IBM will release its 2025 Q3 earnings report on October 22nd (after U.S. stock market close). Following the second quarter's revenue and earnings beat, upgraded full-year revenue outlook, and reaffirmed free cash flow targets, the market is focused on whether the single-digit revenue growth in Q3 can align with an increase in the software business proportion, leading to further improvements in gross margins and non-GAAP EPS. This also tests the pace and quality of AI-related contract confirmations.

Forecast

The market consensus expects IBM's Q3 revenue to be $16.09 billion; non-GAAP EPS is estimated at $2.41. The company's key highlights are software and consulting's coordinated drive in improving profit quality and cash flow. The high margins of software and subscription renewal stability enhance profit elasticity and visibility. The most promising existing business growth is anticipated in AI-related software subscriptions and service rollouts. After disclosing $3 billion worth of new AI contracts in Q2, IBM expects these to begin confirmation in Q3 and Q4, supporting the judgment that the software segment will outperform the overall group growth.

Previous Quarter Review

Key points from Q2 2025 earnings

• Total revenue for Q2 was $17 billion, up 8%, or 5% at constant currency

　　-Software revenue grew 10%, or 8% at constant currency

　　-Consulting revenue grew 3%, flat year-over-year at constant currency

　　-Infrastructure revenue grew 14%, or 11% at constant currency

• Margins: GAAP gross margin was 58.8%, up 200 basis points; non-GAAP operating margin was 60.1%, up 230 basis points.

• Pre-tax income margin: GAAP pre-tax income margin was 15.3%, up 120 basis points; non-GAAP operating pre-tax margin was 18.8%, up 110 basis points.

• Cash flow: Year-to-date 2025, operating activities generated cash flow of $6.1 billion; free cash flow was $4.8 billion.

IBM Senior Vice President and CFO James Kavanaugh stated, "As our clients continue to scale AI applications and investments, IBM's innovations across businesses and product lines are increasingly recognized. Revenue growth, product innovation, and productivity enhancement measures have brought significant margin improvements and double-digit profit growth. Consequently, IBM maintains strong free cash flow, ensuring our ability to invest in business while returning dividends to shareholders."

Current Quarter Outlook

• Software and Platforms: AI-driven high margins continue to rise

Since Q2, multiple institutions' forecasts have emphasized the high-margin nature and structural advantages of the software segment, widely expecting Q3 software to outperform the group average growth rate, thereby boosting overall margins slightly. This support stems from two aspects: first, higher pricing and renewal rates of AI and automation capabilities in existing product lines, with subscription and support revenue proportion increasing, enhancing revenue visibility and margin resilience; second, after revealing $3 billion worth of newly signed AI contracts post-Q2, gradual confirmation is expected from Q3, with the high-margin structure resonating with profits. Multiple forecasts also attribute the slight year-over-year improvement in Q3 non-GAAP EPS to software margin increases and income structure optimization, with disciplined expenditure ensuring unit price and margins are not excessively eroded by sales costs. From a pace perspective, large software transactions' signing, activation, and acceptance milestones impact single-quarter confirmation. If projects initiate in Q4 or cross-year, Q3 revenue confirmation might be milder; concurrently, USD exchange rate fluctuations remain a potential headwind for overseas confirmation and cross-currency contract conversions, albeit hedging strategies can mitigate these impacts to an extent.

• Consulting and Delivery: Order digestion and utilization rate improvement are key

Consulting business showed warming order signs in Q2, with Q3 observation shifting to order digestion speed and delivery efficiency, including personnel utilization, billing rates, and project margin improvement. AI-related value-added consulting in solution design, prototype verification, and migration phases is expected to increase unit project's added value, thus boosting unit project margins and overall utilization rates. Institutions broadly focus on consulting "supply-side" efficiency governance: on one hand, scope management and change controls limit low-margin expansion, ensuring project margin control; on the other hand, increasing the "attachment rate" of AI capabilities and software products transforms more projects into coordinated software platform delivery, structurally improving margins. If Q3 delivery remains orderly, consulting's drag on group net margin is expected to narrow sequentially, combined with project pricing flexibility, T&M and fixed-price project optimization, net margin curve expected to stabilize upwards. Variables requiring monitoring include the pace of client budget releases and macro uncertainties impacting new signings. If budget season extension of digitization and AI pilot expansions roll out, it will form momentum for Q4 and next year; conversely, if approval chains prolonged and governance processes tighten, new confirmation pace may be more cautious, with revenue realization more reliant on existing order digestion efficiency.

• Cash Flow and Capital Return: Stability and investment balance

Q2 free cash flow showed robust performance, with the company reaffirming its full-year free cash flow target, leaving room for shareholder returns and disciplined acquisitions. Looking ahead to Q3, in the context of expected margin improvements and stable working capital, operating cash flow and earnings improvement direction probability are high, with accounts receivable collection pace and large contract milestone billing arrangements directly impacting quarterly free cash flow volatility. Capital expenditure and R&D investment balance are key to short-term free cash flow elasticity: sustained AI and hybrid cloud product and platform investments are essential to safeguard mid-term competitiveness and pricing power, but the disciplined investment framework emphasized by management and existing cash generation capabilities provide a buffer between investments and returns. Exchange rate changes also need attention for cash flow conversion, cross-region project multi-currency settlement through hedging arrangements and collection pace management can reduce single-quarter free cash flow disruptions. In terms of shareholder returns, stable cash flow output and improved earnings quality together support return policy sustainability, while preserving flexibility for product capability and ecosystem acquisition.

• Foreign Exchange and Seasonality: Potential disturbances to single-quarter confirmation

Q3 typically sees parallel execution of enterprise IT budgets and rolling reviews, making signing and acceptance rhythms cause certain single-quarter confirmation fluctuations. With high overseas revenue proportion, USD exchange rate changes affect foreign currency priced contracts, and margin levels also influenced by cross-region cost and revenue mismatches. The company's usual multi-currency pricing and hedging arrangements help smooth volatility, but during large contract acceptance windows, slight shifts in project confirmation timelines can visibly impact margins and EPS. Investors should watch management updates on forex sensitivity, hedging coverage, and fourth-quarter/full-year confirmation rhythms during the release for precise annual path calibration.

Analyst Opinions

Analyst sentiment remains stable, with a composite rating of "Moderate Buy" for IBM over the past three months. Out of 22 analysts, 7 give a "Strong Buy" rating, 1 "Moderate Buy", 12 recommend "Hold", and 2 give "Strong Sell".

Content generated based on Tiger AI and Bloomberg data, for reference only.