive backdrop from a technology perspective overall. We feel very good about technology being a source of competitive advantage. And you're seeing that play out in areas around hybrid cloud modernization, around AI, around automation in many areas. We see that continued. So the market backdrop, we couldn't be more optimistic around 2026. Two, the strength and diversity of our portfolio; not only has it been repositioned over the last three or four years to accelerate growth, what is happening? More and more of our composition of software is now aligned to higher growth and markets, which gives us a better vector of growth even as we go into 2026. Three, our annuity portfolio. And I don't think we get a lot of value for this, and we keep bringing it up.
James Kavanaugh: Over a $23 billion ARR book of business, we feel we're going to exit Q4 at double digits. That's a great indicator for 2026 because that is 80% of our software portfolio overall. Four, new innovation, GenAI. I already talked about GenAI, the book of business, and the acceleration we got. And all of the capital investment that's going into the infrastructure providers, I think, is just going to accelerate the innovation curve for enterprise AI overall. And we are a leader in enterprise AI just given our tech stack, our software portfolio, and consulting, and that should deliver a few points. Five, Red Hat. You know, our bookings, our three-month, our six-month, our nine-month, our twelve-month RPO shows accelerating growth coming off of 20% bookings overall.
Over a $23 billion ARR book of business, we feel we're going to exit Q4 at double digits. That's a great indicator for 2026 because that is 80% of our software portfolio overall. Four, new innovation, GenAI. I already talked about GenAI, the book of business, and the acceleration we got. And all of the capital investment that's going into the infrastructure providers, I think, is just going to accelerate the innovation curve for enterprise AI overall. And we are a leader in enterprise AI just given our tech stack, our software portfolio, and consulting, and that should deliver a few points. Five, Red Hat. You know, our bookings, our three-month, our six-month, our nine-month, our twelve-month RPO shows accelerating growth coming off of 20% bookings overall.
James Kavanaugh: By the way, we actually had more opportunity to do even better than that 20%, and that should infuse an inflection in growth. Next, M&A. Now, the point I would bring up on M&A, Arvind already talked about, it's embedded in our model. We've said that all along. But again, I think we've got to continue selling the investor narrative because that M&A drives a much higher organic growth engine because those synergies play to those acquisitions. That's how we pay for control premiums. That's how we get an accelerated top-line growth. That's how we get an accelerated bottom-line growth, and we get accretive value in free cash flow in two years. So our organic engine continues to grow. And then finally, TP modernization. Arvind wrapped up on it. Let's just remind all the investors. TP gets monetized based on hardware installed MIPS usage.
Jim Kavanaugh: By the way, we actually had more opportunity to do even better than that 20%, and that should infuse an inflection in growth. Next, M&A. Now, the point I would bring up on M&A, Arvind already talked about, it's embedded in our model. We've said that all along. But again, I think we've got to continue selling the investor narrative because that M&A drives a much higher organic growth engine because those synergies play to those acquisitions. That's how we pay for control premiums. That's how we get an accelerated top-line growth. That's how we get an accelerated bottom-line growth, and we get accretive value in free cash flow in two years. So our organic engine continues to grow. And then finally, TP modernization. Arvind wrapped up on it. Let's just remind all the investors. TP gets monetized based on hardware installed MIPS usage.
James Kavanaugh: I already said two quarters in, albeit early, we're 130% program to program on Z17. Off of a Z16, that was the most successful program in the history of IBM. We're at 130%. So I do my math and calculation. Higher capacity opportunity creates higher modernization opportunity, creates higher price opportunity, creates higher value creation opportunity. So I think when you look at it, we feel pretty good about delivering our model and software. Operator, let's take the next question. Your next question comes from Eric Woodring with Morgan Stanley. Please state your question. Hey, guys. Thank you very much for taking my question. Just one quick clarification question there, Arvind. The growth rates you just provided in the response to that question for 2026 or into 2026, I just wanted to confirm those were all organic growth rates or whether they included M&A embedded in them.
I already said two quarters in, albeit early, we're 130% program to program on Z17. Off of a Z16, that was the most successful program in the history of IBM. We're at 130%. So I do my math and calculation. Higher capacity opportunity creates higher modernization opportunity, creates higher price opportunity, creates higher value creation opportunity. So I think when you look at it, we feel pretty good about delivering our model and software.
Olympia McNerney: Operator, let's take the next question.
Operator: Your next question comes from Eric Woodring with Morgan Stanley. Please state your question.
Erik Woodring: Hey, guys. Thank you very much for taking my question. Just one quick clarification question there, Arvind. The growth rates you just provided in the response to that question for 2026 or into 2026, I just wanted to confirm those were all organic growth rates or whether they included M&A embedded in them. And then my question, just taking a step back, Arvind, is we've seen cloud providers experience exceptional growth recently, particularly in infrastructure services and large-scale AI workloads. How does IBM view that trend? And do you see a similar opportunity for IBM Cloud to capture long-term infrastructure-driven demand? Thanks.
James Kavanaugh: And then my question, just taking a step back, Arvind, is we've seen cloud providers experience exceptional growth recently, particularly in infrastructure services and large-scale AI workloads. How does IBM view that trend? And do you see a similar opportunity for IBM Cloud to capture long-term infrastructure-driven demand? Thanks. The growth rates that we talked about, we tend not to do much M&A or any in both our mainframe or TPS, as well as in some of the other areas. The growth rates I mentioned, I would call it, are largely organic without having any significant M&A, but tokens, small M&A are probably all included in there, Eric. But if we do anything substantial, it would help accelerate those growth rates. Let's just put it that way. I'll also let Jim comment on it after I talk about the cloud opportunity. We actually partner deeply with all the hyperscalers.
Arvind Krishna: The growth rates that we talked about, we tend not to do much M&A or any in both our mainframe or TPS, as well as in some of the other areas. The growth rates I mentioned, I would call it, are largely organic without having any significant M&A, but tokens, small M&A are probably all included in there, Eric. But if we do anything substantial, it would help accelerate those growth rates. Let's just put it that way. I'll also let Jim comment on it after I talk about the cloud opportunity. We actually partner deeply with all the hyperscalers.
James Kavanaugh: A thing that we haven't talked about, but it's certainly no secret. For example, we are one of CoreWeave's large clients. We also tend to use a lot of infrastructure at AWS, at Azure, as well as at GCP. So as opposed to that, it's an opportunity for us. Eric, it's the flip. We get a huge opportunity to do both consulting projects as well as deploy our software on those infrastructures for our clients. As an example, if I take one of our very large health insurance clients, as they think through where they're going to deploy their AI models, they do not like deploying in a public instance, but they're perfectly fine getting a private instance in a cloud and deploying models there, deploying our software stacks there, and getting growth. So we tend to do that.
A thing that we haven't talked about, but it's certainly no secret. For example, we are one of CoreWeave's large clients. We also tend to use a lot of infrastructure at AWS, at Azure, as well as at GCP. So as opposed to that, it's an opportunity for us. Eric, it's the flip. We get a huge opportunity to do both consulting projects as well as deploy our software on those infrastructures for our clients. As an example, if I take one of our very large health insurance clients, as they think through where they're going to deploy their AI models, they do not like deploying in a public instance, but they're perfectly fine getting a private instance in a cloud and deploying models there, deploying our software stacks there, and getting growth. So we tend to do that.
James Kavanaugh: We also tend to, in some cases, for example, with Groq, we are deploying Groq in people's own data centers. So that's a big opportunity that comes there that'll show up in revenue for us, both in consulting as well as in software, because on top of the Groq infrastructure, we tend to put our software stacks in some instances. So it's less about us getting an opportunity in our cloud only, but much more that that's a growth vector that we are able to ride and that helps increase overall growth rate in both software as well as in consulting. And lastly, let's not forget, our biggest beneficiary of AI infrastructure is our mainframe and our storage portfolio at this time. The latest generation mainframe, we will surprise you with some of the numbers.
We also tend to, in some cases, for example, with Groq, we are deploying Groq in people's own data centers. So that's a big opportunity that comes there that'll show up in revenue for us, both in consulting as well as in software, because on top of the Groq infrastructure, we tend to put our software stacks in some instances. So it's less about us getting an opportunity in our cloud only, but much more that that's a growth vector that we are able to ride and that helps increase overall growth rate in both software as well as in consulting. And lastly, let's not forget, our biggest beneficiary of AI infrastructure is our mainframe and our storage portfolio at this time. The latest generation mainframe, we will surprise you with some of the numbers.
James Kavanaugh: This quarter, a fully populated single system is capable of doing 450 billion inferences per day. As clients purchase that capability, that'll be both a further accelerant to mainframe infrastructure growth, but it also comes with a software stack that helps them do all of that inferencing. If I look at our storage portfolio, as many people have realized, you need a lot of storage to be able to do AI training. We are going to be beneficiaries of that inside our storage portfolio as people deploy that. So I would much more say we are actually the direct beneficiary of the hyperscaler growth of AI capability and capacity as enterprises use this capability. And two, we will be a beneficiary in our mainframe and storage stack in a direct way. I think that that would, I hope, Eric, address that part of the question.
This quarter, a fully populated single system is capable of doing 450 billion inferences per day. As clients purchase that capability, that'll be both a further accelerant to mainframe infrastructure growth, but it also comes with a software stack that helps them do all of that inferencing. If I look at our storage portfolio, as many people have realized, you need a lot of storage to be able to do AI training. We are going to be beneficiaries of that inside our storage portfolio as people deploy that. So I would much more say we are actually the direct beneficiary of the hyperscaler growth of AI capability and capacity as enterprises use this capability. And two, we will be a beneficiary in our mainframe and storage stack in a direct way. I think that that would, I hope, Eric, address that part of the question.
James Kavanaugh: Yeah, Eric, and just to the numbers piece, I mean, first of all, we are all focused here to execute a very important fourth quarter, to finish a very successful 2025 for IBM. But both Arvind and I are given some color about 2026, about the confidence we have in our portfolio. But let me just take a step back and remind you on software. Our software model shared at Investor Day approaching double digits. That is all in. That has two to three points, give or take, each year, maybe a point more and maybe a point less, depending on our disciplined capital allocation around M&A of inorganic contribution and six to seven to eight points of organic.
Jim Kavanaugh: Yeah, Eric, and just to the numbers piece, I mean, first of all, we are all focused here to execute a very important fourth quarter, to finish a very successful 2025 for IBM. But both Arvind and I are given some color about 2026, about the confidence we have in our portfolio. But let me just take a step back and remind you on software. Our software model shared at Investor Day approaching double digits. That is all in. That has two to three points, give or take, each year, maybe a point more and maybe a point less, depending on our disciplined capital allocation around M&A of inorganic contribution and six to seven to eight points of organic.
James Kavanaugh: When you look at 2025, you go do the math, we're probably going to be approaching 6+% organic growth overall, and we're going to have somewhere three to four points this year because we took advantage of a very strategic opportunity with HashiCorp this year. But when you take a look at 2026, the TP growth modernization value that I talked about, the Red Hat accelerated growth profile that's on our revenue under contract, the annuity growth profile that is approaching or now going to be double digits at the exiting the year, each of those are going to fuel that organic growth engine overall. So I think big picture, the model is pretty much what we kind of look at right now for 2026. Great. Operator, let's take the next question. Your next question comes from Jim Schneider with Goldman Sachs. Please state your question. Good evening.
When you look at 2025, you go do the math, we're probably going to be approaching 6+% organic growth overall, and we're going to have somewhere three to four points this year because we took advantage of a very strategic opportunity with HashiCorp this year. But when you take a look at 2026, the TP growth modernization value that I talked about, the Red Hat accelerated growth profile that's on our revenue under contract, the annuity growth profile that is approaching or now going to be double digits at the exiting the year, each of those are going to fuel that organic growth engine overall. So I think big picture, the model is pretty much what we kind of look at right now for 2026.
Olympia McNerney: Great. Operator, let's take the next question.
Operator: Your next question comes from Jim Schneider with Goldman Sachs. Please state your question. Good evening.
James Kavanaugh: Thanks for taking my question. Arvind, I was wondering if you could maybe elaborate a little bit on how you're thinking about M&A from a target perspective. You've previously stated that you're looking to accelerate growth and you're looking for things that fit strategically with a portfolio. But on the margin, anything in any way you're thinking about differently about either the portfolio or the product piece of it or the potential size of transaction you might like to undertake, and specifically, would you consider undertaking a somewhat larger, more transformative transaction, maybe not quite as big as you did with Red Hat, but of sort of similar scale relative to your overall portfolio? Thank you. Yeah. Jim, thanks for the question. Look, M&A is an extremely important part of our strategy. So I want to just perhaps reiterate because this has come up on prior calls as well.
Jim Schneider: Thanks for taking my question. Arvind, I was wondering if you could maybe elaborate a little bit on how you're thinking about M&A from a target perspective. You've previously stated that you're looking to accelerate growth and you're looking for things that fit strategically with a portfolio. But on the margin, anything in any way you're thinking about differently about either the portfolio or the product piece of it or the potential size of transaction you might like to undertake, and specifically, would you consider undertaking a somewhat larger, more transformative transaction, maybe not quite as big as you did with Red Hat, but of sort of similar scale relative to your overall portfolio? Thank you.
Arvind Krishna: Yeah. Jim, thanks for the question. Look, M&A is an extremely important part of our strategy. So I want to just perhaps reiterate because this has come up on prior calls as well.
James Kavanaugh: We look at it always in a multi-year window. We kind of look at what is our excess cash flow over a few years. Once we have that window, that means we can sort of buy ahead, which means we can sort of lean in. If we don't find a good target, like we didn't, for example, I think in 2023, then we actually spent much less than we could have. That's just a backdrop to the amount of financial flexibility that we have, which, if I remember at our Investor Day earlier this year, we laid out that we have somewhere in the mid-20s, perhaps a bit more flexibility over a three-year window. That's kind of a way to sort of look at it. Next, we are very focused on the areas that we have already explained as our strategy.
We look at it always in a multi-year window. We kind of look at what is our excess cash flow over a few years. Once we have that window, that means we can sort of buy ahead, which means we can sort of lean in. If we don't find a good target, like we didn't, for example, I think in 2023, then we actually spent much less than we could have. That's just a backdrop to the amount of financial flexibility that we have, which, if I remember at our Investor Day earlier this year, we laid out that we have somewhere in the mid-20s, perhaps a bit more flexibility over a three-year window. That's kind of a way to sort of look at it. Next, we are very focused on the areas that we have already explained as our strategy.
James Kavanaugh: Very top level, we say hybrid cloud and artificial intelligence. That translates into our hybrid portfolio, our automation portfolio, and our data and AI portfolio. You've seen us do acquisitions in there. For example, we bought an AI company that does LLMs, but it fit into our hybrid portfolio because it's a direct part of the Red Hat and OpenShift portfolios. We did HashiCorp, which fits directly into automation. We did data stacks, which fits into data. When I look at the target lists, there is, I think, a pretty rich list of opportunities that are out there in the private markets, in the PE world, and the public markets across those opportunities that we think will, some of them will be actionable. It's hard to predict upfront which are and which are not.
Very top level, we say hybrid cloud and artificial intelligence. That translates into our hybrid portfolio, our automation portfolio, and our data and AI portfolio. You've seen us do acquisitions in there. For example, we bought an AI company that does LLMs, but it fit into our hybrid portfolio because it's a direct part of the Red Hat and OpenShift portfolios. We did HashiCorp, which fits directly into automation. We did data stacks, which fits into data. When I look at the target lists, there is, I think, a pretty rich list of opportunities that are out there in the private markets, in the PE world, and the public markets across those opportunities that we think will, some of them will be actionable. It's hard to predict upfront which are and which are not.
James Kavanaugh: So I think that if I put it that way, and just to be clear, anything that is of size has to fit three criteria. It has to fit with the strategy we just laid out. There has to be synergy, a.k.a. the growth rate inside IBM will be above what it was as a standalone entity. Some of that comes from our geography spread. We have a sales team in most countries in the world. Some of it comes by the ability to bundle more attractive offerings together. And it comes from faster deployment, for example, leveraging our consulting team or the rest of our sales team. All three will be able to add to a faster growth rate. Third, if it is of size, then we are very disciplined also that we like it to become accretive to cash by the end of the second year.
So I think that if I put it that way, and just to be clear, anything that is of size has to fit three criteria. It has to fit with the strategy we just laid out. There has to be synergy, a.k.a. the growth rate inside IBM will be above what it was as a standalone entity. Some of that comes from our geography spread. We have a sales team in most countries in the world. Some of it comes by the ability to bundle more attractive offerings together. And it comes from faster deployment, for example, leveraging our consulting team or the rest of our sales team. All three will be able to add to a faster growth rate. Third, if it is of size, then we are very disciplined also that we like it to become accretive to cash by the end of the second year.
James Kavanaugh: So those are the criteria. But as you've seen, we have found plenty in the last few years that do fit that whole criteria. So I hope that that gives you a sense. Now, your question on larger, I'll just use that word, larger. We will never rule anything out, but it has to meet all the criteria that we just laid out. It is not for size alone. Red Hat allowed us to enter a new space, helped accelerate IBM's overall growth rate, by the way, both in software and in consulting. So that was the sort of the synergy piece that was there. And many people forget, Red Hat also had a very attractive free cash flow profile that we have been able to leverage since the acquisition. Great. Operator, let's take one final question. Thank you. And that question comes from Brian Essex with JPMorgan.
So those are the criteria. But as you've seen, we have found plenty in the last few years that do fit that whole criteria. So I hope that that gives you a sense. Now, your question on larger, I'll just use that word, larger. We will never rule anything out, but it has to meet all the criteria that we just laid out. It is not for size alone. Red Hat allowed us to enter a new space, helped accelerate IBM's overall growth rate, by the way, both in software and in consulting. So that was the sort of the synergy piece that was there. And many people forget, Red Hat also had a very attractive free cash flow profile that we have been able to leverage since the acquisition.
Olympia McNerney: Great. Operator, let's take one final question.
Operator: Thank you. And that question comes from Brian Essex with JPMorgan. Please state your question.
James Kavanaugh: Please state your question. Hi, good afternoon, and thank you for taking the question. Arvind, maybe as a follow-up to part of Eric's question, and I appreciate your hybrid exposure here. But could you generalize what you're seeing with regard to mixed enterprises focus on AI readiness? Are cloud-native ISV-based agentic applications maybe targeted at task and point solution automation? Are those low-hanging fruit to prove ROI before pursuing self-hosted projects? And then maybe within the IT budgets, where's the spending coming from? What's at risk of getting trimmed as companies focus on adopting AI-based technology? So Brian, let me address the first part of your question with a bit of depth. I actually think that these are an and. Are people going to leverage ISV?
Brian Essex: Hi, good afternoon, and thank you for taking the question. Arvind, maybe as a follow-up to part of Eric's question, and I appreciate your hybrid exposure here. But could you generalize what you're seeing with regard to mixed enterprises focus on AI readiness? Are cloud-native ISV-based agentic applications maybe targeted at task and point solution automation? Are those low-hanging fruit to prove ROI before pursuing self-hosted projects? And then maybe within the IT budgets, where's the spending coming from? What's at risk of getting trimmed as companies focus on adopting AI-based technology?
Arvind Krishna: So Brian, let me address the first part of your question with a bit of depth. I actually think that these are an and. Are people going to leverage ISV?
James Kavanaugh: Otherwise, I'll call it SaaS applications for getting exposure to AI and agents, either as part of those entities or as added value onto them. And there are hundreds, if not thousands, of little boutique companies that provide some of those agents that are out there. I think they'll absolutely do that. They'll kick the tires on it. They'll get some value. But at the end of the day, to get real value from AI, people have to be able to integrate their existing applications. How do they tie what is happening in their payroll system and HR system to perhaps something that is happening in their CRM system, to perhaps something that is happening in their ERP system? As people begin to want to build much more profound agents, that is where a lot of the action that we see is happening.
Otherwise, I'll call it SaaS applications for getting exposure to AI and agents, either as part of those entities or as added value onto them. And there are hundreds, if not thousands, of little boutique companies that provide some of those agents that are out there. I think they'll absolutely do that. They'll kick the tires on it. They'll get some value. But at the end of the day, to get real value from AI, people have to be able to integrate their existing applications. How do they tie what is happening in their payroll system and HR system to perhaps something that is happening in their CRM system, to perhaps something that is happening in their ERP system? As people begin to want to build much more profound agents, that is where a lot of the action that we see is happening.
James Kavanaugh: As people try to build those agents out, then they get deeply concerned about what is that data, where is that data going, and they are going to deploy those either in their own data centers or in a private instance. Note, a private instance on the cloud is quite protected, and people do deploy a lot of critical applications that are there. But if I think about our clients in the regulated industries, banking, and insurance still is very much a data center as well as a cloud picture. If I look at healthcare, healthcare data tends not to go out very much from their own data centers. If I look at telecom, most people build their own backbones and their data and applications reside there, but certain other things like marketing may well reside in the public cloud.
As people try to build those agents out, then they get deeply concerned about what is that data, where is that data going, and they are going to deploy those either in their own data centers or in a private instance. Note, a private instance on the cloud is quite protected, and people do deploy a lot of critical applications that are there. But if I think about our clients in the regulated industries, banking, and insurance still is very much a data center as well as a cloud picture. If I look at healthcare, healthcare data tends not to go out very much from their own data centers. If I look at telecom, most people build their own backbones and their data and applications reside there, but certain other things like marketing may well reside in the public cloud.
James Kavanaugh: So as we begin to look upon all that, I believe that we are at the very beginning. I would actually characterize this, Brian, that if I was to use the baseball analogy, we are still in the first innings of enterprise AI rollout, and I expect that we will see an and. We will see more SaaS AI usage. We will see more public cloud AI usage, and we will begin to see a lot more private AI usage as people begin to get into more critical applications and agents. On the IT budgets, look, IT budgets have been growing ahead of GDP. That's simply an observation. I think this began four or five years ago, but IT budgets are growing typically two to three points ahead of GDP growth. You combine that then with inflation because GDP, after all, is real, not nominal.
So as we begin to look upon all that, I believe that we are at the very beginning. I would actually characterize this, Brian, that if I was to use the baseball analogy, we are still in the first innings of enterprise AI rollout, and I expect that we will see an and. We will see more SaaS AI usage. We will see more public cloud AI usage, and we will begin to see a lot more private AI usage as people begin to get into more critical applications and agents. On the IT budgets, look, IT budgets have been growing ahead of GDP. That's simply an observation. I think this began four or five years ago, but IT budgets are growing typically two to three points ahead of GDP growth. You combine that then with inflation because GDP, after all, is real, not nominal.
James Kavanaugh: I see IT budgets staying healthy. So a lot of the growth comes from the fact that the IT budgets are growing as opposed to at the cost of something else. That said, I think people are getting very, very effective at trying to run and maintain with lower costs and putting more money towards newer projects. Five, 10 years ago, that ratio used to be 70/30. 70 are running what is, 30 are new. I think that is shifting more towards a 60/40 spread. And where it'll go is where we'll get the benefit. That is why our automation portfolio and our hybrid portfolio get a lot more growth because people are using that. So it's sort of substituting for labor and, in some cases, for services by letting those capabilities move into software. Great. Operator, I think we have time for one last question. Thank you.
I see IT budgets staying healthy. So a lot of the growth comes from the fact that the IT budgets are growing as opposed to at the cost of something else. That said, I think people are getting very, very effective at trying to run and maintain with lower costs and putting more money towards newer projects. Five, 10 years ago, that ratio used to be 70/30. 70 are running what is, 30 are new. I think that is shifting more towards a 60/40 spread. And where it'll go is where we'll get the benefit. That is why our automation portfolio and our hybrid portfolio get a lot more growth because people are using that. So it's sort of substituting for labor and, in some cases, for services by letting those capabilities move into software.
Olympia McNerney: Great. Operator, I think we have time for one last question.
Operator: Thank you. And the next question comes from Mark Newman with Bernstein. Please state your question.
James Kavanaugh: And the next question comes from Mark Newman with Bernstein. Please state your question. Hi, thanks for taking my question. Very good to see the growing AI book of business, and thanks for those comments just now. Arvind, I don't think you've given any specific breakdown yet on the breakdown between software and consulting of the AI book of business. Is there any clarity on that? I think it used to be 80/20. Just want to clarify if there's any clarity you've given on that today. And then a follow-up on consulting. I think there's two quarters in a row now where we are seeing the book-to-bill ratio a touch below one. I know you point in the earnings to a book-to-bill ratio greater than one if you're looking at the trailing 12 months, but I would just like to understand more on a shorter-term basis.
Mark Newman: Hi, thanks for taking my question. Very good to see the growing AI book of business, and thanks for those comments just now. Arvind, I don't think you've given any specific breakdown yet on the breakdown between software and consulting of the AI book of business. Is there any clarity on that? I think it used to be 80/20. Just want to clarify if there's any clarity you've given on that today. And then a follow-up on consulting. I think there's two quarters in a row now where we are seeing the book-to-bill ratio a touch below one. I know you point in the earnings to a book-to-bill ratio greater than one if you're looking at the trailing 12 months, but I would just like to understand more on a shorter-term basis.
James Kavanaugh: last six months, it seems like the book-to-bill ratio is below one. If you could explain kind of why, maybe why that's the case, why we shouldn't be worried, especially considering, I think, around 30% of signings you mentioned are AI, which I believe are longer durations. So just a little bit of clarity around consulting and how AI plays into the book-to-bill ratio and that recent number being below one would be appreciated. Thanks very much. Okay. Mark, this is Jim. I'll take both of those. Let's start with the second one first, and then I'll come back to your clarification question on GenAI and, in particular, around the software portfolio overall. I want to dive a little bit deeper in that. But when we take a look at consulting, let's dial back 90 days ago.
last six months, it seems like the book-to-bill ratio is below one. If you could explain kind of why, maybe why that's the case, why we shouldn't be worried, especially considering, I think, around 30% of signings you mentioned are AI, which I believe are longer durations. So just a little bit of clarity around consulting and how AI plays into the book-to-bill ratio and that recent number being below one would be appreciated. Thanks very much.
Jim Kavanaugh: Okay. Mark, this is Jim. I'll take both of those. Let's start with the second one first, and then I'll come back to your clarification question on GenAI and, in particular, around the software portfolio overall. I want to dive a little bit deeper in that. But when we take a look at consulting, let's dial back 90 days ago.
James Kavanaugh: I think we surprised many just compared to what many other consulting companies had been talking about publicly. We talked about green shoots that we saw entering second half. But I think at that time, we were prudently cautious about how we were going to monitor client buying behaviors, and we didn't expect growth in the second half, although we saw many green shoots overall. Now we posted, I think, a marked inflection point of consulting back to growth, up 2%. And it's been driven by what we're seeing as continued opportunity for growth as clients accelerate investment in AI-driven transformation, what we've been talking about on many of these questions here. Why? Companies are looking to unlock efficiency, business model innovation, and growth, growth, growth. And AI is accelerating overall.
I think we surprised many just compared to what many other consulting companies had been talking about publicly. We talked about green shoots that we saw entering second half. But I think at that time, we were prudently cautious about how we were going to monitor client buying behaviors, and we didn't expect growth in the second half, although we saw many green shoots overall. Now we posted, I think, a marked inflection point of consulting back to growth, up 2%. And it's been driven by what we're seeing as continued opportunity for growth as clients accelerate investment in AI-driven transformation, what we've been talking about on many of these questions here. Why? Companies are looking to unlock efficiency, business model innovation, and growth, growth, growth. And AI is accelerating overall.
James Kavanaugh: When we take a look at right now, fourth quarter, and more importantly, early parts of 2026, we again see momentum around those key metrics: our backlog position, our GenAI book, strategic partnerships, and around productivity. Backlog, $31 billion, healthy growth, 4% right now. Our best-ever erosion in, I think, multiple years. What does that say? Clients' commitment to IBM consulting, the quality of our delivery, and the value of our differentiated offerings are doing extremely well. Now, to your point about signings, signings were down 5%. By the way, signings have been down five of the last six quarters, something like that. But as I've said many times before, why don't I start with backlog? That, to me, is the most critical component that's closest to the outcome measure. The outcome measure is revenue.
Jim Kavanaugh: When we take a look at right now, fourth quarter, and more importantly, early parts of 2026, we again see momentum around those key metrics: our backlog position, our GenAI book, strategic partnerships, and around productivity. Backlog, $31 billion, healthy growth, 4% right now. Our best-ever erosion in, I think, multiple years. What does that say? Clients' commitment to IBM consulting, the quality of our delivery, and the value of our differentiated offerings are doing extremely well. Now, to your point about signings, signings were down 5%. By the way, signings have been down five of the last six quarters, something like that. But as I've said many times before, why don't I start with backlog? That, to me, is the most critical component that's closest to the outcome measure. The outcome measure is revenue.
James Kavanaugh: Revenue growth, revenue growth, as Arvind always likes to say in this conference room with our operating team. Indicators are backlog, indicators are signings. But signings are not all equal. And those signings numbers have been driven down. I think we posted down 5% based on lower large deal renewal volume. By the way, I would argue that's, at best, no revenue realization and, probably worst, dilutive revenue because renewals typically drive more price and more productivity. But underneath it, what are we seeing? We're seeing a tremendous improvement in the quality of our signings. Our net new business penetration, again, another quarter in a row, up double digits year to year on a penetration. Over 300 new clients year to date fueling our backlog. Our backlog realization's up over four points year over year.
Revenue growth, revenue growth, as Arvind always likes to say in this conference room with our operating team. Indicators are backlog, indicators are signings. But signings are not all equal. And those signings numbers have been driven down. I think we posted down 5% based on lower large deal renewal volume. By the way, I would argue that's, at best, no revenue realization and, probably worst, dilutive revenue because renewals typically drive more price and more productivity. But underneath it, what are we seeing? We're seeing a tremendous improvement in the quality of our signings. Our net new business penetration, again, another quarter in a row, up double digits year to year on a penetration. Over 300 new clients year to date fueling our backlog. Our backlog realization's up over four points year over year.
James Kavanaugh: When we take a look at our backlog runout, it's pretty healthy, growing at market-level growth rates here over the next three, six, nine, 12 months. A lot of work still to do to sell and bill within quarter, but a lot of good indicators. And that GenAI, to your point, over 22% of our backlog, 30% of our signings, 12% of our revenue, that's what's inflecting the growth overall. So we feel pretty good, and that's why we called the mark inflection, and we said we're going to grow consulting here in the fourth quarter. And we feel pretty good about getting back to market growth levels in 2026. Now, GenAI, the over $9.5 billion book of business, Arvind already talked about, over $7.5 billion in consulting, well over $1.5 billion, almost approaching $2 billion in software. We're, what, seven, eight quarters in here?
Jim Kavanaugh: When we take a look at our backlog runout, it's pretty healthy, growing at market-level growth rates here over the next three, six, nine, 12 months. A lot of work still to do to sell and bill within quarter, but a lot of good indicators. And that GenAI, to your point, over 22% of our backlog, 30% of our signings, 12% of our revenue, that's what's inflecting the growth overall. So we feel pretty good, and that's why we called the mark inflection, and we said we're going to grow consulting here in the fourth quarter. And we feel pretty good about getting back to market growth levels in 2026. Now, GenAI, the over $9.5 billion book of business, Arvind already talked about, over $7.5 billion in consulting, well over $1.5 billion, almost approaching $2 billion in software. We're, what, seven, eight quarters in here?
James Kavanaugh: That number might vary quarter by quarter as far as the composition, but we're still pretty damn close to that 20/80 overall. But the underpinnings behind that of the software book in the generative AI, you see that play out and how it's accelerating automation growth, but also Red Hat. I know there's been a lot of questions around Red Hat. Let me just spend a minute just to close the call on Red Hat. Red Hat, we delivered 12% growth. We were down a couple of points quarter to quarter. And year to date, we're at 13%, low teens, right? Let me break down some of the performance. One from a position of strength, and Arvind talked about a few points. OpenShift, up nearly 40% bookings. Our ARR, $1.8 billion, up mid-30s year over year, accelerating profile. Virtualization, now we've closed total contract value of bookings over $400 million.
That number might vary quarter by quarter as far as the composition, but we're still pretty damn close to that 20/80 overall. But the underpinnings behind that of the software book in the generative AI, you see that play out and how it's accelerating automation growth, but also Red Hat. I know there's been a lot of questions around Red Hat. Let me just spend a minute just to close the call on Red Hat. Red Hat, we delivered 12% growth. We were down a couple of points quarter to quarter. And year to date, we're at 13%, low teens, right? Let me break down some of the performance. One from a position of strength, and Arvind talked about a few points. OpenShift, up nearly 40% bookings. Our ARR, $1.8 billion, up mid-30s year over year, accelerating profile. Virtualization, now we've closed total contract value of bookings over $400 million.
James Kavanaugh: We got a $700 million pipeline over the next five plus quarters. And Ansible, 20% bookings in the quarter, accelerating the high teens. So what happened on the sequential decline? One, as we knew, we were facing tougher comparison on the consumption-based services. That impacted us by about a point. And RHEL, about 50% of our portfolio. We've been talking about we've been growing RHEL abnormally in the mid-teens. We reverted back to our model, growing 6%, and had about a point. Now, taking a step back, Red Hat model's mid-teens. And when you look at it, our 80% subs business, we got to grow low end of that high teens. The consumption-based, we got to grow high single digit. When you look at our year to date, and Arvind talked about our bookings year to date, we're well positioned on that subscription-based business, growing high teens already on bookings.
We got a $700 million pipeline over the next five plus quarters. And Ansible, 20% bookings in the quarter, accelerating the high teens. So what happened on the sequential decline? One, as we knew, we were facing tougher comparison on the consumption-based services. That impacted us by about a point. And RHEL, about 50% of our portfolio. We've been talking about we've been growing RHEL abnormally in the mid-teens. We reverted back to our model, growing 6%, and had about a point. Now, taking a step back, Red Hat model's mid-teens. And when you look at it, our 80% subs business, we got to grow low end of that high teens. The consumption-based, we got to grow high single digit. When you look at our year to date, and Arvind talked about our bookings year to date, we're well positioned on that subscription-based business, growing high teens already on bookings.
James Kavanaugh: When you look at that six, nine, 12-month revenue under contract, we're accelerating that growth as we go into 2026. That gives us confidence in that acceleration comment that Arvind talked about and I talked about as qualitative statements about confidence in 2026. When you look at Q4, let's put this in perspective. We're going to accelerate Red Hat growth in 2025. It's going to be a nice acceleration on the subs, and we got about a two-point headwind on consumption-based services. We knew about that because last year we grew consumption-based services high teens. When you look at Q4, we're going to wrap on that. We've known about that all year long. When we look at Q4, double-digit, solid double-digit growth in Red Hat, low teen growth for the year, nice composition of where that acceleration is.
When you look at that six, nine, 12-month revenue under contract, we're accelerating that growth as we go into 2026. That gives us confidence in that acceleration comment that Arvind talked about and I talked about as qualitative statements about confidence in 2026. When you look at Q4, let's put this in perspective. We're going to accelerate Red Hat growth in 2025. It's going to be a nice acceleration on the subs, and we got about a two-point headwind on consumption-based services. We knew about that because last year we grew consumption-based services high teens. When you look at Q4, we're going to wrap on that. We've known about that all year long. When we look at Q4, double-digit, solid double-digit growth in Red Hat, low teen growth for the year, nice composition of where that acceleration is.
James Kavanaugh: But the most important thing, we're well positioned for 2026. So with that, I'll turn it back over to Arvind to close out the call. Thanks, Jim. Look, to close out, we are pleased with the performance this quarter. All of our segments accelerated sequentially. Our portfolio strength, business model, and relentless focus on productivity reinforce our confidence in the category. I look forward to sharing our progress as we close out the year. Thank you, Arvind. Operator, let me turn it back to you to close out the call. Thank you for participating on today's call. The conference has now ended. You may disconnect at this time.
But the most important thing, we're well positioned for 2026. So with that, I'll turn it back over to Arvind to close out the call.
Arvind Krishna: Thanks, Jim. Look, to close out, we are pleased with the performance this quarter. All of our segments accelerated sequentially. Our portfolio strength, business model, and relentless focus on productivity reinforce our confidence in the category. I look forward to sharing our progress as we close out the year.
Olympia McNerney: Thank you, Arvind. Operator, let me turn it back to you to close out the call.
Operator: Thank you for participating on today's call. The conference has now ended. You may disconnect at this time.