IBM Q3 Earnings Guide: Red Hat, Watsonx, Backlog, Cloud, Margins
IBM Q3 Earnings Guide: Red Hat, Watsonx, Backlog, Cloud, Margins
By:Gus Downing
International Business Machines (IBM) reports their Q3 FY2025 earnings on Wednesday, October 22, after market close.
IBM has ridden the AI wave back into relevancy in recent years, moving up 38% in 2024 and 28% so far in 2025.
Software and Red Hat momentum, Watsonx demand, revenue mix, backlog, bookings, margins, and cash will all be integral to IBM’s post-earnings move.
From Stall to Surge: IBM in 2024–2025
IBM has been one of the market’s best recovery stories in recent years; after running sideways for most of the 2010s and being written off as stagnant by many analysts, they have risen from the ashes as a result of the AI revolution. Shares moved up 38% in 2024 and are up over 28% so far in 2025.
IBM’s Q1 and Q2 FY2025 calls both saw strong beats of consensus estimates for revenue and earnings per share (EPS), though the Q2 call did lead to a sizable drop in share price after the company announced that their software revenue segment had taken a hit. Despite the hit, IBM did raise their free cash flow guidance, and shares have returned to their previous levels ahead of this Q3 report.
What to Watch on Wednesday
IBM will report their Q3 FY2025 earnings this Wednesday, October 22, after market close. Consensus estimates call for an EPS of $2.44 and revenue of $16.1 billion. While these numbers and forward guidance will obviously be most important to how IBM shares respond, there are a number of other critical components that could move the stock.
Chief among these factors is the momentum in IBM’s software division, particularly in Red Hat, their enterprise open source software company, and OpenShift, which is Red Hat’s containerization software. Guidance for both of these was re-accelerated in Q2; whether or not that acceleration is sustained into Q3 will be very telling for IBM.
Generative AI demand is another important piece for IBM ahead of this print, particularly demand for Watsonx, IBM’s primary generative AI platform. Any updates on booked generative AI projects, conversion to revenue, and services pull-through in IBM’s AI consulting division could have a tangible impact on share price.
Revenue mix will also be a major pillar for IBM’s performance after this report. After their Q2 print, shares slid on a slacking software mix, while infrastructure was a bright spot. Any recovery in their software sector or continued momentum with infrastructure, particularly IBM’s AI-upgraded z systems, could impact gross margin.
Lastly is IBM’s backlog, bookings, margin, and cash. The company’s Q2 commentary flagged improving backlog and bookings for consulting, but continuity obviously matters. Q2 also called for free cash flow of $13.5 billion by the end of the year; any reaffirmation or changes to their margin and cash projections could move shares.
The Road Ahead
There will also be no shortage of factors to watch for IBM into 2026 and beyond. Exit velocity into 2026 is one of the most critical of these factors; the company has previously indicated that they expect 5% constant currency revenue growth for 2025. Whether this expectation holds up, and how it is adjusted into 2026, will be big.
Investments and capacity will be another major player. IBM has elaborate U.S. investment plans and advanced systems roadmaps in mainframe and quantum development, all underpinning medium-term demand. If they stay on track, shares may rise, and if not, shares may stagnate until the company catches back up.
The last big picture piece is segment balance. Durability of IBM’s software growth and mainframe normalization are both paramount. Consulting is also a prominent segment, and the big question there is whether consulting can convert AI interest into profitable delivery at scale.
The options market is pricing in a $22.50 move in either direction, which would constitute an 8% move. It’s unclear how these factors will all work together to move shares after earnings, but if you’re going to trade this call, be prepared to win or lose big.
Gus Downing is host of the tastylive Network show Risk and Reward. @GainsByGus
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