International Business Machines (IBM -0.31%) reported 2Q 2025 earnings on July 23, 2025, delivering $17 billion in revenue and $4.8 billion in first-half free cash flow, driven by standout software and infrastructure gains.

The company raised its full-year free cash flow outlook to above $13.5 billion and affirmed revenue growth guidance above 5%, supported by double-digit Red Hat growth, robust automation, and surging AI-related bookings. Key insights below highlight IBM's accelerating software momentum, transformation in productivity, and expanding AI footprint.

Red Hat and automation fuel IBM software acceleration

Red Hat contributed 3.5 percentage points of organic software growth, while automation grew 15% in the first half of 2025, and HashiCorp delivered a strong initial performance following its acquisition. OpenShift achieved $1.7 billion in annual recurring revenue (ARR), and Red Hat’s virtualization pipeline grew by over $300 million in total bookings through the first three quarters.

"OpenShift growing revenue more than 20% with ARR now at $1.7 billion. Automation grew 14%, with HashiCorp off to a strong start … We accelerated our Red Hat performance first quarter, second quarter by an incremental point, now growing about 14.5% … our pipeline in the second half is 3x last year across our entire automation portfolio with regards to HashiCorp."
-- Jim Kavanaugh, Senior Vice President and Chief Financial Officer

This sustained outperformance in hybrid cloud and automation positions IBM to deliver near-double-digit software revenue growth for FY2025 at constant currency, non-GAAP, driving a favorable long-term revenue mix shift and expanding recurring revenue base.

IBM productivity transformation expands margins and financial flexibility

IBM expanded its operating gross profit margin by 230 basis points, reflecting disciplined execution and productivity initiatives including embedding AI into workflows and optimizing the supply chain by moving distributed infrastructure manufacturing to a strategic partner. IBM exited 2024 with $3.5 billion in annual run rate savings and now expects to reach $4.5 billion by the end of 2025, fueling further margin expansion and cash flow conversion.

"We are taking up the year on our productivity initiatives. We exited last year, we talked about $3.5 billion of productivity that we've been able to fundamentally drive out of this business … that's given us guidance and confidence to raise that to $4.5 billion. That flows to operating margin. We're taking our operating margins up from a half a point to now roughly a point … and then we're flowing that all the way down through the cash flow. High quality, sustainable cash flow generation."
-- Jim Kavanaugh, Senior Vice President and Chief Financial Officer

Escalating productivity-driven savings provide IBM with headroom for strategic M&A and ongoing innovation investment.

AI portfolio and ecosystem drive differentiated growth at scale

IBM’s cumulative Gen AI book of business surpassed $7.5 billion since inception, with AI now surpassing 10% of consulting revenue at a more than three-point margin premium compared to non-AI work. Over 150 prebuilt agents and deep partnerships with Oracle, Amazon Web Services (AWS), Salesforce, and others are embedding Watson x solutions across customer workflows, while unique offerings like Code Assistant for z and the newly launched z17 mainframe further strengthen IBM’s competitive position in scalable enterprise AI.

"Our Gen AI book of business now stands at over $7.5 billion inception to date, with momentum accelerating quarter over quarter. We are seeing strong demand for our AI agents and assistants, REL AI, Granite Models, as well as an accelerating need for our consulting services to deploy AI. Just last week, IBM was recognized as an emerging leader in the first-ever Gartner emerging market quadrant for Gen AI consulting and implementation services."
-- Arvind Krishna, Chairman, President, and Chief Executive Officer

IBM’s leadership in enterprise-scale AI and its partner ecosystem create a powerful flywheel effect, deepening client engagement and underpinning the company’s long-term secular growth thesis in AI-powered automation and hybrid cloud environments.

Looking Ahead

For the full year, IBM reaffirmed constant currency revenue growth of 5% plus (non-GAAP) and raised free cash flow guidance above $13.5 billion. Management expects software to approach double-digit revenue growth, with Red Hat growth in the mid-teens and low-single-digit gains in transaction processing are expected as the z17 mainframe cycle accelerates. Operating pre-tax margin is now expected to expand by about one point for the full year, and IBM is comfortable with consensus expectations for revenue and profit.