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SEC filingIBM's Q2 2025 performance was driven by strong Software and Infrastructure growth, with gross margin expansion of 2.0 points to 58.8% reflecting portfolio mix and productivity.
In the second quarter of 2025, IBM reported total revenue of $17.0 billion, a 7.7% increase as reported and 5.3% adjusted for currency compared to the prior-year period. This top-line growth was led by the Software and Infrastructure segments. Gross profit margin expanded 2.0 points to 58.8%, driven by an improving portfolio mix and productivity actions. Total expense and other income increased 9.6% year-over-year, primarily due to higher operating acquisition-related spending and currency effects. Pre-tax income from continuing operations grew 17.0% to $2.6 billion, with a pre-tax margin of 15.3%, up 1.2 points. Net income from continuing operations was $2.2 billion, a 19.8% increase, resulting in a net income margin of 12.9%, up 1.3 points. Diluted earnings per share from continuing operations was $2.31, an 18.0% increase. On an operating (non-GAAP) basis, pre-tax income was $3.2 billion with a margin of 18.8%, and diluted EPS was $2.80, up 15.2%.
For the first six months of 2025, revenue was $31.5 billion, up 4.3% as reported. Gross margin improved 1.9 points to 57.1%. Net income from continuing operations decreased 4.6% to $3.2 billion, impacted by a prior-year tax benefit, while operating (non-GAAP) net income increased 8.6% to $4.2 billion. Free cash flow for the first half was $4.8 billion, an increase of $0.3 billion year-over-year.
Software revenue grew 9.6% as reported (7.6% adjusted for currency) to $7.4 billion, with strength across Hybrid Cloud (Red Hat), Automation, and Data. Annual recurring revenue (ARR) reached $22.7 billion, up 12.2% year-over-year. Segment gross margin was 83.9%, up 0.3 points, while segment profit margin of 31.1% decreased 0.3 points due to acquisition investments.
Consulting revenue increased 2.6% as reported but was flat adjusted for currency at $5.3 billion, as the business stabilized. Strategy and Technology revenue grew 0.9% as reported, while Intelligent Operations grew 4.8%. Segment gross margin improved 1.2 points to 27.5%, and segment profit margin expanded 1.6 points to 10.6%, reflecting productivity actions. Consulting signings decreased 15.6% year-over-year, though the trailing twelve-month book-to-bill ratio remained over 1.14.
Infrastructure revenue surged 13.6% as reported (11.5% adjusted for currency) to $4.1 billion, driven by the launch of the new IBM z17 mainframe. IBM Z revenue increased 70.2%, while Distributed Infrastructure declined 15.1% due to product cycle dynamics. Segment gross margin expanded 5.0 points to 61.5%, and segment profit margin increased 5.4 points to 23.3%.
Financing revenue decreased 1.7% to $0.2 billion, but segment profit increased 134.2% to $179 million, driven by higher intercompany income related to IBM Z product cycle dynamics.
Management expects technology to remain a key competitive advantage, with enterprise AI gaining traction across the portfolio. The company will continue to invest in innovation, including Quantum, and completed six acquisitions in the first half of 2025, including HashiCorp. IBM is transforming its operations by embedding AI in workflows and optimizing its supply chain, including shifting Distributed Infrastructure manufacturing to a strategic partner. While the operating environment remains dynamic, the company believes its focused portfolio, disciplined investments, and strong liquidity position support durable performance. For 2025, total pre-tax retirement-related plan cost is expected to be approximately $1.1 billion, with contributions of approximately $1.3 billion. The company also expects to record a one-time, non-cash tax charge in Q3 2025 related to U.S. tax reform, which will not impact operating (non-GAAP) earnings.
IBM's balance sheet reflects significant acquisition-driven expansion. Total assets increased to $148.6 billion from $137.2 billion at year-end 2024, primarily due to a $6.8 billion increase in goodwill to $67.5 billion, largely from the HashiCorp acquisition. Cash and equivalents decreased to $11.9 billion from $13.9 billion, while marketable securities rose to $3.5 billion from $0.6 billion, partly due to securities acquired from HashiCorp. Total debt increased substantially to $64.2 billion from $55.0 billion, driven by $8.4 billion in new issuances against $2.6 billion in repayments. The company maintains ample liquidity with a $10 billion revolving credit facility, extended to 2028 and 2030, with zero borrowings outstanding.
IBM disclosed $66 billion in remaining performance obligations (RPO), with approximately 69% expected to be recognized as revenue within two years and 27% in years three through five. This represents a significant forward revenue base not reflected on the balance sheet. The company also reported $2.0 billion in unused extended lines of credit to third parties and $2.1 billion in committed future client financing. Long-term debt contractual obligations total $65.2 billion, with $2.97 billion due in the remainder of 2025 and $6.4 billion in 2026. The company is assessing the impact of newly enacted U.S. tax legislation (Public Law 119-21) and expects a one-time non-cash charge in Q3 2025 for deferred tax remeasurement.
IBM deployed significant capital toward acquisitions, spending $7.8 billion net of cash acquired, including $7.4 billion for HashiCorp. The company issued $8.4 billion in new debt (including $3.6 billion in Euro notes and $4.75 billion in U.S. dollar notes) while repaying $2.6 billion. Dividends remained a priority with $3.1 billion paid ($1.68 per share quarterly), and a subsequent dividend of $1.68 was declared payable September 10, 2025. Capital expenditures were modest at $0.5 billion. Stock-based compensation cost increased to $842 million from $636 million, reflecting annual cycles and HashiCorp-related awards.
Segment disclosures show Software as the largest and most profitable segment with 31.1% margins on $7.4 billion in revenue (+9.6% YoY). Infrastructure demonstrated the strongest growth at +13.6% YoY with margins expanding to 23.3%. Consulting margins improved to 10.6% on modest 2.6% revenue growth. The Financing segment, while small, generated $179 million in profit. Geographically, the Americas contributed 49.8% of total revenue, EMEA 31.9%, and Asia Pacific 18.3%. The segment reconciliations highlight significant corporate adjustments including $549 million in amortization of acquired intangibles and $424 million in stock-based compensation.
IBM's cash flow from operations (CFO) for the first half of 2025 was $6.1 billion, slightly below the $6.2 billion reported in the same period of 2024. CFO comfortably exceeded net income of $3.2 billion, with the primary non-cash adjustments being $1.1 billion in depreciation and $2.2 billion in total amortization (capitalized software and acquired intangibles). Stock-based compensation added $842 million. A negative swing in operating assets and liabilities of $421 million partially offset these adjustments, compared to a positive contribution of $152 million in the prior year, indicating some working capital pressure.
Capital expenditures (Payments for property, plant and equipment) were stable at $454 million. When combined with the $314 million investment in software, total capitalizable investments were $768 million. The company did not disclose a free cash flow figure, but CFO less capex alone would be approximately $5.6 billion, which does not fully cover the $3.1 billion in dividends paid.
A significant anomaly in the period was the $7.8 billion outflow for acquisitions, net of cash acquired, which drove the massive $11.3 billion use of cash in investing activities. This was primarily funded by $8.4 billion in new debt proceeds, resulting in net cash provided by financing activities of $2.6 billion. Overall, the net change in cash was a decrease of $2.1 billion, bringing the cash balance to $12.0 billion at period end.