IBM’s management has lifted its full-year free cash flow target to $14 billion, up from an initial outlook of $13 billion, reflecting stronger operating leverage across Software, Consulting and Infrastructure. Through the first nine months of fiscal 2025, the company generated $7.2 billion in free cash flow, versus $6.6 billion in the comparable period a year earlier. Analysts expect fourth-quarter free cash flow to contribute roughly $3.5 billion toward this goal, driven by disciplined working-capital management and favorable billing patterns in its services business. Investors will be watching whether IBM can sustain its cash-conversion rate above 90%, which would underpin further share repurchases and support the dividend at its current yield of approximately 2.3%.

After two years of mid-single-digit software revenue expansion, Jefferies projects a reacceleration in IBM’s software growth for Q4, forecasting year-over-year gains of 6% to 8%. This revival is attributed to strong uptake of watsonx.ai services, broader adoption of hybrid-cloud management tools from Red Hat, and the impact of the Confluent acquisition, which closed last December for $11 billion. Wall Street consensus estimates call for software revenues to reach roughly $8.2 billion in the quarter, with gross margins hovering near 58%. Upward revisions by three major brokerages this month reflect renewed confidence in IBM’s ability to cross-sell analytics and streaming data capabilities into its existing enterprise accounts.

IBM’s consulting segment, which accounts for nearly 30% of quarterly revenues, is poised to deliver another quarter of healthy double-digit growth. Clients have accelerated investments in AI-driven process optimization and legacy-system modernization, buoyed by IBM’s alliance with Microsoft to integrate Azure AI services into its consulting engagements. Jefferies and Goldman analysts both anticipate consulting revenues of approximately $6.5 billion in Q4, marking a 12% increase year-over-year. Operating margins in this segment are expected to rise to 14%, up from 12.5% a year ago, as IBM leverages pricing discipline and higher-value, IP-based deliverables.

Looking beyond Q4, consensus forecasts call for IBM’s adjusted EPS to grow at a 19% compound annual rate from fiscal 2024 through 2027, driven by higher software leverage and sustained consulting momentum. The street’s 2026 EPS estimate stands at $12.40, implying a forward multiple near 30× earnings. While this multiple is above the historical five-year average of 22×, analysts argue it is justified by IBM’s commitment to return at least 85% of free cash flow to shareholders and the unique positioning of its hybrid-cloud and AI portfolio. Any upside surprises in free cash flow or better-than-expected software margins could prompt further multiple expansion.