"IBM ( NYSE:IBM) heads into its third-quarter earnings tonight, up 30% year-to-date. After a stronger-than-expected second quarter-powered by software growth and robust mainframe refresh demand-attention now turns to where the company guidance for 2016 looks. Sentiment on whether AI-enabled software and Red Hat's hybrid-cloud momentum can drive another leg of margin expansion while free cash flow keeps pace with capital returns."
"Red Hat and watsonx adoption curve - Management last quarter pointed to broadening AI workloads and faster Red Hat attach. Analysts will watch ARR growth, cross-sell rates, and signs that AI is contributing to incremental software revenue. Consulting pipeline and margins - Consulting held up through macro uncertainty; utilization and large-deal signings in regulated sectors remain critical swing factors for EBIT margin. Mainframe normalization - zSystems and storage outperformed in Q2; investors want clarity on demand cadence as the upgrade cycle moderates."
IBM enters third-quarter earnings after a near 30% year-to-date stock gain and a stronger-than-expected second quarter driven by software growth and mainframe refresh demand. Market attention centers on whether AI-enabled software and Red Hat's hybrid-cloud momentum can produce additional margin expansion while maintaining robust free cash flow to support capital returns. Analysts and investors will focus on ARR growth, cross-sell rates, consulting utilization and large regulated deals affecting EBIT margin, mainframe demand cadence as upgrades normalize, the mix of ratable software to sustain >60% non-GAAP gross margin, and free cash flow conversion versus a >$13.5 billion target. Consulting pipeline stability and meeting free cash flow targets underpin dividend safety and ongoing capital returns.
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