IBM's Growth Accelerates. You Can Thank the Mainframe.

International Business Machines (NYSE: IBM) boosted its full-year outlook when it reported its third-quarter results on Wednesday. With the company handily beating analyst expectations for both revenue and earnings, it now sees constant-currency revenue growth of more than 5% and free cash flow of roughly $14 billion. Revenue grew by more than 7% in the third quarter, adjusted for currency.

While there were multiple drivers behind the guidance bump, including a booming AI business and strong software growth, the company's iconic mainframe systems played a significant role.

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The best mainframe launch in history

Every few years, IBM rolls out a new version of its mainframe systems. IBM's mainframes are still widely used in some industries, including financial services, and they offer a level of reliability that can't be matched by commodity hardware. The latest mainframe, the z17, started shipping in June.

The z17 puts a heavy emphasis on AI. A built-in AI accelerator can handle 450 billion inferencing operations per day with 1-millisecond response times, making it ideal for use cases like real-time fraud detection. With the launch of the IBM Spyre AI accelerator later this year, mainframe users will be able to add even more AI computing capacity to their z17 systems and unlock additional generative AI use cases.

Each time IBM launches a new mainframe system, an upgrade cycle is triggered that leads to multiple quarters of significant mainframe revenue growth. This time is no different. Overall infrastructure revenue rose by 15% year over year in the third quarter to $3.6 billion, adjusted for currency, driven by a 59% jump in mainframe revenue.

This was the best third quarter in terms of revenue for the mainframe business in close to two decades, and it was the best two-quarter mainframe launch in the company's history. Typically, mainframe revenue will surge for multiple quarters following a launch, then suffer sharp year-over-year declines as the launch is lapped and customers await the next iteration.

The strength of the mainframe business boosted the infrastructure segment's profit margin by 4.2 percentage points year over year to 18.1%. Profitability improved in the software and consulting segments as well, contributing to the company's boosted free cash flow outlook.

IBM now expects the infrastructure segment, spearheaded by the mainframe business, to contribute more than 1.5 percentage points of revenue growth this year. That means that a little less than one-third of IBM's overall revenue growth will come from infrastructure, even though infrastructure is the smallest of the three core segments. In the third quarter, infrastructure accounted for about 22% of total revenue.

Once the current mainframe product cycle fades, IBM's revenue growth can be carried by a booming AI business. IBM has now generated $9.5 billion in AI bookings, mostly in its consulting segment, and those bookings will meaningfully contribute to revenue going forward. For 2025, though, the decades-old mainframe business is a big part of the growth story.

Timothy Green has positions in International Business Machines. The Motley Fool has positions in and recommends International Business Machines. The Motley Fool has a disclosure policy.