filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE MONTHS ENDED MARCH 31, 2026
Snapshot
Organization of Information:
The Management Discussion is designed to provide readers with an overview of the business and a narrative on our financial results and certain factors that may affect our future prospects from the perspective of management.
Within the tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior-period amounts have been reclassified to conform to the current-period presentation. This is annotated where applicable.
Currency:
The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. When we refer to growth rates at constant currency or adjust such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior-year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. Refer to “Currency Rate Fluctuations” on page 53 for additional information.
Operating (non-GAAP) Earnings:
In an effort to provide better transparency into the operational results of the business, supplementally, management separates business results into operating and non-operating categories. Operating earnings from continuing operations is a non-GAAP measure that excludes the effects of certain acquisition-related charges and intangible asset amortization, expense resulting from basis differences on equity method investments, retirement-related costs and their related tax impacts. Due to the unique, non-recurring nature of the enactment of the U.S. Tax Cuts and Jobs Act (TCJA or U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of 2017, and adjustments to that charge as non-operating. Adjustments include the tax effect of true-ups, audit adjustments, accounting elections and new regulations, or laws (e.g., H.R. 1 in July of 2025) that impact the TCJA provisions which resulted in the one-time provisional charge. For acquisitions, operating (non-GAAP) earnings exclude the amortization of acquired intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable retention, restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs. These charges are excluded as they may be inconsistent in amount and timing from period to period and are significantly impacted by the size, type and frequency of our acquisitions. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance, and we consider these costs to be outside of the operational performance of the business.
Overall, management believes that supplementally providing investors with a view of operating earnings as described above provides increased transparency and clarity into both the operational results of the business and the performance of our pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows us to provide a long-term strategic view of the business going forward. In addition, these non-GAAP measures provide a perspective consistent with areas of interest we routinely receive from investors and analysts.
Management Discussion – (continued)
Financial Results Summary — Three Months Ended March 31:
| ($ and shares in millions, except per share amounts) | Yr.-to-Yr. Percent/ Margin Change | |||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||
| Revenue (1) | $ | 15,917 | $ | 14,541 | 9.5 | % | ||||||||||||||
| Gross profit margin | 56.2 | % | 55.2 | % | 1.0 | pts. | ||||||||||||||
| Total expense and other (income) | $ | 7,562 | $ | 6,873 | 10.0 | % | ||||||||||||||
| Income from continuing operations before income taxes | $ | 1,387 | $ | 1,158 | 19.8 | % | ||||||||||||||
| Provision for/(benefit from) income taxes from continuing operations | $ | 172 | $ | 103 | 65.8 | % | ||||||||||||||
| Income from continuing operations | $ | 1,216 | $ | 1,054 | 15.3 | % | ||||||||||||||
| Income from continuing operations margin | 7.6 | % | 7.3 | % | 0.4 | pts. | ||||||||||||||
| Income from discontinued operations, net of tax | $ | 0 | $ | 1 | nm | |||||||||||||||
| Net income | $ | 1,216 | $ | 1,055 | 15.2 | % | ||||||||||||||
| Earnings per share from continuing operations - assuming dilution | $ | 1.28 | $ | 1.12 | 14.3 | % | ||||||||||||||
| Consolidated earnings per share - assuming dilution | $ | 1.28 | $ | 1.12 | 14.3 | % | ||||||||||||||
| Weighted-average shares outstanding - assuming dilution | 952.1 | 945.4 | 0.7 | % | ||||||||||||||||
| At 3/31/2026 | At 12/31/2025 | |||||||||||||||||||
| Assets | $ | 156,229 | $ | 151,880 | 2.9 | % | ||||||||||||||
| Liabilities | $ | 123,174 | $ | 119,139 | 3.4 | % | ||||||||||||||
| Equity | $ | 33,056 | $ | 32,740 | 1.0 | % |
(1)Year-to-year revenue growth of 6 percent adjusted for currency.
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The following table provides the company’s operating (non-GAAP) earnings for the first quarter of 2026 and 2025.
| ($ in millions, except per share amounts) | Yr.-to-Yr. Percent Change | |||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||
| Net income as reported | $ | 1,216 | $ | 1,055 | 15.2 | % | ||||||||||||||
| Income from discontinued operations, net of tax | 0 | 1 | nm | |||||||||||||||||
| Income from continuing operations | $ | 1,216 | $ | 1,054 | 15.3 | % | ||||||||||||||
| Non-operating adjustments (net of tax): | ||||||||||||||||||||
| Acquisition-related charges | $ | 508 | $ | 429 | 18.4 | |||||||||||||||
| Non-operating retirement-related costs/(income) | 94 | 35 | 169.4 | |||||||||||||||||
| U.S. tax reform impacts | 4 | (2) | nm | |||||||||||||||||
| Operating (non-GAAP) earnings (1) | $ | 1,821 | $ | 1,517 | 20.1 | % | ||||||||||||||
| Diluted operating (non-GAAP) earnings per share (1) | $ | 1.91 | $ | 1.60 | 19.4 | % |
(1)Refer to the quarter-to-date "GAAP Reconciliation" on page 57 for additional information..
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Macroeconomic Environment:
The strength of our portfolio and the resiliency of our business model, underpinned by our software-led hybrid cloud and AI strategy, position us well to navigate the current climate. While the economic and geopolitical environment remain dynamic and uncertain, businesses continue to invest in technology to scale AI, drive productivity, increase resiliency and
Management Discussion – (continued)
accelerate their growth. This was reflected in our performance in the first quarter. Our durable, high value portfolio enables us to execute on our strategy delivering innovation to our clients and partners.
In the first three months of 2026, movements in global currencies continued to impact our reported year-to-year revenue and profit. We execute hedging programs which defer, but do not eliminate, the impact of currency. The (gains)/losses from these hedging programs are reflected primarily in other (income) and expense. Refer to “Currency Rate Fluctuations” on page 53 for additional information.
Financial Performance Summary — Three Months Ended March 31:
In the first quarter of 2026, we reported $15.9 billion in revenue, income from continuing operations of $1.2 billion, and operating (non-GAAP) earnings of $1.8 billion. Diluted earnings per share from continuing operations was $1.28 as reported and $1.91 on an operating (non-GAAP) basis. We generated $5.2 billion in cash from operations and $2.2 billion in free cash flow. We returned $1.6 billion to shareholders in dividends and invested in the acquisition of Confluent, Inc. (Confluent). Our first-quarter performance reinforces the strategic choices we have made over the last several years to advance IBM as a software-led Hybrid Cloud and AI platform company. With our focus on the fundamentals of our business, we continue to maintain a strong liquidity position and solid investment grade balance sheet which enables us to invest in our business and return value to shareholders through dividends.
Total revenue grew 9.5 percent as reported and 6.1 percent adjusted for currency compared to the prior-year period. Software delivered revenue growth of 11.3 percent as reported (7.9 percent adjusted for currency). Consulting revenue increased 4.0 percent as reported (0.9 percent adjusted for currency). Infrastructure revenue increased 15.3 percent as reported (11.7 percent adjusted for currency).
From a geographic perspective, Americas revenue increased 9.1 percent as reported (8.2 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased 15.2 percent as reported (5.4 percent adjusted for currency). Asia Pacific increased 1.1 percent as reported (1.7 percent adjusted for currency).
Gross margin of 56.2 percent increased 1.0 point year to year with margin expansion driven primarily by productivity actions, revenue growth and portfolio mix. Operating (non-GAAP) gross margin of 57.7 percent increased 1.1 points compared to the prior-year period due to the same dynamics.
Total expense and other (income) increased 10.0 percent in the first quarter of 2026 compared to the first quarter of 2025 driven by our organic and inorganic investments in portfolio innovation and the effects of currency, partially offset by savings from productivity actions. Total operating (non-GAAP) expense and other (income) increased 8.7 percent year to year, driven primarily by the same factors.
Pre-tax income from continuing operations was $1.4 billion in the first quarter of 2025 compared to $1.2 billion in the prior-year period and pre-tax margin was up 0.8 points year to year to 8.7 percent. The continuing operations provision for income taxes was $0.2 billion in the first quarter of 2026, compared to $0.1 billion in the first quarter of 2025. Net income from continuing operations was $1.2 billion in the current period compared to $1.1 billion in the prior-year period and the net income from continuing operations margin of 7.6 percent was up 0.4 points year to year. The year-to-year performance was primarily driven by revenue growth, portfolio mix and increased productivity, partially offset by our organic and inorganic investments in portfolio innovation.
Operating (non-GAAP) pre-tax income from continuing operations of $2.1 billion increased 22.5 percent compared to the first quarter of 2025 and the operating (non-GAAP) pre-tax margin from continuing operations increased 1.4 points to 13.4 percent primarily driven by the factors described above. The operating (non-GAAP) provision for income taxes was $0.3 billion in the first quarter of 2026, compared to $0.2 billion in the first quarter of 2025. Operating (non-GAAP) net income from continuing operations of $1.8 billion increased 20.1 percent and the operating (non-GAAP) net income margin from continuing operations of 11.4 percent increased 1.0 point year to year.
Diluted earnings per share from continuing operations of $1.28 increased 14.3 percent and operating (non-GAAP) diluted earnings per share of $1.91 increased 19.4 percent compared to the first quarter of 2025.
At March 31, 2026, the balance sheet remained strong with financial flexibility to support and invest in the business. Cash and cash equivalents, restricted cash and marketable securities at March 31, 2026 of $11.8 billion decreased $2.6 billion from December 31, 2025 and debt of $66.4 billion at March 31, 2026 increased $5.1 billion. The company
Management Discussion – (continued)
continues to make investments in innovation both organically and through acquisitions, including the Confluent acquisition in first-quarter 2026.
Total assets increased $4.3 billion ($5.1 billion adjusted for currency) from December 31, 2025 primarily driven by the Confluent acquisition. Total liabilities increased $4.0 billion ($4.9 billion adjusted for currency) from December 31, 2025. Total equity of $33.1 billion increased $0.3 billion from December 31, 2025.
Cash provided by operating activities was $5.2 billion in the first three months of 2026, an increase of $0.8 billion compared to the first three months of 2025. Free cash flow was $2.2 billion, an increase of $0.3 billion versus the prior-year period. Refer to page 55 for additional information on free cash flow. Net cash used in investing activities of $10.5 billion, which includes our investment in the acquisition of Confluent, decreased $2.5 billion compared to the prior-year period. Financing activities were a net source of cash of $2.7 billion, a decrease of $2.7 billion compared to the prior-year period.
Management Discussion – (continued)
First Quarter in Review
Results of Continuing Operations
Segment Details
The following tables present each reportable segment’s revenue and gross margin results, followed by an analysis of the first three months of 2026 versus the first three months of 2025 reportable segments results.
| ($ in millions) | Yr.-to-Yr. Percent/Margin Change | Yr.-to-Yr. Percent Change Adjusted For Currency | ||||||||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Software | $ | 7,052 | $ | 6,336 | 11.3 | % | 7.9 | % | ||||||||||||||||||
| Gross margin | 82.8 | % | 83.6 | % | (0.8) | pts. | ||||||||||||||||||||
| Consulting | 5,272 | 5,068 | 4.0 | % | 0.9 | % | ||||||||||||||||||||
| Gross margin | 27.5 | % | 27.3 | % | 0.2 | pts. | ||||||||||||||||||||
| Infrastructure | 3,326 | 2,886 | 15.3 | % | 11.7 | % | ||||||||||||||||||||
| Gross margin | 56.9 | % | 52.8 | % | 4.1 | pts. | ||||||||||||||||||||
| Financing | 220 | 191 | 14.8 | % | 10.2 | % | ||||||||||||||||||||
| Gross margin | 43.4 | % | 45.8 | % | (2.4) | pts. | ||||||||||||||||||||
| Other (1) | 48 | 61 | (21.4) | % | (37.4) | % | ||||||||||||||||||||
| Gross margin | nm | (416.6) | % | nm | ||||||||||||||||||||||
| Total revenue | $ | 15,917 | $ | 14,541 | 9.5 | % | 6.1 | % | ||||||||||||||||||
| Total gross profit | $ | 8,950 | $ | 8,031 | 11.4 | % | ||||||||||||||||||||
| Total gross margin | 56.2 | % | 55.2 | % | 1.0 | pts. | ||||||||||||||||||||
| Non-operating adjustments: | ||||||||||||||||||||||||||
| Amortization of acquired intangible assets | 237 | 200 | 18.3 | % | ||||||||||||||||||||||
| Operating (non-GAAP) gross profit | $ | 9,187 | $ | 8,232 | 11.6 | % | ||||||||||||||||||||
| Operating (non-GAAP) gross margin | 57.7 | % | 56.6 | % | 1.1 | pts. |
(1)Includes reductions in revenue for estimated residual value less related unearned income on sales-type leases, which reflects the z17 launch in June 2025. Refer to note A, "Significant Accounting Policies," in the company's 2025 Annual Report for additional information.
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Software
| ($ in millions) | Yr.-to-Yr. Percent Change | Yr.-to-Yr. Percent Change Adjusted For Currency | ||||||||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||||||||
| Software revenue: | $ | 7,052 | $ | 6,336 | 11.3 | % | 7.9 | % | ||||||||||||||||||
| Hybrid Cloud | $ | 1,905 | $ | 1,687 | 12.9 | % | 10.0 | % | ||||||||||||||||||
| Automation | 1,741 | 1,584 | 9.9 | 6.7 | ||||||||||||||||||||||
| Data | 1,474 | 1,236 | 19.2 | 15.9 | ||||||||||||||||||||||
| Transaction Processing | 1,932 | 1,828 | 5.7 | 1.7 |
Software revenue of $7,052 million increased 11.3 percent as reported (7.9 percent adjusted for currency) in the first quarter of 2026 compared to the prior-year period, with growth in all lines of business. This revenue performance reflects the diversity of our portfolio, our ongoing generative AI innovation, and the continued shift to higher growth end markets.
Management Discussion – (continued)
Revenue performance by line of business in the first quarter compared to the prior-year period was as follows:
Hybrid Cloud (Red Hat) revenue increased 12.9 percent as reported (10.0 percent adjusted for currency) in the first quarter, reflecting accelerated growth of approximately two points compared to fourth-quarter 2025, primarily driven by the stabilization of our consumption-based services revenue growth. OpenShift had strong year-to-year growth in the first quarter and now represents a $2 billion annual recurring revenue business. Automation revenue grew 9.9 percent as reported (6.7 percent adjusted for currency). This includes revenue growth contribution from our HashiCorp acquisition which closed in February 2025. Data revenue grew 19.2 percent as reported (15.9 percent adjusted for currency) reflecting demand for our generative AI products, strength in our strategic partnerships, and inorganic contribution from our acquisitions, including DataStax and Confluent which closed in mid-March 2026. Transaction Processing revenue increased 5.7 percent as reported (1.7 percent adjusted for currency), reflecting growth due to our strong IBM z17 program.
Across Software, our annual recurring revenue (ARR) was solid at $24.6 billion, which increased approximately $3 billion as reported year to year. ARR is a key performance metric management uses to assess the health and growth trajectory of our Software segment, and is calculated by using the current quarter’s recurring revenue and then multiplying that value by four. The first-quarter 2026 recurring revenue metric includes annualized Confluent recurring revenue since the acquisition date of March 17, 2026. This value includes the following consumption models: (1) software subscription agreements, including committed term licenses, (2) as-a-service arrangements such as SaaS and PaaS, and (3) maintenance and support contracts. ARR should be viewed independently of software revenue as this performance metric and its inputs may not represent revenue that will be recognized in future periods.
| ($ in millions) | Yr.-to-Yr. Percent/ Margin Change | |||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||
| Software: | ||||||||||||||||||||
| Gross profit | $ | 5,836 | $ | 5,294 | 10.2 | % | ||||||||||||||
| Gross profit margin | 82.8 | % | 83.6 | % | (0.8) | pts. | ||||||||||||||
| Segment profit | $ | 2,099 | $ | 1,847 | 13.7 | % | ||||||||||||||
| Segment profit margin | 29.8 | % | 29.1 | % | 0.6 | pts. |
Software gross profit margin decreased 0.8 points to 82.8 percent in the first quarter of 2026 compared to the prior-year period, reflecting our investments in portfolio innovation.
Segment profit of $2,099 million increased 13.7 percent and segment profit margin of 29.8 percent increased 0.6 points compared to the prior-year period, reflecting the benefits of our productivity actions, contributions from revenue growth and mix, partially offset by organic and inorganic investments in portfolio innovation.
Consulting
| ($ in millions) | Yr.-to-Yr. Percent Change | Yr.-to-Yr. Percent Change Adjusted For Currency | ||||||||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||||||||
| Consulting revenue: | $ | 5,272 | $ | 5,068 | 4.0 | % | 0.9 | % | ||||||||||||||||||
| Strategy and Technology | $ | 2,896 | $ | 2,782 | 4.1 | % | 0.9 | % | ||||||||||||||||||
| Intelligent Operations | 2,376 | 2,286 | 4.0 | 0.8 |
Consulting revenue of $5,272 million increased 4.0 percent as reported and 0.9 percent adjusted for currency on a year-to-year basis. We had revenue growth across the portfolio reflecting momentum in the business as client demand continues to shift towards enterprise-wide transformation. Strategy and Technology revenue increased 4.1 percent as reported (0.9 percent adjusted for currency) and Intelligent Operations revenue increased 4.0 percent as reported (0.8 percent adjusted for currency). The revenue performance in Consulting reflects our differentiated, asset-led delivery model which continues to drive productivity and speed to value, combining our deep domain expertise with software, automation, and reusable assets to help clients deploy AI securely and at scale.
Management Discussion – (continued)
| ($ in millions) | Yr.-to-Yr. Percent/ Margin Change | |||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||
| Consulting: | ||||||||||||||||||||
| Gross profit | $ | 1,449 | $ | 1,381 | 4.9 | % | ||||||||||||||
| Gross profit margin | 27.5 | % | 27.3 | % | 0.2 | pts. | ||||||||||||||
| Segment profit | $ | 558 | $ | 558 | (0.1) | % | ||||||||||||||
| Segment profit margin | 10.6 | % | 11.0 | % | (0.4) | pts. |
In the first quarter of 2026, Consulting gross profit margin of 27.5 percent increased 0.2 points on a year-to-year basis. Segment profit of $558 million decreased 0.1 percent and segment profit margin of 10.6 percent decreased 0.4 points year to year.
Consulting segment profit and profit margin performance in the first quarter of 2026 compared to the prior-year period declined modestly as productivity gains were offset by investments in the business and currency headwinds reflecting our geographic mix of the business.
Consulting Signings, Book-to-Bill and Backlog
| ($ in millions) | Yr.-to-Yr. Percent Change | Yr.-to-Yr. Percent Change Adjusted For Currency | ||||||||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||||||||
| Total Consulting signings | $ | 5,354 | $ | 4,934 | 8.5 | % | 6.0 | % |
Consulting signings increased 8.5 percent as reported and 6.0 percent adjusted for currency for the three months ended March 31, 2026, compared to the prior-year period. Signings returned to growth in the first-quarter 2026, with strength across our application and data transformation offerings. Our book-to-bill ratio for the trailing twelve-months was 1.04. Book-to-bill represents the ratio of IBM Consulting signings to its revenue over the same period and is a useful indicator of the demand for our business over time. At March 31, 2026, backlog was $31.3 billion.
Signings are management’s initial estimate of the value of a client’s commitment under a services contract. The calculation used by management involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement and the presence of termination charges or wind-down costs. Backlog reflects the estimated remaining value of overall work to be recognized as revenue under services contracts, and it is calculated as the total reported signings less already recognized revenue and less any backlog adjustments.
Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Total signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger contracts. Signings associated with an acquisition will be recognized on a prospective basis. Backlog estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustments for revenue not materialized and adjustments for currency.
Management believes the estimated values of signings and backlog provide an indication of our forward-looking revenue, which are used by management as tools to monitor the performance of the business and are viewed as useful decision-making information for investors. There are no third-party standards or requirements governing the calculation of these measurements. The conversion of signings and backlog into revenue may vary based on the types of services and solutions, contract duration, customer decisions, and other factors, which may include, but are not limited to, the macroeconomic environment or external events.
Management Discussion – (continued)
Infrastructure
| ($ in millions) | Yr.-to-Yr. Percent Change | Yr.-to-Yr. Percent Change Adjusted For Currency | ||||||||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||||||||
| Infrastructure revenue: | $ | 3,326 | $ | 2,886 | 15.3 | % | 11.7 | % | ||||||||||||||||||
| Hybrid Infrastructure | $ | 2,108 | $ | 1,646 | 28.1 | % | 24.8 | % | ||||||||||||||||||
| IBM Z | 50.9 | 48.3 | ||||||||||||||||||||||||
| Distributed Infrastructure | 16.7 | 13.1 | ||||||||||||||||||||||||
| Infrastructure Support | 1,218 | 1,240 | (1.8) | (5.7) |
Infrastructure revenue of $3,326 million increased 15.3 percent as reported and 11.7 percent adjusted for currency in the first quarter of 2026 compared to the prior-year period, with Hybrid Infrastructure increasing 28.1 percent as reported (24.8 percent adjusted for currency) and Infrastructure Support decreasing 1.8 percent as reported (5.7 percent adjusted for currency). Within Hybrid Infrastructure, IBM Z increased 50.9 percent as reported (48.3 percent adjusted for currency) in the first quarter, with z17 continuing to outperform prior programs. Clients are investing in IBM Z as they modernize mission-critical workloads, driven by requirements for resiliency, security and compliance, while enabling new AI capabilities on the platform. Distributed Infrastructure revenue increased 16.7 percent as reported (13.1 percent adjusted for currency), with growth in both Power and Storage. Power revenue growth was driven by demand for Power11, with its resiliency and performance advantages supporting data-intensive workloads. Revenue growth in Storage reflects strong adoption of our new Flash offerings introduced in the first-quarter 2026, which incorporate industry-leading agentic AI capabilities.
| ($ in millions) | Yr.-to-Yr. Percent/ Margin Change | |||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||
| Infrastructure: | ||||||||||||||||||||
| Gross profit | $ | 1,891 | $ | 1,522 | 24.2 | % | ||||||||||||||
| Gross profit margin | 56.9 | % | 52.8 | % | 4.1 | pts. | ||||||||||||||
| Segment profit | $ | 524 | $ | 248 | 111.7 | % | ||||||||||||||
| Segment profit margin | 15.8 | % | 8.6 | % | 7.2 | pts. |
Infrastructure gross profit margin of 56.9 percent increased 4.1 points in the first quarter of 2026 compared to the prior-year period. Infrastructure segment profit of $524 million increased 111.7 percent and segment profit margin of 15.8 percent increased 7.2 points compared to the prior-year period.
Infrastructure gross profit, segment profit and the respective margin expansion for the first quarter of 2026 reflect the productivity actions we have taken and the growth and mix of revenue, partially offset by our ongoing investments in product innovation.
Financing
Refer to pages 56 through 57 for a discussion of Financing’s segment results.
Management Discussion – (continued)
Geographic Revenue
In addition to the revenue presentation by reportable segment, we also measure revenue performance on a geographic basis.
| ($ in millions) | Yr.-to-Yr. Percent Change | Yr.-to-Yr. Percent Change Adjusted For Currency | ||||||||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||||||||
| Total Revenue | $ | 15,917 | $ | 14,541 | 9.5 | % | 6.1 | % | ||||||||||||||||||
| Americas | $ | 7,861 | $ | 7,206 | 9.1 | % | 8.2 | % | ||||||||||||||||||
| Europe/Middle East/Africa (EMEA) | 5,242 | 4,552 | 15.2 | 5.4 | ||||||||||||||||||||||
| Asia Pacific | 2,814 | 2,783 | 1.1 | 1.7 |
Geographic revenue performance for the three months ended March 31, 2026:
Americas revenue of $7,861 million increased 9.1 percent as reported and 8.2 percent adjusted for currency in the first quarter of 2026 compared to the prior-year period. The U.S. increased 7.5 percent year to year. Canada increased 12.5 percent as reported and 7.9 percent adjusted for currency. Latin America increased 14.4 percent as reported and 9.1 percent adjusted for currency, with Brazil increasing 29.3 percent as reported and 22.4 percent adjusted for currency.
In EMEA, total revenue of $5,242 million increased 15.2 percent as reported and 5.4 percent adjusted for currency. Italy, France, Germany and the U.K. increased 23.8 percent, 21.7 percent, 18.7 percent and 17.0 percent, respectively, as reported, and 12.3 percent, 10.2 percent, 7.2 percent and 9.7 percent, respectively, adjusted for currency. The Middle East and Africa region increased 15.8 percent as reported and 13.4 percent adjusted for currency and represents less than 3 percent of IBM total revenue.
Asia Pacific revenue of $2,814 million increased 1.1 percent as reported and 1.7 percent adjusted for currency. Japan decreased 3.8 percent as reported and 0.7 percent adjusted for currency. Australia and India increased 15.2 percent and 5.2 percent, respectively, as reported, and 3.9 percent and 11.4 percent, respectively, adjusted for currency.
Expense
Total Expense and Other (Income)
| ($ in millions) | Yr.-to-Yr. Percent Change | |||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||
| Total expense and other (income) | $ | 7,562 | $ | 6,873 | 10.0 | % | ||||||||||||||
| Non-operating adjustments: | ||||||||||||||||||||
| Amortization of acquired intangible assets | $ | (333) | $ | (294) | 13.1 | % | ||||||||||||||
| Acquisition-related charges | (76) | (63) | 20.9 | |||||||||||||||||
| Non-operating retirement-related (costs)/income | (96) | (23) | nm | |||||||||||||||||
| Operating (non-GAAP) expense and other (income) | $ | 7,057 | $ | 6,494 | 8.7 | % | ||||||||||||||
| Total expense-to-revenue ratio | 47.5 | % | 47.3 | % | 0.2 | pts. | ||||||||||||||
| Operating (non-GAAP) expense-to-revenue ratio | 44.3 | % | 44.7 | % | (0.3) | pts. |
nm - not meaningful
Management Discussion – (continued)
For additional information regarding total expense and other (income) for both expense presentations, refer to the following analyses by category.
Selling, General and Administrative Expense
| ($ in millions) | Yr.-to-Yr. Percent Change | |||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||
| Selling, general and administrative expense: | ||||||||||||||||||||
| Selling, general and administrative — other | $ | 3,900 | $ | 3,806 | 2.5 | % | ||||||||||||||
| Advertising and promotional expense | 229 | 238 | (3.7) | |||||||||||||||||
| Workforce rebalancing charges | 359 | 316 | 13.7 | |||||||||||||||||
| Amortization of acquired intangible assets | 333 | 294 | 13.1 | |||||||||||||||||
| Stock-based compensation | 270 | 217 | 24.3 | |||||||||||||||||
| Provision for/(benefit from) expected credit loss expense | (2) | 14 | nm | |||||||||||||||||
| Total selling, general and administrative expense | $ | 5,089 | $ | 4,886 | 4.2 | % | ||||||||||||||
| Non-operating adjustments: | ||||||||||||||||||||
| Amortization of acquired intangible assets | $ | (333) | $ | (294) | 13.1 | % | ||||||||||||||
| Acquisition-related charges | (75) | (58) | 28.1 | |||||||||||||||||
| Operating (non-GAAP) selling, general and administrative expense | $ | 4,682 | $ | 4,533 | 3.3 | % |
nm - not meaningful
Total selling, general and administrative (SG&A) expense increased 4.2 percent in the first quarter of 2026 versus the prior-year period driven primarily by the following factors:
-
Higher operating expenses from acquired businesses, as a result of our continued investment to drive our hybrid cloud and AI strategy (3 points);
-
The effects of currency (2 points); and
-
Higher acquisition-related charges and amortization of acquired intangible assets (1 point); partially offset by
-
Benefits from productivity and the actions taken to transform our operations (2 points).
Operating (non-GAAP) SG&A expense increased 3.3 percent year to year primarily driven by the same factors above, excluding the higher acquisition-related charges and amortization of acquired intangible assets.
Expected credit loss expense was a benefit of $2 million in the first quarter of 2026 compared to a provision of $14 million in the prior-year period. The year-to-year change was primarily driven by higher unallocated reserve requirements in the prior year as a result of the economic conditions. Refer to "Receivables and Allowances" section on page 50 for additional information.
Research and Development
| ($ in millions) | Yr.-to-Yr. Percent Change | |||||||||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||||||||
| Research and development expense | $ | 2,173 | $ | 1,950 | 11.4 | % | ||||||||||||||||||||
Research and development (R&D) expense increased 11.4 percent in the first quarter of 2026. The year-to-year increase in R&D expense reflects our organic and inorganic investments to drive innovation in AI, hybrid cloud and quantum, and the effects of currency.
Management Discussion – (continued)
Intellectual Property and Custom Development Income
| ($ in millions) | Yr.-to-Yr. Percent Change | |||||||||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||||||||
| Intellectual property and custom development income: | ||||||||||||||||||||||||||
| Intellectual property income (1) | $ | 45 | $ | 63 | (28.5) | % | ||||||||||||||||||||
| Custom development income | 127 | 190 | (33.3) | |||||||||||||||||||||||
| Total | $ | 172 | $ | 253 | (32.1) | % |
(1)Includes licensing, royalty-based fees and sales.
Total intellectual property and custom development income decreased 32.1 percent year to year in the first quarter of 2026. The timing and amount of licensing and sales of IP may vary significantly from period to period depending upon the timing of licensing agreements, economic conditions, industry consolidation and the timing of new patents and know-how development.
Other (Income) and Expense
| ($ in millions) | Yr.-to-Yr. Percent Change | |||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||
| Other (income) and expense: | ||||||||||||||||||||
| (Gains)/losses on foreign currency transactions | $ | (328) | $ | 443 | nm | |||||||||||||||
| (Gains)/losses on derivative instruments | 423 | (442) | nm | |||||||||||||||||
| Interest income | (152) | (191) | (20.4) | % | ||||||||||||||||
| Net (gains)/losses from securities and investment assets | (9) | 29 | nm | |||||||||||||||||
| Retirement-related costs/(income) | 96 | 23 | nm | |||||||||||||||||
| Other | (31) | (26) | 18.9 | |||||||||||||||||
| Total other (income) and expense | $ | (1) | $ | (165) | (99.2) | % | ||||||||||||||
| Non-operating adjustments: | ||||||||||||||||||||
| Non-operating retirement-related (costs)/income | (96) | (23) | nm | |||||||||||||||||
| Operating (non-GAAP) other (income) and expense | $ | (98) | $ | (187) | (47.8) | % | ||||||||||||||
nm - not meaningful
Total other (income) and expense was income of $1 million in the first quarter of 2026, a decrease of $163 million compared to the prior-year period. The year-to-year change was primarily driven by:
-
Higher net exchange losses (including derivative instruments) of $94 million; and
-
Higher non-operating retirement-related cost of $74 million. Refer to "Retirement-Related Plans" on page 49 for additional information.
Operating (non-GAAP) other (income) and expense was income of $98 million in the first quarter of 2026, a decrease $89 million compared to the prior-year period. The year-to-year change was primarily driven by higher net exchange losses (including derivative instruments).
Interest Expense
| ($ in millions) | Yr.-to-Yr. Percent Change | |||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||
| Interest expense | $ | 473 | $ | 455 | 4.0 | % |
Interest expense of $473 million in the first quarter of 2026 increased $18 million compared to the prior-year period, driven by higher average debt balances. In addition, when external borrowings support the Financing business, interest expense is presented in cost of financing on the Consolidated Income Statement. Interest reported in cost of financing in the first quarter of 2026 was $111 million, a year-to-year increase of $23 million.
Management Discussion – (continued)
Retirement-Related Plans
The following table provides the total pre-tax cost for all retirement-related plans. The operating cost amounts are included in the Consolidated Income Statement within the caption (e.g., Cost, SG&A, R&D) relating to the job function of the plan participants. The non-operating cost amounts are included in other (income) and expense.
| ($ in millions) | Yr.-to-Yr. Percent Change | |||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||
| Retirement-related plans — cost: | ||||||||||||||||||||
| Service cost | $ | 131 | $ | 130 | 0.5 | % | ||||||||||||||
| Multi-employer plans | 3 | 3 | (14.0) | |||||||||||||||||
| Cost of defined contribution plans | 118 | 110 | 7.3 | |||||||||||||||||
| Total operating costs | $ | 251 | $ | 243 | 3.4 | % | ||||||||||||||
| Interest cost | $ | 507 | $ | 476 | 6.4 | % | ||||||||||||||
| Expected return on plan assets | (629) | (614) | 2.5 | |||||||||||||||||
| Recognized actuarial losses | 198 | 152 | 30.5 | |||||||||||||||||
| Amortization of prior service costs/(credits) | 9 | (2) | nm | |||||||||||||||||
| Curtailments/settlements | 2 | 2 | (21.5) | |||||||||||||||||
| Other costs | 11 | 8 | 25.1 | |||||||||||||||||
| Total non-operating costs/(income) | $ | 96 | $ | 23 | nm | |||||||||||||||
| Total retirement-related plans — cost | $ | 348 | $ | 266 | 30.9 | % |
nm - not meaningful
Total pre-tax retirement-related plan cost in the first quarter of 2026 increased by $82 million compared to the first quarter of 2025, primarily driven by an increase in recognized actuarial losses ($46 million) and interest cost ($30 million), partially offset by higher expected return on plan assets ($15 million).
As described in the “Operating (non-GAAP) Earnings” section, management characterizes certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in the first quarter of 2026 were $251 million, an increase of $8 million compared to the first quarter of 2025. Non-operating costs were $96 million in the first quarter of 2026 compared to $23 million in the prior-year period. The year-to-year increase in non-operating costs was driven by the same factors as described in the total pre-tax retirement plan cost above.
Taxes
The continuing operations provision for income taxes was $172 million in the first quarter of 2026, compared to $103 million in the first quarter of 2025. The operating (non-GAAP) provision for income taxes was $308 million in the first quarter of 2026, compared to $221 million in the first quarter of 2025.
IBM’s tax provision and effective tax rate are impacted by recurring and discrete factors including the geographical mix of income before taxes, changes in business operations, incentives, specific transactions, changes in unrecognized tax benefits, settlement of income tax audits, and changes in tax laws or regulations. The GAAP tax provision and effective tax rate could also be affected by adjustments to the previously recorded charges for U.S. tax reform attributable to any changes in law, new regulations and guidance, and audit adjustments, among others.
The U.S. Internal Revenue Service (IRS) has proposed adjustments related to certain cross-border transactions with respect to the company’s 2013-2014 and 2015-2016 U.S. income tax returns. The company strongly disagrees with the IRS’ proposed adjustments, has filed IRS Appeals protests, and will pursue resolution at court, if necessary. In the fourth quarter of 2025, the IRS concluded its audit of the company’s 2017-2018 U.S. income tax returns. The company strongly disagrees with certain adjustments proposed by the IRS and is evaluating its options to contest them. With respect to major U.S. state and foreign taxing jurisdictions, the company is generally no longer subject to tax examinations for years prior to 2016. The company is no longer subject to income tax examination of its U.S. federal tax return for years prior to 2013. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.
Management Discussion – (continued)
Financial Position
Dynamics
Our balance sheet at March 31, 2026 continues to provide us with financial flexibility to support and invest in the business.
Cash and cash equivalents, restricted cash and marketable securities at March 31, 2026 were $11,827 million, a decrease of $2,643 million compared to December 31, 2025. Total debt of $66,361 million at March 31, 2026 increased $5,100 million compared to December 31, 2025, primarily driven by the first-quarter 2026 debt issuances to increase our financial liquidity and plan for our future debt maturities. We continue to manage our debt levels while being acquisitive and without sacrificing investments in our business.
In the first three months of 2026, we generated $5,169 million in cash from operating activities, an increase of $799 million compared to the first three months of 2025. Our free cash flow for the three months ended March 31, 2026 was $2,220 million, an increase of $258 million versus the prior-year period. Refer to pages 54 through 55 for additional information on free cash flow. We returned $1,576 million to shareholders through dividends in the first three months of 2026 and invested in the acquisition of Confluent which completed in March 2026.
Our pension plans were well funded at the end of 2025, with worldwide qualified plans funded at 116 percent. Overall pension funded status as of the end of March 2026 was fairly consistent with year-end 2025. Refer to “Retirement-Related Plans” on page 30 in our 2025 Annual Report for additional information.
IBM Working Capital
| ($ in millions) | At March 31, 2026 | At December 31, 2025 | ||||||||||||
| Current assets | $ | 31,914 | $ | 36,944 | ||||||||||
| Current liabilities | 40,101 | 38,658 | ||||||||||||
| Working capital | $ | (8,186) | $ | (1,714) | ||||||||||
| Current ratio | 0.80:1 | 0.96:1 |
Working capital decreased $6,472 million from the year-end 2025 position. Current assets decreased $5,030 million ($4,721 million adjusted for currency) primarily due to decreases in receivables of $3,395 million related to collections of seasonally higher year-end balances, along with declines in cash and cash equivalents, restricted cash and marketable securities of $2,643 million, which included the reductions for the acquisition of Confluent in the first quarter. Current liabilities increased $1,442 million ($1,664 million adjusted for currency) primarily driven by increases in short-term debt due to timing of maturities and debt acquired in the Confluent acquisition of $1,100 million, which was settled on April 15, 2026 (refer to note 5, “Acquisitions & Divestitures,” for additional information), and an increase of $933 million in deferred income, partially offset by a decrease in accounts payable.
Receivables and Allowances
Roll Forward of Total IBM Receivables Allowance for Credit Losses
| ($ in millions) | ||||||||||||||||||||||||||
| January 1, 2026 | Additions / (Releases) (1) | Write-offs (2) | Foreign currency and other | March 31, 2026 | ||||||||||||||||||||||
| $276 | $(1) | $(8) | $(1) | $267 |
(1)Additions/(Releases) for allowance for credit losses are recorded in expense.
(2)Refer to note A, “Significant Accounting Policies,” in our 2025 Annual Report for additional information regarding allowance for credit loss write-offs.
Excluding receivables classified as held for sale, the total IBM receivables provision coverage was 1.2 percent at March 31, 2026, an increase of 10 basis points compared to December 31, 2025. The increase in coverage is primarily driven by a decrease in total receivables. The majority of the write-offs during the three months ended March 31, 2026 were related to receivables which had been previously reserved. Refer to Financing's “Balance Sheet and Return on Equity Highlights” on page 56 for additional details regarding the Financing segment receivables and allowances.
Management Discussion – (continued)
Noncurrent Assets and Liabilities
| ($ in millions) | At March 31, 2026 | At December 31, 2025 | ||||||||||||
| Noncurrent assets | $ | 124,315 | $ | 114,936 | ||||||||||
| Long-term debt | $ | 57,706 | $ | 54,836 | ||||||||||
| Noncurrent liabilities (excluding debt) | $ | 25,367 | $ | 25,645 |
Noncurrent assets increased $9,379 million ($9,835 million adjusted for currency) primarily due to an increase in goodwill and intangible assets from the Confluent acquisition.
Long-term debt increased $2,870 million ($3,199 million adjusted for currency) primarily driven by our first-quarter 2026 debt issuances, partially offset by reclassifications to short-term debt to reflect upcoming maturities.
Noncurrent liabilities (excluding debt) decreased $278 million ($8 million adjusted for currency) primarily driven by currency.
Debt
Our funding requirements are continually monitored as we execute our strategies to manage the overall asset and liability profile. Additionally, we maintain sufficient flexibility to access global funding sources as needed.
| ($ in millions) | At March 31, 2026 | At December 31, 2025 | ||||||||||||
| Total debt | $ | 66,361 | $ | 61,260 | ||||||||||
| Financing segment debt (1) | $ | 12,837 | $ | 15,093 | ||||||||||
| Non-Financing debt | $ | 53,523 | $ | 46,167 |
(1)Refer to Financing’s “Balance Sheet and Return on Equity Highlights” on page 56 for additional details.
Total debt of $66,361 million increased $5,100 million ($5,427 million adjusted for currency) from December 31, 2025, primarily driven by proceeds from issuances of $7,437 million to increase our financial liquidity and plan for our future debt maturities, as well as debt acquired in the Confluent acquisition (refer to note 5, "Acquisitions & Divestitures," for additional information), partially offset by maturities of $2,928 million.
Non-Financing debt of $53,523 million increased $7,356 million ($7,628 million adjusted for currency) from December 31, 2025, primarily driven by the same dynamics as described above.
Financing segment debt of $12,837 million decreased $2,256 million ($2,201 million adjusted for currency) from December 31, 2025, primarily due to lower funding requirements associated with financing receivables.
Financing provides financing solutions predominantly for IBM’s external client assets, and the debt used to fund Financing assets is primarily comprised of intercompany loans. Total debt changes generally correspond with the level of client and commercial financing receivables, the level of cash and cash equivalents, the change in intercompany and external payables, and the change in intercompany investment from IBM. The terms of the intercompany loans are set by the company to substantially match the term, currency and interest rate variability underlying the financing receivable. The Financing debt-to-equity ratio remained at 9.0 to 1 at March 31, 2026.
In the Consolidated Income Statement, when external borrowings support the Financing business, interest expense is presented in cost of financing. Refer to note 12, “Borrowings,” for additional information.
Equity
Total equity increased $315 million from December 31, 2025, primarily driven by net income of $1,216 million and an increase in common stock of $618 million, partially offset by dividends paid of $1,576 million.
Management Discussion – (continued)
Cash Flow
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 7, are summarized in the table below. These amounts also include the cash flows associated with the Financing business.
| ($ in millions) | ||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||
| Net cash provided by/(used in): | ||||||||||||||
| Operating activities | $ | 5,169 | $ | 4,370 | ||||||||||
| Investing activities | (10,489) | (12,979) | ||||||||||||
| Financing activities | 2,719 | 5,443 | ||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (177) | 167 | ||||||||||||
| Net change in cash, cash equivalents and restricted cash | $ | (2,777) | $ | (2,999) |
Net cash provided by operating activities increased $799 million as compared to the first three months of 2025. This was due to an increase in performance-related improvements within net income, and an increase in cash provided by financing receivables, partially offset by higher interest payments on debt.
Net cash used in investing activities decreased $2,491 million primarily due to lower cash used in purchases of marketable securities and other investments, as well as proceeds from the sale of marketable securities acquired in the Confluent acquisition. This decrease was partially offset by higher cash used for acquisitions, reflecting the impact of the Confluent acquisition in the current quarter compared with the HashiCorp acquisition in the prior‑year period.
Net cash provided by financing activities decreased $2,724 million primarily driven by a higher level of maturities and lower level of debt issuances in the current-year period.
Looking Forward
Technology remains a key driver of growth and competitive advantage which allows businesses to scale, drive cost efficiencies, productivity and transformation. It is clear that hybrid cloud and AI are the two most consequential technologies for enterprise performance. These technologies are no longer viewed as incremental tools, but as platforms that fundamentally change how businesses scale, compete, and operate. Their value is even more critical in today’s environment.
AI is changing the economics of enterprise operations. To capture this opportunity and build a competitive advantage, businesses must go beyond just adding AI; they must become AI-first. The portfolio of AI offerings we have built, including cost efficient, fit-for-purpose open-source models deployed in hybrid environments, is focused on helping businesses scale AI and generate return through productivity improvements and automation. In Software, IBM watsonx provides a robust portfolio of AI products for developing AI apps, managing data, and governing the entire lifecycle of AI models and AI agents, allowing clients to move from pilots to production with full control over cost, security, sovereignty, and performance. Our watsonx platform and watsonx Orchestrate help enterprises deploy AI by connecting agents, models, and workflows with governance and security. We continue to see Infrastructure play a critical role, as AI moves into the core of enterprise operations, enabling hybrid cloud environments for mission-critical transactions and AI workloads, as clients bring AI to their data. IBM Z delivers enhanced AI acceleration through multi-model AI capabilities, low unit cost architecture at scale for workloads that require end-to-end encryption, continued availability, and ultra-high throughput. In Consulting, AI is both a growth driver and a productivity engine. Our experts are helping clients design and execute AI strategies by leveraging the IBM Consulting Advantage platform, an AI delivery platform designed to implement solutions at scale, transforming how our consultants work. As agents take on more work, delivery becomes faster, more software driven, and more scalable.
AI is a powerful productivity driver for our clients and for IBM. We are transforming our enterprise operations, driving efficiency and cost savings with our Client Zero approach, leveraging technology and embedding AI in our own workflows. Our developer workforce is using IBM Bob, our AI-based software development system that automates the full
Management Discussion – (continued)
software lifecycle, driving developer productivity and predictable enterprise costs. IBM Bob became generally available in March.
We remain focused on accelerating organic innovation speed and impact, and we continue to invest in emerging technologies, including Quantum, bringing new innovations to market. To complement our portfolio, in mid-March we completed the previously announced acquisition of Confluent, which enables enterprises to deploy generative and agentic AI better and faster by providing trusted communication and data flow between environments, applications and APIs.
We had a strong start to 2026. Our first-quarter performance reflects the durability of our portfolio and the continued execution of our focused strategy around hybrid cloud and AI, giving us confidence in our ability to continue to deliver long-term growth aligned with our financial model.
Currency Rate Fluctuations
Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our financial results and financial position. Movements in currency, and the fact that we do not hedge 100 percent of our currency exposures, will result in a currency impact to our revenues, profit and cash flows throughout 2026. We execute a hedging program which defers, versus eliminates, the volatility of currency impacts on our financial results. During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates over time.
References to “adjusted for currency” or “constant currency” reflect adjustments based upon a simple mathematical formula. However, this constant currency methodology that we utilize to disclose this information does not incorporate any operational actions that management could take to mitigate fluctuating currency rates. Based on the currency rate movements in the first quarter of 2026, revenue from continuing operations increased 9.5 percent as reported and 6.1 percent at constant currency compared to the prior year.
At March 31, 2026, currency changes resulted in assets and liabilities denominated in most local currencies being translated into fewer U.S. dollars than at year-end 2025. We use financial hedging instruments to limit specific currency risks related to foreign currency-based transactions.
We translate revenue, cost and expense in our non-U.S. operations at current exchange rates in the reported period. In the first quarter of 2026, the impact from currency translation and hedging to year-to-year pre-tax income, operating (non-GAAP) pre-tax income and segments profit margin was not material. Hedging and certain underlying foreign currency transaction gains and losses are allocated to our segment results. Considering the operational responses mentioned above, movements of exchange rates, and the nature and timing of hedging instruments, it is difficult to predict future currency impacts in any particular period.
For non-U.S. subsidiaries and branches that operate in U.S. dollars or whose economic environment is highly inflationary, translation adjustments are reflected in results of operations. Generally, we manage currency risk in these entities by linking prices and contracts to U.S. dollars.
Liquidity and Capital Resources
In our 2025 Annual Report, on pages 31 to 33, there is a discussion of our liquidity including two tables that present three years of data. The table presented on page 31 includes net cash from operating activities, cash and cash equivalents, restricted cash and short-term marketable securities, and the size of our global credit facilities for each of the past three years. For the three months ended, or at, as applicable, March 31, 2026, those amounts are $5.2 billion of net cash from operating activities, $11.8 billion of cash and cash equivalents, restricted cash and short-term marketable securities and $10.0 billion in global credit facilities, respectively. While we have no current plans to draw on these credit facilities, they are available as back-up liquidity.
Management Discussion – (continued)
The major rating agencies' ratings on our debt securities at March 31, 2026 appear in the following table and remain unchanged from December 31, 2025.
| IBM Ratings: | Standard and Poor's | Moody’s Investors Service | Fitch Ratings | |||||||||||||||||
| Senior long-term debt | A- | A3 | A- | |||||||||||||||||
| Commercial paper | A-2 | Prime-2 | F1 |
We have financial flexibility, supported by our strong liquidity position and cash flows, to operate at a single A credit rating. Debt levels have increased $5.1 billion ($5.4 billion adjusted for currency) from December 31, 2025 driven by debt issuances, as well as debt acquired in the Confluent acquisition, partially offset by maturities. In the first quarter of 2026, we issued $7.4 billion of debt for general corporate purposes. Refer to note 12, “Borrowings,” for additional information.
We do not have “ratings trigger” provisions in our debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating. Our debt covenants are well within the required levels. Our contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if our credit rating were to fall below investment grade. At March 31, 2026, the fair value of those instruments that were in a liability position was $693 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of our outstanding instruments and market conditions. We have no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on our financial position or liquidity.
We prepare our Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 7 of this Form 10-Q and highlight causes and events underlying sources and uses of cash in that format on page 52. For the purpose of running its business, IBM manages, monitors and analyzes cash flows in a different manner.
Management uses free cash flow as a measure to evaluate its operating results, strategic investments, plan shareholder return levels and assess its ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary expenditures. We define free cash flow as net cash from operating activities less the change in Financing receivables and net capital expenditures, including the investment in software and other asset sales. A key objective of the Financing business is to generate strong returns on equity, and our Financing receivables are the basis for that growth. Accordingly, management considers Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations of both free cash flow and net cash from operating activities that exclude the effect of Financing receivables.
Management Discussion – (continued)
The following is management’s view of cash flows for the first three months of 2026 and 2025 prepared in a manner consistent with the description above.
| ($ in millions) | ||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||
| Net cash from operating activities per GAAP | $ | 5,169 | $ | 4,370 | ||||||||||
| Less: change in Financing receivables | 2,565 | 2,087 | ||||||||||||
| Net cash from operating activities, excluding Financing receivables | $ | 2,604 | $ | 2,283 | ||||||||||
| Capital expenditures, net | (384) | (321) | ||||||||||||
| Free cash flow | $ | 2,220 | $ | 1,962 | ||||||||||
| Change in Financing receivables | 2,565 | 2,087 | ||||||||||||
| Acquisitions | (10,465) | (7,098) | ||||||||||||
| Divestitures | 1 | (1) | ||||||||||||
| Dividends | (1,576) | (1,549) | ||||||||||||
| Change in total debt | 4,509 | 7,092 | ||||||||||||
| Other | 279 | 128 | ||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (177) | 167 | ||||||||||||
| Change in cash, cash equivalents, restricted cash and short-term marketable securities | $ | (2,643) | $ | 2,788 |
In the first three months of 2026, we generated $2.2 billion in free cash flow, an increase of $0.3 billion versus the prior-year period. The increase was primarily driven by performance-related improvements within net income, partially offset by higher interest payments on debt and increased investments in capital expenditures. In the first three months of 2026, we continued to return value to shareholders with $1.6 billion in dividends, and we invested in the Confluent acquisition.
Events that could temporarily change the historical cash flow dynamics discussed previously and in our 2025 Annual Report include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding requirements, periods of severe downturn in the capital markets, the timing of tax payments, or the timing of certain working capital activities related to collections and payments. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described in note 14, “Contingencies,” in this Form 10-Q.
With respect to pension funding, our pension plans remain well funded as of the end of March 2026. Our expected 2026 contributions and pre-tax retirement-related plan costs remain fairly consistent with the expectations disclosed in the 2025 Annual Report. Refer to “Retirement-Related Plans” on page 30 in our 2025 Annual Report for additional information. Financial market performance could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. We are not quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or changes in pension plan funding regulations. In 2026, we are not legally required to make any contributions to the U.S. defined benefit pension plans and our legally required contributions to certain non-U.S. defined benefit plans are not expected to be material.
Our cash flows are sufficient to fund our current operations and obligations, including investing and financing activities such as dividends and debt service. When additional requirements arise, we have several liquidity options available. These options may include the ability to borrow additional funds at reasonable interest rates and utilizing our committed global credit facilities. Our overall shareholder payout remains at a comfortable level and we remain fully committed to our long-standing dividend policy.
Management Discussion – (continued)
Financing
Financing is a reportable segment that facilitates IBM clients’ acquisition of hardware, software and services by providing financing solutions, while generating solid returns on equity.
Results of Operations
| ($ in millions) | Yr.-to-Yr. Percent Change/Margin Change | Yr.-to-Yr. Percent Change Adjusted For Currency | ||||||||||||||||||||||||
| For the three months ended March 31: | 2026 | 2025 | ||||||||||||||||||||||||
| Revenue | $ | 220 | $ | 191 | 14.8 | % | 10.2 | % | ||||||||||||||||||
| Segment profit (1) | $ | 118 | $ | 69 | 72.6 | % | ||||||||||||||||||||
| Segment profit margin | 53.8 | % | 35.8 | % | 18.0 | pts. |
(1)Intercompany financing activities are reflected in segment profit and are eliminated in IBM’s consolidated financial results.
For the three months ended March 31, 2026, financing revenue increased 14.8 percent as reported (10.2 percent adjusted for currency) compared to the prior-year period, primarily driven by an increase in client financing assets.
Segment profit increased 72.6 percent to $118 million and segment profit margin increased 18.0 points to 53.8 percent, respectively, compared to the prior-year period. The increase in segment profit was driven by higher unallocated reserve requirements in the prior year as a result of economic conditions and year-to-year revenue growth as described above.
Balance Sheet and Return on Equity Highlights
| ($ in millions) | At March 31, 2026 | At December 31, 2025 | ||||||||||||
| Client financing receivables (1) | $ | 12,210 | $ | 13,192 | ||||||||||
| Commercial financing receivables (1) (2) | $ | 1,312 | $ | 2,992 | ||||||||||
| Financing Segment Debt (3) | $ | 12,837 | $ | 15,093 | ||||||||||
| Equity | $ | 1,426 | $ | 1,678 |
(1)Refer to note 9, “Financing Receivables,” for additional information.
(2)Includes both held for investment and held for sale receivables.
(3)Financing segment debt is primarily comprised of intercompany loans.
Return on equity was 25.3 percent compared to 18.5 percent for the three months ended March 31, 2026 and 2025, respectively. The increase was primarily driven by higher net income which reflects the increase in segment profit as described above. Return on equity is calculated as annualized after-tax segment profit divided by the average of the ending equity for Financing for the last two quarters. Annualized after-tax segment profit is a function of IBM's provision for income taxes determined on a consolidated basis.
The following table presents Client financing and Commercial financing receivables excluding receivables classified as held for sale.
| ($ in millions) | At March 31, 2026 | At December 31, 2025 | ||||||||||||
| Amortized cost | $ | 12,907 | $ | 15,193 | ||||||||||
| Specific allowance for credit losses | 84 | 88 | ||||||||||||
| Unallocated allowance for credit losses | 44 | 53 | ||||||||||||
| Total allowance for credit losses | 128 | 141 | ||||||||||||
| Net financing receivables | $ | 12,780 | $ | 15,052 | ||||||||||
| Allowance for credit losses coverage | 1.0 | % | 0.9 | % |
Management Discussion – (continued)
The percentage of Financing segment receivables reserved increased from 0.9 percent at December 31, 2025 to 1.0 percent at March 31, 2026, primarily driven by the decline in amortized cost resulting from seasonally higher year-end balances.
We continue to apply our rigorous credit policies. Approximately 80 percent of the total external portfolio was with investment grade clients, an increase of 2 points as compared to December 31, 2025. This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects certain mitigating actions taken to reduce the risk to IBM. For additional information relating to the company's credit quality and mitigation actions, including sales of receivables, refer to note 9, “Financing Receivables.”
GAAP Reconciliation
The tables below provide a reconciliation of our income statement results as reported under GAAP to our operating earnings presentation which is a non-GAAP measure. Management’s calculation of operating (non-GAAP) earnings, as presented, may differ from similarly titled measures reported by other companies. Refer to the “Operating (non-GAAP) Earnings” section on page 38 for management’s rationale for presenting operating earnings information.
| ($ in millions, except per share amounts) | GAAP | Acquisition- Related Adjustments | Retirement- Related Adjustments | U.S. Tax Reform Impacts | Operating (non-GAAP) | |||||||||||||||||||||||||||
| For the three months ended March 31, 2026: | ||||||||||||||||||||||||||||||||
| Gross profit | $ | 8,950 | $ | 237 | $ | — | $ | — | $ | 9,187 | ||||||||||||||||||||||
| Gross profit margin | 56.2 | % | 1.5 | pts. | — | pts. | — | pts. | 57.7 | % | ||||||||||||||||||||||
| SG&A | $ | 5,089 | $ | (408) | $ | — | $ | — | $ | 4,682 | ||||||||||||||||||||||
| Other (income) and expense | (1) | — | (96) | — | (98) | |||||||||||||||||||||||||||
| Total expense and other (income) | 7,562 | (409) | (96) | — | 7,057 | |||||||||||||||||||||||||||
| Pre-tax income from continuing operations | 1,387 | 646 | 96 | — | 2,129 | |||||||||||||||||||||||||||
| Pre-tax margin from continuing operations | 8.7 | % | 4.1 | pts. | 0.6 | pts. | — | pts. | 13.4 | % | ||||||||||||||||||||||
| Provision for/(benefit from) income taxes (1) | $ | 172 | $ | 137 | $ | 3 | $ | (4) | $ | 308 | ||||||||||||||||||||||
| Effective tax rate | 12.4 | % | 2.7 | pts. | (0.4) | pts. | (0.2) | pts. | 14.5 | % | ||||||||||||||||||||||
| Income from continuing operations | $ | 1,216 | $ | 508 | $ | 94 | $ | 4 | $ | 1,821 | ||||||||||||||||||||||
| Income margin from continuing operations | 7.6 | % | 3.2 | pts. | 0.6 | pts. | 0.0 | pts. | 11.4 | % | ||||||||||||||||||||||
| Diluted earnings per share from continuing operations | $ | 1.28 | $ | 0.53 | $ | 0.10 | $ | 0.00 | $ | 1.91 |
| ($ in millions, except per share amounts) | GAAP | Acquisition- Related Adjustments | Retirement- Related Adjustments | U.S. Tax Reform Impacts | Operating (non-GAAP) | |||||||||||||||||||||||||||
| For the three months ended March 31, 2025: | ||||||||||||||||||||||||||||||||
| Gross profit | $ | 8,031 | $ | 201 | $ | — | $ | — | $ | 8,232 | ||||||||||||||||||||||
| Gross profit margin | 55.2 | % | 1.4 | pts. | — | pts. | — | pts. | 56.6 | % | ||||||||||||||||||||||
| SG&A | $ | 4,886 | $ | (353) | $ | — | $ | — | $ | 4,533 | ||||||||||||||||||||||
| Other (income) and expense | (165) | — | (23) | — | (187) | |||||||||||||||||||||||||||
| Total expense and other (income) | 6,873 | (357) | (23) | — | 6,494 | |||||||||||||||||||||||||||
| Pre-tax income from continuing operations | 1,158 | 557 | 23 | — | 1,738 | |||||||||||||||||||||||||||
| Pre-tax margin from continuing operations | 8.0 | % | 3.8 | pts. | 0.2 | pts. | — | pts. | 12.0 | % | ||||||||||||||||||||||
| Provision for/(benefit from) income taxes (1) | $ | 103 | $ | 128 | $ | (12) | $ | 2 | $ | 221 | ||||||||||||||||||||||
| Effective tax rate | 8.9 | % | 4.5 | pts. | (0.8) | pts. | 0.1 | pts. | 12.7 | % | ||||||||||||||||||||||
| Income from continuing operations | $ | 1,054 | $ | 429 | $ | 35 | $ | (2) | $ | 1,517 | ||||||||||||||||||||||
| Income margin from continuing operations | 7.3 | % | 3.0 | pts. | 0.2 | pts. | 0.0 | pts. | 10.4 | % | ||||||||||||||||||||||
| Diluted earnings per share from continuing operations | $ | 1.12 | $ | 0.45 | $ | 0.04 | $ | 0.00 | $ | 1.60 |
(1)The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income.
Management Discussion – (continued)
Forward-Looking and Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the following: a downturn in economic environment and client spending budgets; a failure of the company’s innovation initiatives; damage to the company’s reputation; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; the company’s ability to successfully manage acquisitions, alliances and divestitures, including integration challenges, failure to achieve objectives, the assumption or retention of liabilities and higher debt levels; fluctuations in financial results; impact of local legal, economic, political, health and other conditions; the company’s failure to meet growth and productivity objectives; ineffective internal controls; the company’s use of accounting estimates; impairment of the company’s goodwill or amortizable intangible assets; the company’s ability to attract and retain key employees and its reliance on critical skills; impacts of relationships with critical suppliers; product and service quality issues; the development and use of AI, including the company's increased AI solutions and use of AI technologies; impacts of business with government clients; reliance on third party distribution channels and ecosystems; cybersecurity and data protection considerations; adverse effects related to climate change and other environmental matters; tax matters; legal proceedings and investigatory risks; the company’s pension plans; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Qs, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission or in materials incorporated therein by reference. Any forward-looking statement in this Form 10-Q speaks only as of the date on which it is made. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements.
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