IBM beats fourth-quarter revenue estimates as AI clamor boosts software demand

Jan 28 (Reuters) – IBM beat Wall Street estimates for fourth-quarter revenue and profit on Wednesday, as the rapid adoption of AI boosts demand for its software services, ranging from managing vast amounts of data to automating IT processes. Shares of the company rose nearly 9% in extended trading. Businesses have doubled down on upgrading their software suites to develop data-intensive artificial intelligence technology, helping sales for IT service and software providers such as IBM. Big Blue reported December quarter revenue of $19.69 billion, beating analysts' average estimate of $19.23 billion, according to data compiled by LSEG. Adjusted earnings of $4.52 per share also beat an estimate of profit of $4.32 per share. IBM has been boosting its software portfolio, turning to inorganic growth to better address the requirements of companies adopting AI, with deals like its $6.4 billion acquisition of HashiCorp and ongoing $11 billion buyout of data infrastructure company Confluent. IBM anticipates absorbing about $600 million of dilution from the Confluent acquisition in 2026, driven largely by stock-based compensation and interest expenses, CFO Jim Kavanaugh said in a post-earnings call. Sales in its software segment stood at $9.03 billion in the quarter ended December 31, also beating an estimate of $8.77 billion. Within the software segment, its Automation unit grew 18% and sales in the Data unit grew 22% in the quarter. FEDERAL SHUTDOWN HITS HYBRID CLOUD However, sales growth in its high-margin hybrid cloud unit – known as Red Hat – decelerated to 10% in the fourth quarter, down from 14% in the third quarter and 16% in the second. Growth in the hybrid cloud unit was hurt by the longest U.S. government shutdown in history that occurred in the last quarter of 2025, CFO Kavanaugh told Reuters in an interview. The shutdown hurt Red Hat growth by "a couple points", Kavanaugh said, adding that the federal government constitutes about 15% of its hybrid cloud bookings. The federal government also appeared headed for a partial government shutdown this week, with Republicans and Democrats at odds over funding for President Donald Trump's Department of Homeland Security. "We're going to have to deal with that as we move forward. Hopefully that is a short-term disruption," Kavanaugh said. "If the government approves the budget resolution and gets back to business and doesn't go on a shutdown, we'll have to wait and see how that plays out." The company's "AI book of business" grew to $12.5 billion in the fourth quarter, up $3 billion from the previous quarter. IBM will stop reporting this metric separately from the first quarter, Kavanaugh said. (Reporting by Arsheeya Bajwa in Bengaluru; Editing by Pooja Desai and Alan Barona)

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