IBM beats revenue forecasts, but AI worries weigh on software growth

IBM’s latest quarter showed a company still expanding, but not quickly enough to reassure investors that artificial intelligence will strengthen, rather than strain, its software franchise. Revenue rose 9 percent to $15.9 billion in the first quarter, beating expectations, yet IBM shares fell 6.5 percent after hours as traders zeroed in on the risk that AI could compress the margins of businesses built on legacy software and modernization services.

The Armonk, New York, company said adjusted operating earnings came to $1.91 a share and free cash flow reached $2.2 billion. Software revenue rose 11 percent, consulting revenue increased 4 percent and infrastructure revenue climbed 15 percent, helped by adoption of newer mainframe systems. IBM also said annual recurring revenue reached $24.6 billion, up 10 percent, a sign that the company’s subscription and services base is still growing even as the market questions how durable that growth will be.

The concern is not about IBM’s ability to sell technology today. It is about whether AI will change what customers pay for tomorrow. Attention has been especially fixed on IBM’s high-margin software stack, including Red Hat hybrid cloud and Watsonx AI tools, where growth was 11.3 percent. Those worries intensified after Anthropic said in February that its tools could help modernize COBOL, the decades-old language still used across IBM mainframes. Industry analysts said the claim raised a direct challenge to a lucrative modernization niche that has long supported IBM’s mainframe ecosystem.

There were still signs of strength inside the hardware business. IBM said infrastructure revenue rose 15 percent, and reporting around the earnings call noted that Z mainframe hardware revenue jumped sharply, showing that a new hardware cycle can still offset softer sentiment around software. Chief financial officer James Kavanaugh argued that customers using IBM’s AI modernization tools are consuming more mainframe capacity, not less. He said generative AI in mainframe modernization is “actually an accelerator for the portfolio.”

IBM kept its 2026 outlook intact, still expecting more than 5 percent constant-currency revenue growth and about $1 billion more in year-over-year free cash flow. Chief executive Arvind Krishna also said the company’s growth in the Middle East was its strongest in decades and that IBM could withstand a closure of the Strait of Hormuz for several weeks. For investors, though, the larger question remains unchanged: IBM can beat the quarter, but it still has to prove that AI demand will turn into enough durable revenue growth to satisfy Wall Street.