Nearly five years to the day after being named chief executive of IBM Corp., Arvind Krishna joined Chief Financial Officer James Kavanaugh in taking a victory lap today as the company posted strong fourth-quarter and full-year results, driven primarily by accelerating growth in software and infrastructure.

Executives said IBM’s 9% quarterly revenue growth, the highest in three years, and strong across-the-board software performance validated Krishna’s goals of making IBM a software-led company. Software now comprises 45% of IBM’s business, up from 25% in 2018.

The flywheel effect created by software-generated annualized recurring revenue growth is driving cash flow that the company has invested in research and development, as well as recent acquisitions like HashiCorp Inc., Apptio Inc., DataStax Inc. and Confluent Inc. ARR of $23.6 billion was up over $2 billion from the end of 2024.

IBM’s free cash flow was $7.6 billion, up $1.4 billion year to year and “the highest free cash flow margin in reported history,” Kavanaugh said. The gross operating pretax margin of 59.5% was “the highest in a decade.” Executives said free cash flow should increase by $1 billion from the $14.7 billion reported in 2025.

Exceeded all targets

“We exceeded all of our target metrics for revenue growth, profitability and free cash flow that we laid out at our Investor Day [last February],” said Krishna (pictured). “Our flywheel for growth is underpinned by client trust, flexible and open platforms, sustained innovation, deep domain expertise and a broad ecosystem.”

Fourth-quarter revenue of $19.7 billion beat consensus estimates of $19.23 billion. Earnings of $4.52 per share surpassed $3.92 a year earlier and came in well ahead of analyst expectations of $4.31. Full-year revenue rose 8%, to $67.5 billion.

IBM forecast full-year revenue growth of 5% in 2026, ahead of analyst expectations. More importantly, executives said the coming year should mark the end of the cycle of revenue ups and downs the company has experienced for the past several years. “We are confident in our ability to sustain 5% annual revenue growth and free cash flow of over $1 billion,” Kavanaugh said.

Investors rewarded Big Blue with an 8.3% bump in the stock price – or more than $24 a share – in early after-hours trading.

Software strength

Investors who beat down the company’s stock three months ago over a perceived shortfall in software growth should be cheered by 14% growth — 9% in constant currency — in that segment. It was the highest quarterly growth rate for software in the company’s history, Kavanaugh said.

Expansion was broad-based, with sales of data software needed to undergird artificial intelligence models up 22%, compared to 8% growth the previous quarter. Automation software sales jumped 18%.

Hybrid cloud software, a business anchored by IBM’s Red Hat subsidiary, expanded 10%. Although that’s below the 14% growth of the previous quarter, the business was hard-hit by the U.S. government shutdown, Kavanaugh said. Nevertheless, Red Hat’s OpenShift enterprise-grade Kubernetes container platform is on track to reach $1.9 billion in ARR this year, he said.

The company’s infrastructure segment delivered the strongest percentage growth, with quarterly revenue up 21% to $5.1 billion. The standout contributor was the new Z17 mainframes, sales of which surged 67% year over year and outpaced the initial performance of the previous Z 16 generation, IBM said. The Z line recorded its highest annual revenue in 20 years, Krishna said. IBM is also on track to deliver the world’s first fault-tolerant quantum computer by 2029.

AI was another bright spot. The company reported its generative AI “book of business” exceeded $12.5 billion in the quarter, up from $9.5 billion the previous quarter. AI products span software transactions, new software-as-a-service contracts and consulting deals tied to AI-related offerings.

AI is mainstream

Executives said IBM will no longer report generative AI revenues separately. “AI is now embedded across our business, from how we deliver services to our software portfolio to the capabilities we are adding to our infrastructure platforms and how we drive our own productivity,” Kavanaugh said.

More than 20,000 IBMers are using Project Bob, an AI-based toolset for enterprise software development lifecycles, and reporting productivity gains averaging 45%, Krishna said. The company has replaced 200 human resources roles, previously held by people, with AI agents.

“We set out goal to achieve $2 billion in productivity savings by end of 2024,” Kavanaugh said. “We’re now at a $4.5 billion annual savings run rate.”

Consulting revenue was the only weak spot, growing 3% year over year and 1% on a constant-currency basis. Although a slow-growth and low-margin business, consulting continues to play a strategic role by pulling demand for IBM’s software platforms, executives said.

‘Pep in their step’

The results vindicate Krishna’s strategy of doubling down on hybrid cloud and AI platforms, said Trevor White, vice president of research at Nucleus Research Inc. “IBM has some pep in their step again,” he said. “After a period in the wilderness, they seem to be back in the swing of things.”

White said the company made some smart calls by avoiding the temptation to become a hyperscaler or a pure-play AI business.

“As folks engage more with AI, the computing costs and infrastructure needs are going to become all-consuming,” he said. “Given the uncertainty of the physical infrastructure needed for a lot of this stuff, that ‘down the middle’ path will be a good space for them. They can return to the IBM of old, which no one got fired for buying.”

Photo: IBM