Buying Software, Building Recurring RevenueNarrow moat

IBM (IBM) — moat facet

IBM's software renews itself and earns an 83% gross margin, and IBM keeps buying more of it at prices that must still be earned back.

IBM's software strategy is to own many products that customers renew, and to buy more of them. The Software segment brought in $29,962 million in 2025, up 10.6%1, and earned $9,920 million of segment profit2. Annual recurring revenue was $24.6 billion in June 20263, and IBM says about 80% of software revenue is recurring4.

Cash spent on acquisitions ($bn)2.320225.120233.320248.3202510.5H1 2026IBM 2025 Annual Report; Q2 2026 results release
Half a year of 2026 exceeded any full year before it.

The protection is the stickiness of enterprise software. Automation tools, databases and integration software become part of how a company runs; replacing them means retraining staff and rewriting connections. That is why Software's gross margin was 83.5% in 20255.

The growth comes partly from acquisitions. IBM spent $5.1 billion on acquisitions in 2023, $3.3 billion in 2024 and $8.3 billion in 20256, and $10.5 billion in the first half of 20267. The large ones were Apptio for $4,612 million8, HashiCorp for $7,433 million9 and Confluent for $11,602 million10. Automation grew 17.9% in 2025 with HashiCorp11 and Data 18.9% in the second quarter of 2026 with Confluent12.

That makes the moat narrow and dependent on the price paid. Recurring software is a fine business; buying it at high prices can still be a mediocre use of capital.

The acquisitions came with cash of their own. HashiCorp brought $929 million of cash and $331 million of short-term securities at the acquisition date13, so its net cost was lower than the headline. IBM also describes buying DataStax in 2025 "to enhance our AI capabilities around unstructured data"14. The purchases fit a pattern: tools that sit between applications and infrastructure, sold as subscriptions, that make sense across any cloud.

The number that decides it is Software segment margin. It was 32.2% in the second quarter of 202615; if acquisitions push it back below 30%, IBM will be trading profitability for size.

Moat trajectory: Widening

ARR $24.6bn; Software margin 32.2% in Q2 2026.

The number that tests this moat
Reported
Software annual recurring revenue growth
about $2bn a year (Q2 2026)

The recurring base's expansion including acquisitions; a fall toward $1bn once Confluent annualises would mean organic growth is slow.

Source: IBM Form 10-Q, Q2 2026 ↗
Aspects of the moat
DIG DEEPER 01
HashiCorp: $7.4 Billion for Automation
HashiCorp lifted Automation 17.9% in its first year, and the 3.6% of the latest quarter is the first clean look at what IBM bought.
DIG DEEPER 02
Confluent: $11.6 Billion for Data
IBM paid $11.6 billion for Confluent, twice its half-year free cash flow, to make data the reason customers stay.
DIG DEEPER 03
Software ARR $24.6 Billion, 80% Recurring
Four-fifths of IBM's software revenue renews without a new sale, which is why a mainframe-driven miss still left the recurring base growing.
DIG DEEPER 04
Software Margin From 30.0% to 33.1%
IBM's software earns a 33% segment margin, three times Consulting's, and it has risen every year since 2023.
⚠ Threats to the moat
⚠ THREAT 01
Ten Billion Spent in Six Months
IBM spent $10.5 billion on deals in six months that generated $4.8 billion of free cash, and its cash fell by $6.3 billion.
⚠ THREAT 02
Organic Growth Is Hard to See
Strip out HashiCorp and Confluent and IBM's software growth looks nearer the low single digits than the double digits reported.
References
  1. ReportedThe Software segment brought in $29,962 million in 2025, up 10.6%, and earned $9,920 million of segment profit.
    IBM 2025 Annual Report (Form 10-K exhibit) - management discussion, consolidated financial statements and notes - management discussion of the Software segment: Hybrid Cloud, Automation, Data, Transaction Processing and ARR. — FY2025 · publ. 24 February 2026 · source ↗
  2. ReportedThe Software segment brought in $29,962 million in 2025, up 10.6%, and earned $9,920 million of segment profit.
    IBM 2025 Annual Report (Form 10-K exhibit) - management discussion, consolidated financial statements and notes - management discussion of the Software segment: Hybrid Cloud, Automation, Data, Transaction Processing and ARR. — FY2025 · publ. 24 February 2026 · source ↗
  3. ReportedAnnual recurring revenue was $24.6 billion in June 2026, and IBM says about 80% of software revenue is recurring.
    IBM Form 10-Q for the quarter ended 30 June 2026 - segment results, revenue categories, RPO, the Confluent acquisition and management discussion - Software segment results and revenue categories. — Q2 2026 · publ. 23 July 2026 · source ↗
  4. ReportedAnnual recurring revenue was $24.6 billion in June 2026, and IBM says about 80% of software revenue is recurring.
    IBM Form 10-Q for the quarter ended 30 June 2026 - segment results, revenue categories, RPO, the Confluent acquisition and management discussion - Software segment results and revenue categories. — Q2 2026 · publ. 23 July 2026 · source ↗
  5. ReportedThat is why Software's gross margin was 83.5% in 2025.
    IBM 2025 Annual Report (Form 10-K exhibit) - management discussion, consolidated financial statements and notes - management discussion of the Software segment: Hybrid Cloud, Automation, Data, Transaction Processing and ARR. — FY2025 · publ. 24 February 2026 · source ↗
  6. ReportedIBM spent $5.1 billion on acquisitions in 2023, $3.3 billion in 2024 and $8.3 billion in 2025, and $10.5 billion in the first half of 2026.
    IBM 2025 Annual Report (Form 10-K exhibit) - management discussion, consolidated financial statements and notes - financial statements and notes: income statement, cash flow, borrowings, goodwill, acquisitions, pensions and market risk. — FY2025 · publ. 24 February 2026 · source ↗
  7. ReportedIBM spent $5.1 billion on acquisitions in 2023, $3.3 billion in 2024 and $8.3 billion in 2025, and $10.5 billion in the first half of 2026.
    IBM second-quarter 2026 results release, Form 8-K exhibit 99.1 - cash, debt, acquisitions, free cash flow, backlog and full-year expectations. — Q2 2026 · publ. 22 July 2026 · source ↗
  8. ReportedThe large ones were Apptio for $4,612 million, HashiCorp for $7,433 million and Confluent for $11,602 million.
    IBM 2023 Annual Report (Form 10-K exhibit) - Apptio purchase price, 2022-2023 segment pre-tax income, Red Hat growth, total debt. — FY2023 · publ. February 2024 · source ↗
  9. ReportedThe large ones were Apptio for $4,612 million, HashiCorp for $7,433 million and Confluent for $11,602 million.
    IBM 2025 Annual Report (Form 10-K exhibit) - management discussion, consolidated financial statements and notes - financial statements and notes: income statement, cash flow, borrowings, goodwill, acquisitions, pensions and market risk. — FY2025 · publ. 24 February 2026 · source ↗
  10. ReportedThe large ones were Apptio for $4,612 million, HashiCorp for $7,433 million and Confluent for $11,602 million.
    IBM Form 10-Q for the quarter ended 30 June 2026 - segment results, revenue categories, RPO, the Confluent acquisition and management discussion - Software segment results and revenue categories. — Q2 2026 · publ. 23 July 2026 · source ↗
  11. ReportedAutomation grew 17.9% in 2025 with HashiCorp and Data 18.9% in the second quarter of 2026 with Confluent.
    IBM 2025 Annual Report (Form 10-K exhibit) - management discussion, consolidated financial statements and notes - management discussion of the Software segment: Hybrid Cloud, Automation, Data, Transaction Processing and ARR. — FY2025 · publ. 24 February 2026 · source ↗
  12. ReportedAutomation grew 17.9% in 2025 with HashiCorp and Data 18.9% in the second quarter of 2026 with Confluent.
    IBM Form 10-Q for the quarter ended 30 June 2026 - segment results, revenue categories, RPO, the Confluent acquisition and management discussion - Software segment results and revenue categories. — Q2 2026 · publ. 23 July 2026 · source ↗
  13. ReportedHashiCorp brought $929 million of cash and $331 million of short-term securities at the acquisition date, so its net cost was lower than the headline.
    IBM 2025 Annual Report (Form 10-K exhibit) - management discussion, consolidated financial statements and notes - financial statements and notes: income statement, cash flow, borrowings, goodwill, acquisitions, pensions and market risk. — FY2025 · publ. 24 February 2026 · source ↗
  14. ReportedIBM also describes buying DataStax in 2025 "to enhance our AI capabilities around unstructured data".
    IBM 2025 Annual Report (Form 10-K exhibit) - management discussion, consolidated financial statements and notes - financial statements and notes: income statement, cash flow, borrowings, goodwill, acquisitions, pensions and market risk. — FY2025 · publ. 24 February 2026 · source ↗
  15. ReportedIt was 32.2% in the second quarter of 2026; if acquisitions push it back below 30%, IBM will be trading profitability for size.
    IBM Form 10-Q for the quarter ended 30 June 2026 - segment results, revenue categories, RPO, the Confluent acquisition and management discussion - income statement, segment table, RPO, pensions and working capital. — Q2 2026 · publ. 23 July 2026 · source ↗
Sources
Generated September 28, 2026