International Business Machines Corporation Q3 FY2025 earnings call

• Economy: Technology remains a key driver of growth and competitive advantage, AI adoption is accelerating, hybrid cloud is the foundation of enterprise IT, and overall optimistic despite macro uncertainties.
• Execution: Software, consulting, and infrastructure all showed sequential acceleration. AI is infused in products to boost growth, IBM has achieved $4.5 billion of annual run rate productivity savings, the Gen AI book of business is over $9.5 billion, consulting has over 200 projects using digital workers, Watson X and Red Hat AI are in demand, Granite 4.0 was launched, and partnerships with Anthropic and Grok were announced. Quantum computing has made progress with projects like HSBC and Vanguard.
• Client zero: Over 1,000 client zero engagements have been carried out this year.

In the third quarter, software revenue grew 9%, with automation growth accelerating to 22% due to strength in the organic portfolio and early synergies with HashiCorp. Red Hat bookings growth accelerated to about 20% and revenue grew 12%. Infrastructure grew 15%, with hybrid infrastructure up 26% and IBM Z delivering its highest third-quarter revenue in nearly two decades, up 59% year to year. Consulting returned to growth in Q3 with revenue up 2%, and the 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.

• Raised revenue growth expectation to more than 5% and free cash flow to about $14 billion for 2025.
• Software is expected to grow near double digits for the full year.
• Infrastructure is expected to contribute over 1.5 points to IBM's revenue growth in 2025.
• Consulting sees an inflection in growth with Q4 revenue performance similar to Q3.
• Raised the full-year operating pretax margin expansion to over a point.

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Q: Amit Daryanani on free cash flow.

A: Jim Kavanaugh discussed that free cash flow is driven by revenue growth, operating leverage, and fundamentals, with confidence in the sustainable free cash flow in 2026.

Q: Wamsi Mohan on AI impact and government shutdown.

A: Arvind Krishna said the government shutdown has de minimis impact on IBM, and AI is a strong contributor to software and consulting growth.

Q: Ben Reitzes on software growth and M&A.

A: Arvind Krishna and Jim Kavanaugh discussed software segment growth components, Red Hat's acceleration, and the role of M&A in growth.

Q: Eric Woodring on M&A and cloud.

A: Arvind Krishna and Jim Kavanaugh talked about M&A criteria and cloud as a growth vector for IBM.

Q: Jim Schneider on M&A target.

A: Arvind Krishna said M&A is important, looks for strategic fit, and has financial flexibility.

Q: Brian Essex on AI application and IT budgets.

A: Arvind Krishna discussed AI application in ISV, cloud, and private instances, and IT budgets staying healthy with a shift to new projects.

Q: Mark Newman on consulting AI book and book to bill.

A: Jim Kavanaugh discussed consulting growth, backlog, signings quality, and Red Hat's performance