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IBM’s second-quarter report delivered mixed signals to investors. While the tech giant beat Wall Street’s overall earnings and revenue forecasts and raised its full-year free cash flow guidance, its software revenue and gross margin narrowly fell short of analyst expectations, prompting a 6% drop in after-hours trading.

Financial Performance Overview

IBM posted adjusted earnings per share of $2.80, exceeding the consensus estimate of $2.64, alongside total revenue of $16.98 billion, up nearly 8% year-over-year and slightly ahead of the $16.59 billion forecast. This marked a notable improvement over Q1, which saw revenue growth below 1%.

Net income increased to $2.19 billion (or $2.31 per share), compared to $1.83 billion ($1.96 per share) in the same quarter last year, despite acquisition-related expenses.

Software Segment Under Pressure

The company’s software revenue climbed about 10% to $7.39 billion, yet fell just short of the $7.43 billion StreetAccount consensus. The segment’s gross margin stood at 83.9%, slightly under the expected 84.0%.

CEO Arvind Krishna attributed the software performance gap to a client shift in spending priorities:

“Clients reprioritized their spend to the hardware,” he noted on the earnings call.

Meanwhile, hybrid cloud revenue, which includes Red Hat, delivered robust 16% growth, underscoring IBM’s ongoing strategic emphasis in this area.

Consulting and Infrastructure Segments Show Growth

IBM’s consulting revenue increased by nearly 3% to $5.31 billion, surpassing estimates of $5.16 billion, despite challenges from delayed discretionary projects and timing of contract renewals, as highlighted by CFO Jim Kavanaugh.

Infrastructure revenue rose 14% to $4.14 billion, comfortably beating the $3.75 billion consensus, supported by demand for next-generation hardware solutions.

Innovation and Strategic Moves

The quarter saw the launch of IBM’s next-generation z17 mainframe, showcasing the company’s continued focus on advanced enterprise computing.

Additionally, IBM acquired Hakkoda, a consulting firm specializing in data and artificial intelligence, bolstering its AI capabilities.

Krishna reported the company’s generative AI business book has grown from $6 billion in April to $7.5 billion currently, reflecting accelerating demand for AI-powered solutions.

Outlook and Market Position

IBM reaffirmed its 2025 free cash flow guidance of over $13.5 billion and anticipates at least 5% revenue growth at constant currency for the full year.

Krishna expressed optimism about M&A prospects in the current regulatory environment, saying:

“What we’ve seen over the last four months makes us optimistic that we are now in a rational regulation environment where M&A that makes sense will get approved in reasonable timeframes.”

Stock Performance

Despite the software revenue miss, IBM shares have gained 28% so far in 2025, significantly outperforming the 8% rise in the S&P 500 index over the same period. The after-hours dip reflects investor sensitivity to the narrow shortfall in software, a critical segment for IBM’s long-term strategy.

IBM’s results highlight the company’s steady progress amid shifting client spending patterns and a competitive technology landscape, while signaling areas for continued focus, especially in software and AI innovation.

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