International Business Machines Corp 8-K, filed Oct 21, 2026
International Business Machines Corp (IBM)
8-K
2026-10-21
For: 2026-10-21
View Original
Added on
October 22, 2026
About this 8-K
International Business Machines Corp filed this 8-K on October 21, 2026.
IBM reported third-quarter 2026 revenue of $17.1 billion, up 5 percent and 6 percent at constant currency, and raised its full-year free cash flow outlook to an increase of more than $1 billion year-over-year. AI summary
Items reported
- Item 2.02: Financial results
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: October 21, 2026
(Date of earliest event reported)
(Exact name of registrant as specified in its charter)
| (State of Incorporation) | (Commission File Number) | (IRS employer Identification No.) | ||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(Registrant’s telephone number)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |||||
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |||||
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |||||
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | |||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||||||||
| NYSE Texas | ||||||||||||||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02. Results of Operations and Financial Condition.
The registrant’s press release dated October 21, 2026, regarding its financial results for the period ended September 30, 2026, including consolidated financial statements for the period ended September 30, 2026, is Exhibit 99.1 of this Form 8-K.
In an effort to provide investors with additional information regarding the company’s results as determined by generally accepted accounting principles (GAAP), the company has disclosed in the attached press release certain non-GAAP information which management believes provides useful information to investors. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are included in the press release, which is Exhibit 99.1 to this Form 8-K. The rationale for management’s use of non-GAAP measures is included in Exhibit 99.2 to this Form 8-K.
The information in this Item 2.02, including the corresponding Exhibits 99.1 and 99.2, is being furnished with the Commission and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934.
Item 9.01. Financial Statements and Exhibits.
(d)Exhibits
The following exhibits are being furnished as part of this report:
| Exhibit No. | Description of Exhibit | |||||||
| 99.1 | ||||||||
| 99.2 | ||||||||
The following exhibit is being filed as part of this report:
| Exhibit No. | Description of Exhibit | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL Document) | |||||||
IBM’s web site (www.ibm.com) contains a significant amount of information about IBM, including financial and other information for investors (www.ibm.com/investor/). IBM encourages investors to visit its various web sites from time to time, as information is updated and new information is posted.
2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
Date: October 21, 2026 | ||||||||
| By: | /s/ Nicolás A. Fehring | |||||||
| Nicolás A. Fehring | ||||||||
| Vice President and Controller | ||||||||
3
Exhibit 99.1
IBM RELEASES THIRD-QUARTER RESULTS
Exceeded expectations with accelerated revenue growth led by Software and Infrastructure; Raises outlook for full-year free cash flow
ARMONK, N.Y., October 21, 2026 . . . IBM (NYSE: IBM) today announced third-quarter 2026 earnings results.
“Disciplined execution throughout the quarter drove accelerated revenue growth and strong free cash flow. Our clients are now deploying Super Intelligence in ways that transform entire operating models, instead of simply addressing narrow or novel problems. IBM's technology and expertise are helping organizations drive growth and serve customers with greater speed, precision and efficiency than ever before," said Arvind Krishna, IBM chairman, president and chief executive officer. "For the full year, we continue to expect constant currency revenue growth in the range of four-to-five percent, and we now expect free cash flow to increase by more than $1 billion year-over-year.”
Third-Quarter Highlights
•Revenue
–Revenue of $17.1 billion, up 5 percent, up 6 percent at constant currency
–Software revenue up 8 percent, up 9 percent at constant currency
–Consulting revenue flat, up 2 percent at constant currency
–Infrastructure revenue up 4 percent, up 5 percent at constant currency
•Profit
–Gross Profit Margin: GAAP: 56.8 percent, down 50 basis points; Operating (Non-GAAP): 58.5 percent, down 20 basis points
–Pre-Tax Income Margin: GAAP: 14.6 percent, down 30 basis points; Operating (Non-GAAP): 19.3 percent, up 70 basis points
•Cash Flow
–Year to date, net cash from operating activities of $11.8 billion; free cash flow of $7.8 billion
THIRD-QUARTER 2026 INCOME STATEMENT SUMMARY | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | Gross Profit | Gross Profit Margin | Pre-tax Income | Pre-tax Income Margin | Net Income | Diluted Earnings Per Share | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP from Continuing Operations | $ | 17.1B | $ | 9.7B | 56.8 | % | $ | 2.5B | 14.6 | % | $ | 2.2B | $ | 2.31 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Year/Year | 5 | % (1) | 4 | % | (0.5) | Pts | 3 | % | (0.3) | Pts | 26 | % | 26 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Operating (Non-GAAP) | $ | 10.0B | 58.5 | % | $ | 3.3B | 19.3 | % | $ | 2.8B | $ | 2.95 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Year/Year | 4 | % | (0.2) | Pts | 9 | % | 0.7 | Pts | 12 | % | 11 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
(1) 6% at constant currency.
“Demand across our portfolio combined with strong operational execution led to accelerated growth and solid operating pre-tax margin expansion in the quarter," said James Kavanaugh, IBM senior vice president and chief financial officer. "Just as we are helping clients extract value from their operations with Super Intelligence, we are driving tangible returns through our productivity initiatives inside IBM. This approach fuels profit and free cash flow growth and enables us to continue to invest in our business while returning value to shareholders through our dividend.”
Segment Results for Third Quarter
•Software — revenues of $7.8 billion, up 8 percent, up 9 percent at constant currency
–Hybrid Cloud (Red Hat) up 11 percent
–Automation down 3 percent
–Data up 19 percent, up 20 percent at constant currency
–Transaction Processing up 9 percent, up 10 percent at constant currency
•Consulting — revenues of $5.3 billion, flat, up 2 percent at constant currency
–Strategy and Technology up 2 percent, up 4 percent at constant currency
–Intelligent Operations down 2 percent, flat at constant currency
•Infrastructure — revenues of $3.7 billion, up 4 percent, up 5 percent at constant currency
–Hybrid Infrastructure up 8 percent, up 9 percent at constant currency
•IBM Z down 20 percent, down 19 percent at constant currency
•Distributed Infrastructure up 31 percent, up 32 percent at constant currency
–Infrastructure Support down 3 percent, down 2 percent at constant currency
•Financing — revenues of $0.2 billion, down 4 percent, down 3 percent at constant currency
Cash Flow and Balance Sheet
In the third quarter, the company generated net cash from operating activities of $4.0 billion, up $0.9 billion year to year. IBM’s free cash flow was $3.0 billion, up $0.7 billion year to year. The company returned $1.6 billion to shareholders in dividends in the third quarter.
For the first nine months of the year, the company generated net cash from operating activities of $11.8 billion, up $2.6 billion year to year. IBM's free cash flow was $7.8 billion, up $0.6 billion year to year.
IBM ended the third quarter with $11.1 billion of cash, restricted cash and marketable securities, down $3.4 billion from year-end 2025. The company invested $11.4 billion in acquisitions this year. Debt, including IBM Financing debt of $12.7 billion, totaled $63.8 billion, up $2.6 billion year to date.
Full-Year 2026 Expectations
•Revenue: The company continues to expect full-year constant currency revenue growth in the range of four-to-five percent. At current foreign exchange rates, currency is expected to be neutral to growth for the year
•Free cash flow: The company now expects full-year free cash flow to increase by more than $1 billion year-over-year
Dividend Declaration
The IBM board of directors approved a regular quarterly cash dividend of $1.69 per common share, to stockholders of record on November 10, 2026. With payment of the December 10, 2026 dividend, IBM will have paid consecutive quarterly dividends every year since 1916.
Forward-Looking and Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in this release 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 release 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.
Presentation of Information in this Press Release
In an effort to provide investors with additional information regarding the company’s results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release the following non-GAAP information, which management believes provides useful information to investors:
•adjusting for currency (i.e., at constant currency);
•presenting operating (non-GAAP) earnings per share amounts and related income statement items;
•free cash flow;
•net cash from operating activities excluding IBM Financing receivables;
•adjusted EBITDA;
•adjusted EBITDA margin.
The rationale for management’s use of these non-GAAP measures is included in Exhibit 99.2 in the Form 8-K that includes this press release and is being submitted today to the SEC.
Conference Call and Webcast
IBM’s regular quarterly earnings conference call is scheduled to begin at 5:00 p.m. ET, today. The Webcast may be accessed via a link at https://www.ibm.com/investor/events/earnings-3q26. Presentation charts will be available shortly before the Webcast.
Financial Results Below (certain amounts may not add due to use of rounded numbers; percentages presented are calculated from the underlying whole-dollar amounts).
| Contact: | IBM | ||||
| Tim Davidson, 914-844-7847 | |||||
| tfdavids@us.ibm.com | |||||
| Erin McElwee, 347-920-6825 | |||||
| erin.mcelwee@ibm.com | |||||
INTERNATIONAL BUSINESS MACHINES CORPORATION
COMPARATIVE FINANCIAL RESULTS
(Unaudited; $ in millions except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||||||||||||||
| REVENUE BY SEGMENT | |||||||||||||||||||||||||||||||||||
| Software | $ | 7,804 | $ | 7,209 | $ | 22,617 | $ | 20,932 | |||||||||||||||||||||||||||
| Consulting | 5,335 | 5,324 | 15,934 | 15,706 | |||||||||||||||||||||||||||||||
| Infrastructure | 3,707 | 3,559 | 10,868 | 10,586 | |||||||||||||||||||||||||||||||
| Financing | 192 | 200 | 598 | 557 | |||||||||||||||||||||||||||||||
| Other | 66 | 38 | 165 | 68 | |||||||||||||||||||||||||||||||
| TOTAL REVENUE | 17,103 | 16,331 | 50,182 | 47,849 | |||||||||||||||||||||||||||||||
| GROSS PROFIT | 9,714 | 9,360 | 28,571 | 27,369 | |||||||||||||||||||||||||||||||
| GROSS PROFIT MARGIN | |||||||||||||||||||||||||||||||||||
| Software | 82.5 | % | 83.1 | % | 82.6 | % | 83.5 | % | |||||||||||||||||||||||||||
| Consulting | 27.4 | % | 29.3 | % | 27.9 | % | 28.0 | % | |||||||||||||||||||||||||||
| Infrastructure | 56.7 | % | 57.2 | % | 57.4 | % | 57.7 | % | |||||||||||||||||||||||||||
| Financing | 40.7 | % | 45.6 | % | 42.2 | % | 45.7 | % | |||||||||||||||||||||||||||
| TOTAL GROSS PROFIT MARGIN | 56.8 | % | 57.3 | % | 56.9 | % | 57.2 | % | |||||||||||||||||||||||||||
| EXPENSE AND OTHER INCOME | |||||||||||||||||||||||||||||||||||
| SG&A | 4,620 | 4,748 | 14,691 | 14,661 | |||||||||||||||||||||||||||||||
| R&D | 2,378 | 2,082 | 6,863 | 6,129 | |||||||||||||||||||||||||||||||
| Intellectual property and custom development income | (164) | (219) | (501) | (687) | |||||||||||||||||||||||||||||||
| Other (income) and expense | (109) | (173) | (296) | (376) | |||||||||||||||||||||||||||||||
| Interest expense | 491 | 492 | 1,451 | 1,457 | |||||||||||||||||||||||||||||||
| TOTAL EXPENSE AND OTHER INCOME | 7,217 | 6,931 | 22,208 | 21,184 | |||||||||||||||||||||||||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 2,497 | 2,430 | 6,363 | 6,185 | |||||||||||||||||||||||||||||||
| Pre-tax income margin | 14.6 | % | 14.9 | % | 12.7 | % | 12.9 | % | |||||||||||||||||||||||||||
| Provision for/(benefit from) income taxes | 298 | 686 | 782 | 1,193 | |||||||||||||||||||||||||||||||
| Effective tax rate | 11.9 | % | 28.2 | % | 12.3 | % | 19.3 | % | |||||||||||||||||||||||||||
INCOME FROM CONTINUING OPERATIONS | $ | 2,199 | $ | 1,744 | $ | 5,581 | $ | 4,992 | |||||||||||||||||||||||||||
| DISCONTINUED OPERATIONS | |||||||||||||||||||||||||||||||||||
| Income from discontinued operations, net of taxes | (10) | 0 | (10) | 1 | |||||||||||||||||||||||||||||||
NET INCOME | $ | 2,190 | $ | 1,744 | $ | 5,571 | $ | 4,993 | |||||||||||||||||||||||||||
EARNINGS PER SHARE OF COMMON STOCK | |||||||||||||||||||||||||||||||||||
| Assuming dilution | |||||||||||||||||||||||||||||||||||
| Continuing operations | $ | 2.31 | $ | 1.84 | $ | 5.86 | $ | 5.27 | |||||||||||||||||||||||||||
| Discontinued operations | $ | (0.01) | $ | 0.00 | $ | (0.01) | $ | 0.00 | |||||||||||||||||||||||||||
| TOTAL | $ | 2.30 | $ | 1.84 | $ | 5.85 | $ | 5.27 | |||||||||||||||||||||||||||
| Basic | |||||||||||||||||||||||||||||||||||
| Continuing operations | $ | 2.33 | $ | 1.87 | $ | 5.93 | $ | 5.36 | |||||||||||||||||||||||||||
| Discontinued operations | $ | (0.01) | $ | 0.00 | $ | (0.01) | $ | 0.00 | |||||||||||||||||||||||||||
| TOTAL | $ | 2.32 | $ | 1.87 | $ | 5.92 | $ | 5.36 | |||||||||||||||||||||||||||
| WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (M’s) | |||||||||||||||||||||||||||||||||||
| Assuming dilution | 953.5 | 948.9 | 953.0 | 947.4 | |||||||||||||||||||||||||||||||
| Basic | 944.4 | 933.9 | 941.4 | 930.9 | |||||||||||||||||||||||||||||||
INTERNATIONAL BUSINESS MACHINES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
| ($ in millions) | At September 30, 2026 | At December 31, 2025 | ||||||||||||
| ASSETS: | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 9,233 | $ | 13,587 | ||||||||||
| Restricted cash | 48 | 54 | ||||||||||||
| Marketable securities | 1,825 | 830 | ||||||||||||
| Notes and accounts receivable - trade, net | 5,794 | 8,112 | ||||||||||||
| Short-term financing receivables | ||||||||||||||
| Held for investment, net | 5,638 | 7,344 | ||||||||||||
| Held for sale | 774 | 1,131 | ||||||||||||
| Other accounts receivable, net | 1,673 | 1,052 | ||||||||||||
| Inventories | 1,945 | 1,220 | ||||||||||||
| Deferred costs | 1,177 | 1,084 | ||||||||||||
| Prepaid expenses and other current assets | 3,083 | 2,530 | ||||||||||||
| Total current assets | 31,192 | 36,944 | ||||||||||||
| Property, plant and equipment, net | 6,043 | 5,899 | ||||||||||||
| Operating right-of-use assets, net | 3,114 | 3,129 | ||||||||||||
| Long-term financing receivables, net | 6,844 | 7,708 | ||||||||||||
| Prepaid pension assets | 7,715 | 7,544 | ||||||||||||
| Deferred costs | 808 | 825 | ||||||||||||
| Deferred taxes | 8,827 | 8,610 | ||||||||||||
| Goodwill | 74,916 | 67,717 | ||||||||||||
| Intangibles, net | 13,603 | 11,391 | ||||||||||||
| Investments and sundry assets | 1,950 | 2,112 | ||||||||||||
| Total assets | $ | 155,011 | $ | 151,880 | ||||||||||
| LIABILITIES: | ||||||||||||||
| Current Liabilities: | ||||||||||||||
| Taxes | $ | 1,867 | $ | 2,347 | ||||||||||
| Short-term debt | 7,013 | 6,424 | ||||||||||||
| Accounts payable | 4,491 | 4,756 | ||||||||||||
| Compensation and benefits | 3,668 | 4,114 | ||||||||||||
| Deferred income | 15,164 | 16,101 | ||||||||||||
| Operating lease liabilities | 749 | 800 | ||||||||||||
| Other liabilities | 3,534 | 4,116 | ||||||||||||
| Total current liabilities | 36,485 | 38,658 | ||||||||||||
| Long-term debt | 56,804 | 54,836 | ||||||||||||
| Retirement-related obligations | 8,452 | 9,018 | ||||||||||||
| Deferred income | 4,318 | 4,271 | ||||||||||||
| Operating lease liabilities | 2,574 | 2,547 | ||||||||||||
| Other liabilities | 10,172 | 9,810 | ||||||||||||
| Total liabilities | 118,805 | 119,139 | ||||||||||||
| EQUITY: | ||||||||||||||
| IBM stockholders’ equity: | ||||||||||||||
| Common stock | 65,137 | 63,318 | ||||||||||||
| Retained earnings | 156,576 | 155,648 | ||||||||||||
| Treasury stock - at cost | (171,191) | (170,605) | ||||||||||||
| Accumulated other comprehensive income/(loss) | (14,985) | (15,713) | ||||||||||||
| Total IBM stockholders’ equity | 35,537 | 32,648 | ||||||||||||
| Noncontrolling interests | 669 | 93 | ||||||||||||
| Total equity | 36,206 | 32,740 | ||||||||||||
| Total liabilities and equity | $ | 155,011 | $ | 151,880 | ||||||||||
INTERNATIONAL BUSINESS MACHINES CORPORATION
STATEMENT OF CASH FLOWS
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| ($ in millions) | 2026 | 2025 (1) | 2026 | 2025 (1) | ||||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||||
Net income | $ | 2,190 | $ | 1,744 | $ | 5,571 | $ | 4,993 | ||||||||||||||||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||||||||||||||||||
Depreciation (2) | 550 | 583 | 1,638 | 1,698 | ||||||||||||||||||||||
Amortization of capitalized software and acquired intangible assets | 828 | 699 | 2,363 | 2,027 | ||||||||||||||||||||||
| Stock-based compensation | 535 | 444 | 1,539 | 1,285 | ||||||||||||||||||||||
| Net (gain)/loss on divestitures, asset sales and other | (47) | (6) | (124) | (46) | ||||||||||||||||||||||
| Changes in operating assets and liabilities, net of acquisitions/divestitures | (31) | (383) | 804 | (804) | ||||||||||||||||||||||
| Net cash provided by operating activities | 4,025 | 3,081 | 11,791 | 9,153 | ||||||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||||
| Payments for property, plant and equipment | (332) | (255) | (793) | (709) | ||||||||||||||||||||||
Proceeds from disposition of property, plant and equipment/other | 29 | 7 | 60 | 118 | ||||||||||||||||||||||
Investment in software | (154) | (162) | (467) | (476) | ||||||||||||||||||||||
| Purchases of marketable securities and other investments | (1,898) | (1,169) | (4,769) | (8,910) | ||||||||||||||||||||||
Proceeds from disposition of marketable securities and other investments | 640 | 1,199 | 3,763 | 6,162 | ||||||||||||||||||||||
Acquisition of businesses, net of cash acquired | (884) | (58) | (11,364) | (7,903) | ||||||||||||||||||||||
Divestiture of businesses, net of cash transferred | 28 | - | 30 | (1) | ||||||||||||||||||||||
| Net cash provided by/(used in) investing activities | (2,570) | (437) | (13,539) | (11,719) | ||||||||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||
| Proceeds from new debt | 1,978 | 6 | 9,415 | 8,391 | ||||||||||||||||||||||
| Payments to settle debt | (120) | (1,114) | (7,261) | (3,679) | ||||||||||||||||||||||
| Short-term borrowings/(repayments) less than 90 days - net | 2 | 0 | 3 | (29) | ||||||||||||||||||||||
| Common stock repurchases for tax withholdings | (352) | (414) | (817) | (851) | ||||||||||||||||||||||
| Proceeds from issuance of shares | 143 | 134 | 562 | 535 | ||||||||||||||||||||||
Noncontrolling interest transactions (3) | 575 | - | 557 | (15) | ||||||||||||||||||||||
Financing - other (3) | (24) | (54) | (98) | (93) | ||||||||||||||||||||||
Cash dividends paid | (1,596) | (1,569) | (4,762) | (4,681) | ||||||||||||||||||||||
| Net cash provided by/(used in) financing activities | 607 | (3,012) | (2,402) | (423) | ||||||||||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 3 | (59) | (209) | 429 | ||||||||||||||||||||||
| Net change in cash, cash equivalents and restricted cash | 2,064 | (426) | (4,359) | (2,561) | ||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at the beginning of the period | 7,217 | 12,026 | 13,640 | 14,160 | ||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | 9,282 | $ | 11,600 | $ | 9,282 | $ | 11,600 | ||||||||||||||||||
(1) Reclassified to align with the Consolidated Statement of Cash Flows presentation.
(2) Includes operating lease right-of-use assets amortization.
(3) Prior-year amounts have been reclassified to conform to the change in 2026 presentation.
INTERNATIONAL BUSINESS MACHINES CORPORATION
GAAP NET INCOME TO ADJUSTED EBITDA RECONCILIATION
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| ($ in billions) | 2026 | 2025 | Yr/Yr | 2026 | 2025 | Yr/Yr | ||||||||||||||||||||
| Net income as reported (GAAP) | $ | 2.2 | $ | 1.7 | $ | 0.4 | $ | 5.6 | $ | 5.0 | $ | 0.6 | ||||||||||||||
| Less: income from discontinued operations, net of tax | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||||||||||
| Income from continuing operations | 2.2 | 1.7 | 0.5 | 5.6 | 5.0 | 0.6 | ||||||||||||||||||||
| Provision for/(benefit from) income taxes from continuing ops. | 0.3 | 0.7 | (0.4) | 0.8 | 1.2 | (0.4) | ||||||||||||||||||||
| Pre-tax income from continuing operations (GAAP) | 2.5 | 2.4 | 0.1 | 6.4 | 6.2 | 0.2 | ||||||||||||||||||||
| Non-operating adjustments (before tax) | ||||||||||||||||||||||||||
Acquisition-related charges (1) | 0.7 | 0.6 | 0.1 | 2.1 | 1.7 | 0.3 | ||||||||||||||||||||
| Non-operating retirement-related costs/(income) | 0.1 | 0.0 | 0.1 | 0.3 | 0.1 | 0.2 | ||||||||||||||||||||
| Operating (non-GAAP) pre-tax income from continuing ops. | 3.3 | 3.0 | 0.3 | 8.7 | 8.0 | 0.7 | ||||||||||||||||||||
| Net interest expense | 0.4 | 0.3 | 0.1 | 1.1 | 0.9 | 0.2 | ||||||||||||||||||||
| Depreciation/amortization of non-acquired intangible assets | 0.7 | 0.7 | 0.0 | 2.1 | 2.1 | 0.0 | ||||||||||||||||||||
| Stock-based compensation | 0.5 | 0.4 | 0.1 | 1.5 | 1.3 | 0.3 | ||||||||||||||||||||
| Workforce rebalancing charges | 0.0 | 0.0 | 0.0 | 0.4 | 0.4 | 0.0 | ||||||||||||||||||||
Corporate (gains) and charges (2) | 0.0 | 0.0 | 0.0 | (0.2) | 0.0 | (0.2) | ||||||||||||||||||||
| Adjusted EBITDA | $ | 4.9 | $ | 4.6 | $ | 0.3 | $ | 13.7 | $ | 12.7 | $ | 1.0 | ||||||||||||||
| Revenue | $ | 17.1 | $ | 16.3 | 5 | % | $ | 50.2 | $ | 47.8 | 5 | % | ||||||||||||||
| GAAP net income margin | 12.8 | % | 10.7 | % | 2.1pts | 11.1 | % | 10.4 | % | 0.7pts | ||||||||||||||||
| Adjusted EBITDA margin | 28.7 | % | 28.0 | % | 0.6pts | 27.2 | % | 26.5 | % | 0.8pts | ||||||||||||||||
(1) Primarily consists of amortization of acquired intangible assets.
(2) Primarily consists of unique corporate actions such as gains on divestitures and asset sales.
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
| Three Months Ended September 30, 2026 | ||||||||||||||||||||||||||||||||||||||
| ($ in millions) | Software | Consulting | Infrastructure | Financing | ||||||||||||||||||||||||||||||||||
| Revenue | $ | 7,804 | $ | 5,335 | $ | 3,707 | $ | 192 | ||||||||||||||||||||||||||||||
| Segment profit | $ | 2,734 | $ | 653 | $ | 715 | $ | 108 | ||||||||||||||||||||||||||||||
| Segment profit margin | 35.0 | % | 12.2 | % | 19.3 | % | 56.1 | % | ||||||||||||||||||||||||||||||
| Change YTY revenue | 8.2 | % | 0.2 | % | 4.2 | % | (3.9) | % | ||||||||||||||||||||||||||||||
| Change YTY revenue - constant currency | 8.7 | % | 1.8 | % | 4.9 | % | (3.3) | % | ||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2025 | ||||||||||||||||||||||||||||||||||||||
| ($ in millions) | Software | Consulting | Infrastructure | Financing | ||||||||||||||||||||||||||||||||||
| Revenue | $ | 7,209 | $ | 5,324 | $ | 3,559 | $ | 200 | ||||||||||||||||||||||||||||||
| Segment profit | $ | 2,374 | $ | 686 | $ | 644 | $ | 123 | ||||||||||||||||||||||||||||||
| Segment profit margin | 32.9 | % | 12.9 | % | 18.1 | % | 61.6 | % | ||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2026 | ||||||||||||||||||||||||||||||||||||||
| ($ in millions) | Software | Consulting | Infrastructure | Financing | ||||||||||||||||||||||||||||||||||
| Revenue | $ | 22,617 | $ | 15,934 | $ | 10,868 | $ | 598 | ||||||||||||||||||||||||||||||
| Segment Profit | $ | 7,335 | $ | 1,858 | $ | 2,074 | $ | 334 | ||||||||||||||||||||||||||||||
| Segment Profit Margin | 32.4 | % | 11.7 | % | 19.1 | % | 55.9 | % | ||||||||||||||||||||||||||||||
| Change YTY Revenue | 8.1 | % | 1.5 | % | 2.7 | % | 7.3 | % | ||||||||||||||||||||||||||||||
| Change YTY Revenue - Constant Currency | 7.0 | % | 1.2 | % | 1.9 | % | 5.7 | % | ||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2025 | ||||||||||||||||||||||||||||||||||||||
| ($ in millions) | Software | Consulting | Infrastructure | Financing | ||||||||||||||||||||||||||||||||||
| Revenue | $ | 20,932 | $ | 15,706 | $ | 10,586 | $ | 557 | ||||||||||||||||||||||||||||||
| Segment Profit | $ | 6,517 | $ | 1,807 | $ | 1,857 | $ | 371 | ||||||||||||||||||||||||||||||
| Segment Profit Margin | 31.1 | % | 11.5 | % | 17.5 | % | 66.5 | % | ||||||||||||||||||||||||||||||
INTERNATIONAL BUSINESS MACHINES CORPORATION
U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION
(Unaudited; $ in millions except per share amounts)
| Three Months Ended September 30, 2026 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Continuing Operations | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP | Acquisition- Related Adjustments (1) | Retirement- Related Adjustments (2) | Tax Reform Impacts | Operating (Non-GAAP) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 9,714 | $ | 289 | $ | — | $ | — | $ | 10,004 | |||||||||||||||||||||||||||||||||||||||||||
| Gross profit margin | 56.8 | % | 1.7 | pts | — | pts | — | pts | 58.5 | % | |||||||||||||||||||||||||||||||||||||||||||
| SG&A | $ | 4,620 | $ | (428) | $ | — | $ | — | $ | 4,193 | |||||||||||||||||||||||||||||||||||||||||||
| Other (income) & expense | (109) | 0 | (91) | — | (200) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total expense & other (income) | 7,217 | (418) | (91) | — | 6,708 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-tax income from continuing operations | 2,497 | 707 | 91 | — | 3,295 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-tax margin from continuing operations | 14.6 | % | 4.1 | pts | 0.5 | pts | — | pts | 19.3 | % | |||||||||||||||||||||||||||||||||||||||||||
Provision for/(benefit from) income taxes (3) | $ | 298 | $ | 166 | $ | 20 | — | $ | 483 | ||||||||||||||||||||||||||||||||||||||||||||
| Effective tax rate | 11.9 | % | 2.5 | pts | 0.3 | pts | — | pts | 14.7 | % | |||||||||||||||||||||||||||||||||||||||||||
| Income from continuing operations | $ | 2,199 | $ | 542 | $ | 71 | $ | — | $ | 2,812 | |||||||||||||||||||||||||||||||||||||||||||
| Income margin from continuing operations | 12.9 | % | 3.2 | pts | 0.4 | pts | — | pts | 16.4 | % | |||||||||||||||||||||||||||||||||||||||||||
| Diluted earnings per share: continuing operations | $ | 2.31 | $ | 0.57 | $ | 0.07 | $ | — | $ | 2.95 | |||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2025 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Continuing Operations | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP | Acquisition- Related Adjustments (1) | Retirement- Related Adjustments (2) | Tax Reform Impacts | Operating (Non-GAAP) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 9,360 | $ | 231 | $ | — | $ | — | $ | 9,591 | |||||||||||||||||||||||||||||||||||||||||||
| Gross profit margin | 57.3 | % | 1.4 | pts | — | pts | — | pts | 58.7 | % | |||||||||||||||||||||||||||||||||||||||||||
| SG&A | $ | 4,748 | $ | (354) | $ | — | $ | — | $ | 4,394 | |||||||||||||||||||||||||||||||||||||||||||
| Other (income) & expense | (173) | (6) | (13) | — | (191) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total expense & other (income) | 6,931 | (359) | (13) | — | 6,559 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-tax income from continuing operations | 2,430 | 590 | 13 | — | 3,033 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-tax margin from continuing operations | 14.9 | % | 3.6 | pts | 0.1 | pts | — | pts | 18.6 | % | |||||||||||||||||||||||||||||||||||||||||||
Provision for/(benefit from) income taxes (3) | $ | 686 | $ | 136 | $ | 3 | $ | (309) | $ | 516 | |||||||||||||||||||||||||||||||||||||||||||
| Effective tax rate | 28.2 | % | (1.0) | pts | 0.0 | pts | (10.2) | pts | 17.0 | % | |||||||||||||||||||||||||||||||||||||||||||
| Income from continuing operations | $ | 1,744 | $ | 454 | $ | 10 | $ | 309 | $ | 2,517 | |||||||||||||||||||||||||||||||||||||||||||
| Income margin from continuing operations | 10.7 | % | 2.8 | pts | 0.1 | pts | 1.9 | pts | 15.4 | % | |||||||||||||||||||||||||||||||||||||||||||
| Diluted earnings per share: continuing operations | $ | 1.84 | $ | 0.48 | $ | 0.01 | $ | 0.33 | $ | 2.65 | |||||||||||||||||||||||||||||||||||||||||||
(1)Includes 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.
(2)Includes 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.
(3)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.
INTERNATIONAL BUSINESS MACHINES CORPORATION
U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION
(Unaudited; $ in millions except per share amounts)
| Nine Months Ended September 30, 2026 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Continuing Operations | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP | Acquisition- Related Adjustments (1) | Retirement- Related Adjustments (2) | Tax Reform Impacts | Operating (Non-GAAP) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Gross Profit | $ | 28,571 | $ | 813 | $ | — | $ | — | $ | 29,384 | |||||||||||||||||||||||||||||||||||||||||||
| Gross Profit Margin | 56.9 | % | 1.6 | pts | — | pts | — | pts | 58.6 | % | |||||||||||||||||||||||||||||||||||||||||||
| SG&A | $ | 14,691 | $ | (1,257) | $ | — | $ | — | $ | 13,435 | |||||||||||||||||||||||||||||||||||||||||||
| Other (Income) & Expense | (296) | 1 | (283) | — | (578) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total Expense & Other (Income) | 22,208 | (1,256) | (283) | — | 20,669 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-tax Income from Continuing Operations | 6,363 | 2,069 | 283 | — | 8,715 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-tax Margin from Continuing Operations | 12.7 | % | 4.1 | pts | 0.6 | pts | — | pts | 17.4 | % | |||||||||||||||||||||||||||||||||||||||||||
Provision for/(Benefit from) Income Taxes (3) | $ | 782 | $ | 470 | $ | 43 | $ | (6) | $ | 1,290 | |||||||||||||||||||||||||||||||||||||||||||
| Effective Tax Rate | 12.3 | % | 2.5 | pts | 0.1 | pts | (0.1) | pts | 14.8 | % | |||||||||||||||||||||||||||||||||||||||||||
| Income from Continuing Operations | $ | 5,581 | $ | 1,598 | $ | 240 | $ | 6 | $ | 7,425 | |||||||||||||||||||||||||||||||||||||||||||
| Income Margin from Continuing Operations | 11.1 | % | 3.2 | pts | 0.5 | pts | 0.0 | pts | 14.8 | % | |||||||||||||||||||||||||||||||||||||||||||
| Diluted Earnings Per Share: Continuing Operations | $ | 5.86 | $ | 1.68 | $ | 0.25 | $ | 0.01 | $ | 7.79 | |||||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2025 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Continuing Operations | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP | Acquisition- Related Adjustments (1) | Retirement- Related Adjustments (2) | Tax Reform Impacts | Operating (Non-GAAP) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Gross Profit | $ | 27,369 | $ | 657 | $ | — | $ | — | $ | 28,025 | |||||||||||||||||||||||||||||||||||||||||||
| Gross Profit Margin | 57.2 | % | 1.4 | pts | — | pts | — | pts | 58.6 | % | |||||||||||||||||||||||||||||||||||||||||||
| SG&A | $ | 14,661 | $ | (1,055) | $ | — | $ | — | $ | 13,606 | |||||||||||||||||||||||||||||||||||||||||||
| Other (Income) & Expense | (376) | (7) | (61) | — | (444) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total Expense & Other (Income) | 21,184 | (1,066) | (61) | — | 20,058 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-tax Income from Continuing Operations | 6,185 | 1,723 | 61 | — | 7,968 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-tax Margin from Continuing Operations | 12.9 | % | 3.6 | pts | 0.1 | pts | — | pts | 16.7 | % | |||||||||||||||||||||||||||||||||||||||||||
Provision for/(Benefit from) Income Taxes (3) | $ | 1,193 | $ | 396 | $ | 0 | $ | (307) | $ | 1,282 | |||||||||||||||||||||||||||||||||||||||||||
| Effective Tax Rate | 19.3 | % | 0.8 | pts | (0.2) | pts | (3.9) | pts | 16.1 | % | |||||||||||||||||||||||||||||||||||||||||||
| Income from Continuing Operations | $ | 4,992 | $ | 1,326 | $ | 61 | $ | 307 | $ | 6,686 | |||||||||||||||||||||||||||||||||||||||||||
| Income Margin from Continuing Operations | 10.4 | % | 2.8 | pts | 0.1 | pts | 0.6 | pts | 14.0 | % | |||||||||||||||||||||||||||||||||||||||||||
| Diluted Earnings Per Share: Continuing Operations | $ | 5.27 | $ | 1.40 | $ | 0.06 | $ | 0.32 | $ | 7.06 | |||||||||||||||||||||||||||||||||||||||||||
(1)Includes 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.
(2)Includes 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.
(3)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.
INTERNATIONAL BUSINESS MACHINES CORPORATION
GAAP OPERATING CASH FLOW TO FREE CASH FLOW RECONCILIATION
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| ($ in millions) | 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||||||||||
| Net cash provided by operating activities per GAAP | $ | 4,025 | $ | 3,081 | $ | 11,791 | $ | 9,153 | ||||||||||||||||||||||||
| Less: change in IBM Financing receivables | 541 | 298 | 2,805 | 905 | ||||||||||||||||||||||||||||
| Net cash from operating activities excl. IBM Financing receivables | 3,484 | 2,783 | 8,986 | 8,248 | ||||||||||||||||||||||||||||
| Capital expenditures, net | (457) | (410) | (1,200) | (1,067) | ||||||||||||||||||||||||||||
| Free cash flow | $ | 3,027 | $ | 2,373 | $ | 7,787 | $ | 7,181 | ||||||||||||||||||||||||
INTERNATIONAL BUSINESS MACHINES CORPORATION
GAAP OPERATING CASH FLOW TO ADJUSTED EBITDA RECONCILIATION
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| ($ in billions) | 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||||
| Net cash provided by operating activities | $ | 4.0 | $ | 3.1 | $ | 11.8 | $ | 9.2 | ||||||||||||||||||
| Add: | ||||||||||||||||||||||||||
| Net interest expense | 0.4 | 0.3 | 1.1 | 0.9 | ||||||||||||||||||||||
| Provision for/(benefit from) income taxes from continuing operations | 0.3 | 0.7 | 0.8 | 1.2 | ||||||||||||||||||||||
| Less change in: | ||||||||||||||||||||||||||
| Financing receivables | 0.5 | 0.3 | 2.8 | 0.9 | ||||||||||||||||||||||
Net (gain)/loss on divestitures, assets sales and other (1) | 0.0 | 0.0 | (0.1) | 0.0 | ||||||||||||||||||||||
Other assets and liabilities/other, net (1,2) | (0.7) | (0.8) | (2.6) | (2.2) | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 4.9 | $ | 4.6 | $ | 13.7 | $ | 12.7 | ||||||||||||||||||
| Revenue | $ | 17.1 | $ | 16.3 | $ | 50.2 | $ | 47.8 | ||||||||||||||||||
| Net cash provided by operating activities margin | 23.5 | % | 18.9 | % | 23.5 | % | 19.1 | % | ||||||||||||||||||
| Adjusted EBITDA margin | 28.7 | % | 28.0 | % | 27.2 | % | 26.5 | % | ||||||||||||||||||
(1)Reclassified to align with the presentation of similar line items in the Statement of Cash Flows.
(2)Mainly consists of Changes in operating assets and liabilities, net of acquisitions/divestitures in the Statement of Cash Flows chart, workforce rebalancing charges, non-operating impacts, and corporate (gains) and charges, less the change in Financing receivables.
Exhibit 99.2
Non-GAAP Metrics and Other Financial Information
Operating (non-GAAP) Earnings Per Share and Related Income Statement Items
In an effort to provide better transparency into the operational results of the business, supplementally, the company 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), the company 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 the company’s 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, the company characterizes certain items as operating and others as non-operating, consistent with GAAP. The company includes 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 the company considers these costs to be outside of the operational performance of the business.
Overall, the company 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 the company’s pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows the company 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 the company routinely receives from investors and analysts.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and adjusted EBITDA margin
Additionally, the company reports adjusted EBITDA and adjusted EBITDA margin which, in addition to the operating (non-GAAP) earnings adjustments described above, also excludes income/(loss) from discontinued operations, income tax expense, net interest expense, depreciation/amortization of non-acquired intangible assets including operating lease right-of-use assets, stock-based compensation, and certain other activity that is not reflective of the company’s ongoing operational results such as workforce rebalancing charges and corporate gains and charges. Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by total revenue. The company uses adjusted EBITDA and adjusted EBITDA margin to measure its operating performance and believes that supplementally providing adjusted EBITDA will provide investors with additional transparency and clarity into how the company’s operational profitability is driving its free cash flow results.
Free Cash Flow / Net Cash from Operating Activities Excluding IBM Financing Receivables
The company 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. The company defines 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 presents both free cash flow and net cash from operating activities that exclude the effect of Financing receivables. Free cash flow guidance is derived using an estimate of profit, working capital and operational cash flows. Since the company views Financing receivables as a profit-generating investment which it seeks to maximize, it is not considered when formulating guidance for free cash flow and adjusted EBITDA. As a result, the company does not estimate a GAAP net cash from operations expectation metric.
Constant Currency
When the company refers to growth rates at constant currency or adjusts 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 its 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.
Key Performance Indicators
Annual Recurring Revenue (ARR):
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. 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.
Red Hat Annual Bookings:
Annual bookings (or Annual Contract Value (ACV)) is a key performance metric management uses in its assessment of a customer's commitment under Red Hat subscription and services contracts and provides an indication of forward-looking Red Hat revenue trajectory. It represents the value of a contract over a 12-month period, as of the date of contract signing. Annual bookings is calculated by taking the total subscription and service contract value divided by the number of days in the contract, multiplied by 365, plus the revenue recognized in the quarter for select cloud based offerings. Annual bookings should be viewed independently of revenue as this performance metric and its inputs may not represent the amount of revenue recognized in the period. For example, the conversion of annual bookings to revenue may vary based on types of services, customer decisions, start dates, and other factors. Therefore, annual bookings is not intended to represent current period revenue or revenue that will be recognized in future periods.
GenAI Book of Business:
Generative AI (GenAI) book of business is a key performance metric management uses to assess the progress and growth of the company's AI strategy and offerings. It is calculated as inception to date Software transactional revenue, plus new SaaS Annual Contract Value and Consulting signings related to specific offerings. Since second-quarter 2023, approximately one-fifth of this book of business comes from Software, and the remaining four-fifths is Consulting. Our book of business reflects the value we are delivering to clients in two ways. First, we are partnering with our clients to design and scale AI solutions, whether that be leveraging AI capabilities of IBM, our partners, or a combination of both. Second, we are utilizing generative AI solutions to improve delivery by developing new ways of working and driving productivity within our client contracts. GenAI book of business should be viewed independently of revenue as this performance metric is not intended to represent current period revenue or revenue that will be recognized in future periods.