IBM · Research
IBM Is Now 45% Software, and Confluent Pushed Data Revenue up 19% on Borrowed Money
Software was $22.62B of IBM's $50.18B nine-month revenue. Data software grew 19.12% in Q3 after the Confluent deal, while consulting was flat.
| Scorecard | Read |
|---|---|
| Thesis | Software, led by Red Hat and data, keeps growing near 8% and becomes half of IBM revenue, carrying total growth while consulting stays flat |
| What proves it wrong | Software growth falls back below 6% once Confluent laps, or consulting revenue starts declining |
| Next catalyst | Q4 2026 results in January 2027, with full-year software growth, Confluent's first year and free cash flow |
| Key multiple | 16.42x EV / GAAP EBITDA of $17.73B |
| Debt | $63.82B total debt at Sep 30, 2026: $12.65B Financing segment debt and $51.17B other debt |
| Stock pay | $1.97B from the cash flow line, 2.82% of revenue |
What IBM sells, in plain numbers
IBM has four lines of business: software, consulting, infrastructure and financing. Over the nine months to Sep 30, 2026, revenue was $50,182M [1].
Software was $22,617M, or 45.07%. Consulting was $15,934M, or 31.75%.
Infrastructure was $10,868M, or 21.66%, made up of Hybrid Infrastructure hardware at $7,130M and Infrastructure Support at $3,738M. Financing was $598M, or 1.19% [1].
Put plainly, a little under half of IBM is software. Just under a third is consulting services.
About 14% is hardware, mainly mainframes and storage, and about 7% is hardware support services [1].
Q3 2026 revenue was $17,103M, up 4.73% from $16,331M [1]. Twelve-month revenue was $69.87B.
Software is carrying the growth
Q3 software revenue was $7,804M, up 8.25% from $7,209M [1]. Hybrid Cloud, which is mainly Red Hat, was $2,086M, up 10.60%.
Data was $1,738M, up 19.12%. Transaction Processing was $2,111M, up 9.38%.
Automation was $1,870M, down 3.31%.
The filing gives software ARR of $24.9B and Red Hat growth of 10.6%. OpenShift ARR is about $2.4B [1].
Data growth of 19.12% includes Confluent, acquired in Q1 2026. Nine-month cash spent on acquisitions was $11,364M [1]. Some of the software growth is bought, not built.
Consulting is flat, hardware is cyclical
Q3 consulting revenue was $5,335M against $5,324M, up 0.21% [1]. Strategy and Technology grew 2.07%; Intelligent Operations fell 2.03%.
Hybrid Infrastructure was $2,452M, up 8.35%, still benefiting from the z17 mainframe launched in June 2025 [1]. Infrastructure Support was $1,255M, down 3.16%.
In our reading, mainframe revenue follows a product cycle, and growth tends to fade as the installed base is upgraded. The z17 cycle is in its second year.
Operating income is a proxy
IBM does not show an operating income line. Twelve-month operating income here is pretax income from continuing operations plus interest expense, $12.44B [1].
This is flagged as a proxy.
Adding D&A of $5.30B, depreciation plus amortization of intangibles from the cash flow statement, gives GAAP EBITDA of $17.73B [1].
The toll-gate test
A toll gate owns the record, owns the connection, prices on outcomes and spends R&D on the gate. IBM owns the record in one place clearly: mainframes and Transaction Processing software run the core ledgers of large banks and insurers.
The connection test is partial. Red Hat OpenShift and Confluent move data and applications between systems, but both face open-source and cloud rivals.
Pricing is the weak test. IBM charges by capacity, subscription and consulting hours, not by outcomes.
The owner-cash staircase
Start with GAAP EBITDA of $17.73B: operating income of $12.44B plus D&A of $5.30B over the twelve months [1]. Each step down the staircase removes one thing an owner cannot spend.
Step one is operating cash flow of $15.83B, below EBITDA by $1.90B. Operating cash ran below EBITDA because of cash taxes, interest paid and working capital, which the proxy operating income does not capture [1].
Step two subtracts stock pay of $1.97B, taken from the cash flow line. That leaves $13.86B.
Stock pay is 12.44% of operating cash flow, low for a company with this much software [1].
Step three subtracts all capex of $1.81B, including capitalized software. Owner cash is $12.05B, or 17.25% of revenue and 67.95% of EBITDA.
Capex includes property and equipment plus software investment taken from the cash flow statement, because the software tag in the XBRL data is out of date [1][2].
| Step | Twelve months | What the gap is |
|---|---|---|
| GAAP EBITDA | $17.73B | Operating income plus D&A |
| Operating cash flow | $15.83B | Working capital, cash taxes, interest and non-cash items |
| After stock pay | $13.86B | Stock pay treated as a real cost |
| After all capex | $12.05B | What an owner could take out |
Balance sheet and debt
Total debt was $63,817M at Sep 30, 2026, up $2,557M from Dec 31, 2025 [1]. The filing ties the increase mainly to $9,415M of new issuance, in the same year as the Confluent purchase.
Of the total, $12,652M is Financing segment debt that funds client leases and loans, and $51,166M is other debt [1]. Financing debt is backed by receivables, but the scorecard counts all of it, as the filing does.
Cash and equivalents were $9,233M; cash plus marketable securities was $11,106M [1]. Nine-month operating cash flow was $11,791M, up $2,639M, and free cash flow as IBM defines it was $7,787M.
The cover-page share count is 945,120,805 [1].
What the multiple measures
EV is $291.10B: equity value at the Oct 27, 2026 close on 945.12M cover-page shares, plus debt of $63.82B at carrying value, less cash and equivalents of $9.23B.
On GAAP EBITDA of $17.73B that is 16.42x. On operating cash flow of $15.83B it is 18.39x.
Owner cash of $12.05B is 4.14% of EV.
Net debt is $54.58B, or 3.08x GAAP EBITDA. Excluding Financing segment debt, net debt would be about $41.93B.
What gets overlooked
Automation software fell 3.31% in Q3. It is the software line most exposed to agents doing the work that automation tools are bought for.
Other revenue of $165M in nine months includes residual value adjustments on mainframe leases tied to the z17 launch [1]. It is small but it moves with the hardware cycle.
The operating income proxy includes some non-operating items in pretax income. Without an operating income line, the EBITDA figure is less precise than for companies that publish one.
The deal also changes what IBM is. Each software purchase moves the mix further from hardware and consulting, which tend to swing with corporate budgets and the mainframe cycle.
Peers
The peer set is Roper Technologies, Autodesk and Akamai: large software and infrastructure businesses with recurring revenue.
Peer figures come from each company's latest periodic filing [3][4][5]. Figures are derived from filed statements, and nothing here is a price view.
IBM's stock pay share of revenue is among the lowest in the group, and its revenue growth is the slowest.
Bull, base and bear
| Case | What happens | What the filings would show |
|---|---|---|
| Bull | Software grows near 10% and consulting returns to growth | Software above half of revenue and total growth near 6% |
| Base | Software grows 7% to 8% and consulting stays flat | Total growth near 4% to 5% |
| Bear | Confluent laps, mainframe cycle fades and consulting declines | Total growth near 2% and debt still above $60B |
The base case is the current mix: software growing high single digits, consulting flat and infrastructure following the mainframe cycle.
The bear case is the second half of the mainframe cycle meeting slower consulting. Software alone would then carry growth of only a few percent.
The bull case needs software, especially Red Hat and data, to keep compounding near 10% while consulting finds growth in agent deployment work.
What to watch
Watch software growth in Q1 2027, when Confluent stops counting as new revenue in the comparison [1].
Watch total debt. It rose in 2026 and the pace of reduction will show how much cash goes to deleveraging.
Watch consulting signings. They lead consulting revenue by several quarters.
Watch the Automation line. A second quarter of decline would suggest agents are replacing the tools IBM offers for the same jobs.
Watch Hybrid Infrastructure as the z17 cycle ages. Growth of 8.35% in Q3 came in the second year of the cycle, and a sharp slowdown would pull total growth toward the bear case.
Watch software capex. It now runs through a separate software investment line, and the XBRL tag no longer captures it, so it has to be checked by hand each quarter.
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