International Business Machines shareholders have a single metric to track as fiscal 2026 winds down: IBM software growth. It is the engine behind the company’s expansion story, even though many investors still associate IBM with consulting and hardware. The stock’s poor showing over the year to November 3, 2026 — a 16.5% decline against an 11.9% gain for the S&P 500 — makes the software trajectory all the more consequential.
A faster quarter, but not all of it was new
In constant currency, IBM’s software revenue rose 9% in fiscal Q3 2026. That was four percentage points quicker than the prior quarter, management reported on the October 21 call. Annual recurring revenue in the high-value software category reached $24.9 billion, up 8%.
Some of that acceleration came from deals that had slipped out of Q2. IBM closed roughly two-thirds of those large transactions in Q3. Management estimated that this catch-up accounted for about a quarter of the sequential speed-up and characterized roughly three-quarters of the gain as net new business. On management’s own accounting, the majority of the improvement was not borrowed from earlier in the year.
Mainframe software is expected to cool
Not all of the Q3 pace is projected to last. IBM does not anticipate that transaction processing — the software running on its mainframes — will sustain double-digit growth, and management suggested it may moderate from Q3 into Q4. That shifts the burden to other parts of the software portfolio, particularly Red Hat.
The stakes are visible in recent history. In fiscal Q2 2026, a double-digit decline in transactional software sales, which represent about one-fifth of the software business, reduced software growth by 4 to 5 points. In Q3, those sales rebounded by double digits, led by transaction processing, which grew 10%.
Red Hat is the steadier pillar
Red Hat’s performance has been more consistent. Its revenue increased 11% in fiscal Q3 2026, matching the prior quarter’s rate, while bookings growth accelerated to the high teens. OpenShift, a Red Hat product, now stands as a $2.4 billion annual recurring revenue business and is expanding at more than 30%.
That stability matters because IBM’s overall software growth has already shown sensitivity to license deal timing. If Red Hat does not grow into the space left by a cooling mainframe business, IBM’s software results could again swing with mainframe transaction cycles.
What to watch in January 2027
The 9% headline alone does not reveal how much of IBM’s software growth will repeat. A portion came from Q2 slippage, and the double-digit rise in mainframe software is the piece management expects to fade. If the new business does not recur, the speed-up may prove to have been a one-quarter jump.
Management has offered little guidance on 2027. When asked about Red Hat bookings and the coming year on the October call, executives declined to comment on 2027 growth. Later in the call, they provided only an early view that growth would return to the company’s model. They did note that bookings growth of this kind typically converts into solid revenue growth.
So far, management credits most of the software acceleration to new business, and Red Hat’s bookings are rising faster than before. Because mainframe software is expected to cool, Red Hat’s capacity to fill the gap is the open question. IBM software growth, and Red Hat’s contribution to it, is the number to watch when the company reports in January 2027. Management has said it will put figures on 2027 at that time.
