Company Reports

Following IBM's early earnings announcement on July 14, which was defined by an underwhelming 1% growth in total revenue, other parts of IBM's second-quarter results largely met expectations. Software annual recurring revenue expanded 8% year over year, and consulting signings grew 6% to $5 billion.

While IBM has not always converted technological innovation into commercial success in its century-long history, we think the company’s latest effort to reinvent itself by expanding its software business has been successful so far. Many enterprise customers are searching for IT upgrade solutions to their decades-old infrastructure, and IBM’s leadership in hybrid cloud positions it as a trustworthy partner to preserve legacy IT systems’ stability and security during the modernization process.

IBM's preliminary second-quarter results showed total revenue of $17.2 billion and GAAP earnings per share of $2.27, both of which fell short of expectations. The year-over-year growth of software (5%) and infrastructure (negative 7%) this quarter was 600 basis points below our original forecasts.

IBM announced on May 21 that the company is building a quantum chip foundry, Anderon, in collaboration with the US Department of Commerce. IBM and the US government are each contributing $1 billion to this new joint venture. Shares of IBM were up 8% following the news.

While IBM has not always converted technological innovation into commercial success in its century-long history, we think the company’s latest effort to reinvent itself by expanding its software business has been successful so far. Many enterprise customers are searching for IT upgrade solutions to their decades-old infrastructure, and IBM’s leadership in hybrid cloud positions itself as a trustworthy partner to preserve legacy IT systems’ stability and security during the modernization process.

IBM delivered mixed first-quarter results. Consulting and infrastructure revenue were in line, but software revenue missed expectations. Free cash flow growth of 13% to $2.2 billion was the quarter's highlight, underpinning management's guidance of a $1 billion free cash flow increase in 2026.

We've lowered our Morningstar Economic Moat Ratings for five IT services companies after reviewing artificial intelligence's potential disruption of the global technology sector.

While IBM has not always converted technological innovation into commercial success in its century-long history, we think the company’s latest effort to reinvent itself by expanding its software business has been successful so far. Many enterprise customers are searching for IT upgrade solutions to their decades-old infrastructure, and IBM’s leadership in hybrid cloud positions itself as a trustworthy partner to preserve legacy IT systems’ stability and security during the modernization process.

IBM delivered stellar results to close out 2025, with quarterly revenue up 9% and annual revenue up 6% in constant currency, both expanding at levels not seen in years. Free cash flow of $15 billion also topped the past decade, handsomely surpassing management's $13.5 billion guidance.

IBM announced that it would acquire Confluent, a leading data streaming service provider, in an all-cash deal valued at $11 billion. This is IBM's second major transaction in the data software space for 2025, following the DataStax acquisition that closed in May at an estimated price of $3 billion.

Reuters reported on Oct. 24 that IBM will publish a paper describing the implementation of a quantum error-correction algorithm on AMD's field-programmable gate array chips. IBM shares spiked 7% following the news.

IBM posted solid third-quarter results where momentum across software, consulting, and infrastructure aligned to deliver 7% companywide growth, the highest in three years. However, Red Hat's growth tapered by 200 basis points sequentially, leading to a 6% after-hours selloff.

Global bank HSBC announced on Sept. 25 that its collaboration with IBM on a quantum-based bond trading algorithm resulted in a 34% improvement in trade fulfillments compared with classical computers. Shares of IBM were up 5% following the news.

While IBM has not always converted technological innovation into commercial success in its century-long history, we think the company’s latest effort to reinvent itself by expanding its software business has been successful so far. Many enterprise customers are searching for IT upgrade solutions to their decades-old infrastructure, and IBM’s leadership in hybrid cloud positions itself as a trustworthy partner to preserve legacy IT systems’ stability and compatibility during the modernization process.

IBM's second-quarter revenue grew 5% in constant currency to $17 billion, driven by consistent software growth and its new mainframe launch. Operating margin of 18.3% was 150 basis points higher than a year ago, ahead of management's expected full-year margin expansion of 100 basis points.

We are transferring coverage of IBM and maintaining the company’s narrow moat rating. In recent years, IBM has been reinventing itself as a software-oriented company. We view IBM’s efforts as successful so far, and we estimate that over half of IBM’s revenue will come from software products by 2029. While we maintain IBM’s $242 fair value estimate, we are raising the company’s Morningstar Capital Allocation Rating to Exemplary from Standard to reflect the successful execution of IBM’s recent investments in hybrid cloud and automation.

While IBM has not always converted technological innovation into commercial success in its century-long history, we think the company’s latest effort to reinvent itself by expanding its software business has been successful so far. Many enterprise customers are searching for IT upgrade solutions to their decades-old infrastructure, and IBM’s leadership in hybrid cloud positions itself as a trustworthy partner to preserve legacy IT systems’ stability and compatibility during the modernization process.

IBM, one of the world's largest IT services companies, remains the dominant provider of mainframes and has built out consulting and software businesses focused on digital transformation projects and hybrid cloud infrastructure. IBM has had to reinvent itself over the past several decades as its original mainframe business faced a changing industry landscape. While the company has not always been known for being on the cutting edge of innovation, we think it has positioned itself well to serve the needs of enterprises in search of IT infrastructure upgrades, consulting services, and hardware. We see synergies among its different businesses. IBM's software offerings are being used in hybrid cloud focused projects, in addition to the consulting work to implement and service these projects. These projects can also run on hardware that IBM assists.

Narrow-moat IBM reported first-quarter earnings that exceeded both consensus and our revenue estimates, but they fell short of our profitability expectations. The stronger-than-anticipated performance was primarily driven by the company’s software segment, which continues to show resilience amid ongoing macroeconomic turbulence. As IBM increasingly shifts its sales mix toward software, the segment's stability has become a key pillar of the firm's performance. Management laid out second-quarter guidance to soothe tariff and discretionary spending concerns, expecting strong sales in the range of $16.4 billion-$16.75 billion. However, full-year guidance is unchanged at 5% constant-currency revenue growth, suggesting that revenue growth may decelerate after the second quarter.

IBM, one of the world's largest IT services companies, remains the dominant provider of mainframes and has built out consulting and software businesses focused on digital transformation projects and hybrid cloud infrastructure. IBM has had to reinvent itself over the past several decades as its original mainframe business faced a changing industry landscape. While the company has not always been known for being on the cutting edge of innovation, we think it has positioned itself well to serve the needs of enterprises in search of IT infrastructure upgrades, consulting services, and hardware. We see synergies among its different businesses. IBM's software offerings are being used in hybrid cloud focused projects, in addition to the consulting work to implement and service these projects. These projects can also run on hardware that IBM assists.