IBM's software rebound makes up for a bad second quarter, not the January plan

IBM's revenue grew 6% at constant currency in the September 2026 quarter, and software, its largest business, grew 9%. That was better than the company had told holders to expect in July. Yet IBM left its full-year revenue range where July had put it, and it still ties its profit and cash-flow plans to the bottom of that range. The quarter made up for part of a bad year. It did not bring back the plan IBM started the year with.

That plan, set out in January, called for revenue growth of 5% or more and software growth of 10%. Then the second quarter went wrong. Revenue barely grew, and a batch of large software deals that IBM expected to sign slipped out of the quarter. In July the company cut its revenue goal to a range of 4% to 5% and lowered its software forecast. This week it moved software back up to 7% to 8%, while naming about 7% as its base case. Measured against January, this is still a smaller year.

Within software, the sharpest turn came in one business. Transaction processing, the software IBM sells to run on its mainframes, grew 10% at constant currency last quarter, after shrinking in the quarter before. In July IBM expected it to decline over the second half of the year; it now expects the business to finish the year flat. Sales of the mainframes themselves fell 19% from a year earlier, when IBM's current mainframe had just launched; IBM says that machine's cycle is running well ahead of the last one, and that more installed capacity is what lets it sell more of this software. The chief financial officer said IBM had closed around two-thirds of the large deals that slipped from the second quarter, put their value at $250 million or more and said they were weighted toward transaction processing. By our arithmetic, that is about two-fifths of the rise in software revenue from a year earlier.

Management does not claim the pace will hold. Arvind Krishna, the chief executive, told analysts he did not expect double-digit growth in transaction processing to continue, and pointed instead to a more normal pace. That matters for the arithmetic of the range IBM kept. Calculated from last year's reported revenue and this year's first three quarters, a year that ends at the 4% base case leaves fourth-quarter growth of about 1.9%, against 4.7% last quarter. Reaching the top of the range would take faster growth than IBM managed last quarter. The calculation uses reported figures; IBM guides at constant currency but says currency should be neutral to growth for the year.

Profit followed the same path. IBM's operating (non-GAAP) pretax margin rose 70 basis points from a year earlier, a bigger gain than July's guidance pointed to. Most of the gain came from software: it supplied $360 million of the $383 million rise in segment profit, calculated from the segment figures IBM reported. Consulting's profit fell.

There is a fair case that IBM is simply being careful. James Kavanaugh, the chief financial officer, said: "Given our strong third quarter software performance, our confidence in the full year outlook has increased." The company did lift one forecast, saying free cash flow should rise by more than $1 billion this year, though the first nine months were ahead of last year by a smaller amount.

Keeping a range in place after a quarter that beat it costs a company little if the fourth quarter turns out strong, and spares it a second cut if more of the third quarter's strength leaned on deals carried over from the second than IBM now estimates. IBM, having cut once this year, has chosen to keep that protection.