IBM shares drop as company beats but opts to maintain guidance

IBM shares slipped 6% in extended trading on Wednesday after the hardware, software and consulting provider reported stronger-than-expected first-quarter results but maintained full-year guidance.

Here's how the company did in comparison with LSEG consensus:

IBM's revenue grew 9% year over year in the quarter, according to a statement. Net income of $1.22 billion, or $1.28 per share, increased from $1.06 billion, or $1.12 per share, in the fourth quarter of 2024. Adjusted earnings exclude acquisition-related adjustments.

Management reiterated its view for 2026, including over 5% revenue growth at constant currency and a $1 billion increase to free cash flow.

"I don't think we've ever raised guidance in a first quarter," IBM's finance chief, Jim Kavanaugh, told analysts on a conference call. He said executives believe the company should be "a prudent operator."

Iran's war against the U.S. and Iran broke out on Feb. 28. IBM saw the strongest revenue growth in decades in the Middle East through the quarter, CEO Arvind Krishna said on the call.

"Middle East developments didn't impact us in the first quarter," Krishna said. "Uncertainties remain, but our diversity across businesses, geographies, industries, and large enterprise clients position us well."

IBM's first-quarter software revenue grew 11% to $7.05 billion, higher than the $7.02 billion consensus among analysts polled by StreetAccount.

Revenue growth from Red Hat Enterprise Linux, stemming from IBM's $34 billion Red Hat acquisition in 2019, decelerated from the fourth quarter, said IBM's finance chief, Jim Kavanaugh.

"I think that's a function of, you know, the federal lack of signings and the closure of the government in the fourth quarter that played through, but also a very dislocated hardware supply chain," Kavanaugh said.

Management is looking out for supply chain impacts on Red Hat Enterprise Linux.

"RHEL is tied to enterprise hardware placements overall," Kavanaugh said.

Revenue from consulting, at $5.27 billion, was up 4%, coming in just shy of StreetAccount's $5.28 billion consensus.

Infrastructure increased 15% to $3.33 billion, above the $3.16 billion StreetAccount consensus. IBM pointed to a 51% jump in Z mainframe hardware revenue, with the z17 mainframe model continuing to outperform prior cycles, the company said.

As of Wednesday's close, IBM shares had declined about 15% so far in 2026, while the S&P 500 index was up 4% in the same period.

The stock dropped 13% in a single day in February after artificial intelligence model builder Anthropic said AI could assist companies with modernizing code written in the COBOL programming language. Applications written in COBOL can run on IBM's mainframe computers. "AI strengthens the mainframe case, it does not weaken it," IBM's senior vice president of software, Rob Thomas, wrote in a LinkedIn post.

In mid-March, IBM completed the $11 billion acquisition of data streaming software company Confluent. IBM now sees its operating pre-tax margin expanding by about 1%, despite closing the Confluent deal about two months earlier than expected, Kavanaugh said.

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