International Business Machines Q1 Earnings Call Highlights

Key Points

• Q1 results: IBM reported revenue growth of 6%, free cash flow up 13% (its highest Q1 FCF in a decade) with 140 bps of operating pre‑tax margin expansion, and maintained 2026 targets of >5% revenue growth and about a $1 billion free cash flow improvement while exercising prudence on guidance.
• Software and AI momentum: Software revenue rose 8% with annual recurring revenue at $24.6B (+10%), Data revenue +16% driven by generative AI and acquisitions, and IBM’s AI platform (including watsonx, orchestration, and the closed Confluent deal) is north of $1.5B and growing >40%.
• Infrastructure and mainframe strength: IBM Z delivered a record quarter with Z revenue up 48%, management highlighted on‑platform AI inferencing and a historical 3x–4x monetization stack multiplier, even as full‑year infrastructure revenue is still expected to be down low‑single digits and Confluent-related dilution (~$600M) factors into 2026.

International Business Machines NYSE: IBM opened 2026 with what CEO Arvind Krishna called “a strong start,” reporting first-quarter revenue growth of 6% and 13% growth in free cash flow. Management emphasized margin expansion, software strength led by Data and Red Hat, and another record quarter for IBM Z as enterprises increase investment in hybrid cloud, AI, resiliency, and modernization.

Q1 results: revenue growth, margin expansion, and record Z quarter

Krishna said first-quarter performance reflected “the durability of our portfolio” and “continued execution of our strategy.” He added that while IBM is operating in a “dynamic environment,” developments in the Middle East did not impact IBM in the quarter, and client conversations remained focused on structural priorities such as modernizing core systems, scaling AI, and making “deliberate choices about where workloads should run and who controls the infrastructure underneath them.”

CFO Jim Kavanaugh reported 6% revenue growth, 140 basis points of operating pre-tax margin expansion, 17% adjusted EBITDA growth, and 19% growth in diluted operating earnings per share. IBM generated $2.2 billion of free cash flow, up 13% year over year, which Kavanaugh said was IBM’s “highest first quarter free cash flow in a decade” and “free cash flow margin in reported history.”

Segment performance: software acceleration, infrastructure strength, and consulting stabilization

Software revenue grew 8% in the quarter. Kavanaugh said IBM’s annual recurring revenue (ARR) was $24.6 billion, up 10% from a year earlier. Data revenue grew 16%, which he attributed to demand for generative AI products, strategic partnerships, and contributions from acquisitions, including DataStax and Confluent, which closed in mid-March.

Red Hat grew 10%, with Kavanaugh citing stabilization in consumption-based services revenue growth. He said OpenShift is now a $2 billion ARR business and that virtualization has gained traction, with more than $600 million of contracts signed since the beginning of 2024. Automation revenue grew 7%, and Kavanaugh noted February marked one year since IBM acquired HashiCorp, which he said delivered “record HashiCorp bookings leveraging IBM’s go-to-market scale” and adjusted EBITDA accretion ahead of expectations.

Infrastructure revenue grew 12%, with hybrid infrastructure up 25% and infrastructure support down 6%. IBM Z revenue rose 48%, which management described as another record Z quarter. Kavanaugh said demand was broad-based across IBM Z, Power, and Storage, while distributed infrastructure grew double digits. He highlighted Power demand tied to Power11 and storage growth driven by adoption of new Flash offerings introduced in the quarter, which he said incorporate “agentic AI capabilities.”

Consulting revenue grew 1%. Kavanaugh said consulting signings returned to growth, up 6%, and attributed strength to application and data transformation work as clients modernize environments to support AI adoption. He also said generative AI is “now firmly integrated across our consulting engagements,” representing about 30% of consulting backlog.

AI strategy: hybrid deployment, orchestration, and data “in motion”

Krishna framed enterprise AI adoption as moving from infrastructure to platforms and ultimately to workflows. He said enterprises are building portfolios of models, including frontier models, smaller on-premises models, and open-source models, and that the core challenge is orchestrating across “models, agents, and workflows,” governing data, and securing systems at scale.

IBM positioned its offerings around enabling clients to run AI “on their terms,” including through Red Hat as a common platform across infrastructures, and through watsonx and watsonx Orchestrate for multi-model routing, workflow management, and governance. Krishna also pointed to “AI editions” of software such as Db2, Cognos, and MQ, which he said embed agentic AI while maintaining enterprise security and trust.

Krishna said Confluent, which IBM closed during the quarter, addresses the need to stream “live governed data to models and agents across the hybrid environment.” Kavanaugh later said IBM’s AI platform business (including agents, assistants, and orchestration) is “north of $1.5 billion” over the trailing 12 months, growing above 40%, and contributing “2 points of growth on an annualized basis,” while also creating a “multiplier effect over time.”

Mainframe and infrastructure: AI inferencing, capacity expansion, and monetization

Management repeatedly highlighted IBM Z’s role in enterprise AI, particularly around inferencing “in line” with transactions. Krishna cited examples such as fraud detection, arguing that on-platform inferencing can reduce latency and allow AI to be applied to a larger share of transactions. He said IBM’s Spyre Accelerator enables clients to run AI on “100% of their transaction volume without moving data off-platform.” Krishna also said that with a fully populated system, IBM Z can support “about 450 billion inferences a day.”

In response to questions on monetization, Kavanaugh described IBM Z’s “stack economic multiplier,” saying IBM has historically averaged about a “3x-4x stack multiplier for every hardware dollar” through software, storage attach, maintenance, and financing. He said that after the first full year of z17, IBM increased hardware placement value by more than $1 billion versus the prior program’s first full year, and that for four consecutive quarters IBM shipped more than 100% growth of new MIPS into the market.

On supply chain concerns, Kavanaugh said commodity cost increases—particularly memory—have a “de minimis impact” to IBM overall given the company’s portfolio mix, though he said IBM continues to watch impacts in distributed infrastructure and noted that RHEL is tied to enterprise hardware placements. Krishna added that IBM’s long-standing supplier relationships and early adoption of new memory technologies can help mitigate constraints.

Guidance and outlook: maintaining targets amid prudence, with software expected to grow 10%+

IBM maintained its 2026 outlook despite the first-quarter outperformance. Krishna said IBM remains confident it can sustain revenue growth of 5%+ and grow free cash flow by about $1 billion this year. Kavanaugh said management considered it “prudent to maintain our guidance,” noting the year is still early and macro uncertainty has increased versus 90 days ago.

Kavanaugh said IBM now expects software to grow 10%+ in 2026, supported by an “accelerating software business.” He also said IBM continues to expect consulting revenue growth to accelerate to low- to mid-single digits for the year, citing backlog quality and generative AI momentum.

For infrastructure, Kavanaugh said IBM is “off to a great start with Z17,” but the company continues to expect infrastructure revenue to be down low single digits for the full year, representing about a half-point impact to IBM overall.

On Confluent, Kavanaugh reiterated that IBM previously anticipated about $600 million of dilution in 2026 driven largely by stock-based compensation and interest expense. He said IBM is taking actions to accelerate cost synergies and still expects to expand operating pre-tax margins by about a point this year. For the second quarter, IBM expects constant-currency revenue growth similar to the full-year rate and about 50 basis points of operating pre-tax margin expansion, with software mix and productivity offset by Confluent-related dilution.

In Q&A, Krishna also addressed M&A, saying valuations “are very attractive,” though he cautioned that sellers may take time to accept new pricing levels. He said IBM intends to integrate Confluent fully first, and that “maybe we can do something in the second half” if market conditions persist and Confluent integration progresses.

About International Business Machines NYSE: IBM

International Business Machines Corporation (IBM) is a global technology and consulting company headquartered in Armonk, New York. Founded in 1911 as the Computing-Tabulating-Recording Company (CTR) and renamed IBM in 1924, the company has evolved from early electromechanical machines to a diversified technology provider serving enterprises and governments worldwide. IBM is publicly traded on the New York Stock Exchange under the ticker symbol IBM.

IBM's principal businesses encompass cloud computing and software, infrastructure and systems, consulting and technology services, and research and development.

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