Software ARR $24.6 Billion, 80% RecurringNarrow moat

IBM (IBM) — moat facet

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.

The quality of IBM's software business shows in how much of it recurs. IBM reports that "about 80 percent of our software revenue is recurring in nature"1. Annual recurring revenue across Software was $21.3 billion at the end of 20242, $23.6 billion at the end of 20253 and $24.6 billion at the end of June 20264.

Software annual recurring revenue ($bn)21.3End 202423.6End 202524.6Jun 2026IBM 2025 Annual Report, Form 10-Q Q2 2026; definition broadened Q1 2025
Up $3.3 billion in 18 months, part of it bought.

Recurring revenue is the moat's everyday form. Subscriptions, support contracts and renewable licences come back each year unless the customer actively leaves, and enterprise software rarely leaves quickly. IBM calls ARR "a key performance metric management uses to assess the health and growth trajectory" of the segment5.

The other 20% is where the volatility lives. IBM says it is "transactional in nature" and "predominantly related to the incumbency with IBM Z"6. That is the part that fell in the second quarter of 2026, while the recurring base "delivered healthy growth"7.

Growth in ARR is partly bought. The $2 billion rise in the year to June 2026 reflects "the acquisition of Confluent and growth across other areas"8, and IBM does not split the two. Set against software revenue of $29,962 million in 20259, June 2026 ARR equals about 82% of a year's revenue10, consistent with IBM's own 80% description.

The ARR figure has grown by about $1 billion to $2 billion a year. It was $21.3 billion at the end of 2024, up about $1 billion11; $23.6 billion at the end of 2025, up about $2 billion12; and $24.6 billion in June 2026, up about $2 billion on a year earlier13. The years with the larger increases are the years with the larger acquisitions, which fits the pattern on the organic-growth page.

Track ARR growth net of acquisitions, which IBM does not publish. The closest proxy is the second year after each deal: if ARR growth falls toward $1 billion a year once Confluent annualises, the organic engine is running at about 4%.

Moat trajectory: Widening

ARR $21.3bn (2024) to $24.6bn (Q2 2026).

The number that tests this moat
Reported
Software annual recurring revenue
$24.6bn (Q2 2026), +about $2bn

The recurring core of Software; growth falling toward $1bn a year after Confluent annualises would mean organic growth near 4%.

Source: IBM Form 10-Q, Q2 2026 ↗
⚠ Threats to the moat
⚠ THREAT 01
A Definition That Changed
IBM widened its ARR definition in 2025, so a figure that once read above $15 billion now reads $21.3 billion for the same date.
References
  1. ReportedIBM reports that "about 80 percent of our software revenue is recurring in nature".
    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 ↗
  2. ReportedAnnual recurring revenue across Software was $21.3 billion at the end of 2024, $23.6 billion at the end of 2025 and $24.6 billion at the end of June 2026.
    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 across Software was $21.3 billion at the end of 2024, $23.6 billion at the end of 2025 and $24.6 billion at the end of June 2026.
    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 ↗
  4. ReportedAnnual recurring revenue across Software was $21.3 billion at the end of 2024, $23.6 billion at the end of 2025 and $24.6 billion at the end of June 2026.
    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. ReportedIBM calls ARR "a key performance metric management uses to assess the health and growth trajectory" of the segment.
    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 says it is "transactional in nature" and "predominantly related to the incumbency with IBM Z".
    IBM Form 10-Q for the quarter ended 30 June 2026 - segment results, revenue categories, RPO, the Confluent acquisition and management discussion - Infrastructure and Financing segment results. — Q2 2026 · publ. 23 July 2026 · source ↗
  7. ReportedThat is the part that fell in the second quarter of 2026, while the recurring base "delivered healthy growth".
    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 ↗
  8. ReportedThe $2 billion rise in the year to June 2026 reflects "the acquisition of Confluent and growth across other areas", and IBM does not split the two.
    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 ↗
  9. ReportedSet against software revenue of $29,962 million in 2025, June 2026 ARR equals about 82% of a year's revenue, consistent with IBM's own 80% description.
    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 ↗
  10. Moat Explorer calcSet against software revenue of $29,962 million in 2025, June 2026 ARR equals about 82% of a year's revenue, consistent with IBM's own 80% description.
    Moat Explorer calculation from IBM's reported figures ($ millions unless stated). Segment mix 2025: Software 29,962 / 67,472 = 44.4% of segment revenue and 9,920 / 16,364 = 60.6% of segment profit; Consulting 21,055 / 67,472 = 31.2% and 2,464 / 16,364 = 15.1%; Infrastructure 15,718 / 67,472 = 23.3% and 3,458 / 16,364 = 21.1%; Financing 737 / 67,472 = 1.1% and 521 / 16,364 = 3.2%. Segment revenue below reported revenue: 60,530 - 59,621 = 909 (2022); 61,860 - 61,229 = 631 (2023); 62,753 - 62,510 = 243 (2024); 67,535 - 67,472 = 63 (2025). Growth: revenue 67,535 / 62,753 - 1 = 7.6% (2025); 62,753 / 61,860 - 1 = 1.4% (2024); Q2 2026 17,162 / 16,977 - 1 = 1.1%; Software 25,011 / 23,629 - 1 = 5.8%, 27,085 / 25,011 - 1 = 8.3%, 29,962 / 27,085 - 1 = 10.6%; Software Q2 2026 7,761 / 7,387 - 1 = 5.1%; Consulting 20,884 / 20,058 - 1 = 4.1%, 20,692 / 20,884 - 1 = -0.9%, 21,055 / 20,692 - 1 = 1.8%, 21,055 / 20,058 - 1 = 5.0% over three years, Q2 2026 5,327 / 5,314 - 1 = 0.2%; Infrastructure 14,593 / 15,288 - 1 = -4.5%, 14,020 / 14,593 - 1 = -3.9%, 15,718 / 14,020 - 1 = 12.1%, Q2 2026 3,835 / 4,142 - 1 = -7.4%; Financing 737 / 713 - 1 = 3.4%, Q2 2026 186 / 166 - 1 = 12.0%; Transaction Processing 8,603 / 7,714 - 1 = 11.5% and 8,603 - 7,714 = 889 added 2023-2025; Hybrid Cloud 7,327 - 5,827 = 1,500 added 2023-2025; 11% to 13% of 7,327 = 806 to 952 a year; OpenShift 30% x 2.0bn = 0.6bn a year; Infrastructure Support 5,100 / 6,021 - 1 = -15.3% (2021-2025) and 4,800 / 5,100 - 1 = -5.9%; research and development 8,316 / 7,479 - 1 = 11.2%; Software segment profit 9,920 / 7,012 - 1 = 41.5%; Consulting segment profit 2,464 / 1,871 - 1 = 31.7%; financing receivables 15,193 / 11,738 - 1 = 29.4%; total debt 62.0bn - 50.9bn = 11.1bn since 2022. Shares: mainframe-linked revenue 10,618 + 8,603 + 5,100 = 24,321, and 24,321 / 67,535 = 36.0%; Hybrid Cloud 7,327 / 29,962 = 24.5% of Software; OpenShift 2.0 / 24.6 = 8.1% of software ARR; June 2026 ARR 24.6bn / 2025 Software revenue 29.962bn = 82.1%; revenue outside the United States 40,643 / 67,535 = 60.2%, so about 60%; research and development 8,316 / 67,535 = 12.3% of revenue; quantum more than 10bn / 5 years = more than 2bn a year, and 2.0 / 8.316 = 24%, about a quarter; goodwill 67,717 / 151,880 = 44.6% of total assets; goodwill plus intangibles (67,717 + 11,391) / 151,880 = 52.1%; other assets 151,880 - 67,717 - 11,391 = 72,772; HashiCorp goodwill 4,684 / 7,433 = 63.0%; Confluent goodwill 7,238 / 11,602 = 62.4%, other net assets 11,602 - 7,238 = 4,364; stock-based compensation 1,685 / 16,364 = 10.3% of segment profit; Kyndryl spin 55,179 / 73,620 - 1 = -25.0% of 2020 revenue, about a quarter. Margins: Software Q2 2025 2,296 / 7,387 = 31.1%; Consulting Q2 2025 562 / 5,314 = 10.6%; Infrastructure Q2 2026 835 / 3,835 = 21.8% and Q2 2025 965 / 4,142 = 23.3%; total segment profit Q2 2026 4,092 / 17,110 = 23.9% and Q2 2025 4,003 / 17,009 = 23.5%; Financing Q2 2026 108 / 186 = 58% (reported 58.0%); pre-tax margin 10,328 / 67,535 = 15.3%; Global Technology Services 2020 117 / 27,039 = 0.4%; gross margin Q2 2026 9,907 / 17,162 = 57.7% and Q2 2025 9,977 / 16,977 = 58.8%. Red Hat: 7,327 / 35,100 = 20.9% of consideration; pre-tax at the Software margin 0.331 x 7,327 = 2,425, and 2,425 / 35,100 = 6.9%, about 7%; after a 21% tax 6.9% x 0.79 = 5.5%; revenue needed for 8% after tax 0.08 x 35,100 / (0.331 x 0.79) = 10,738, about 10.7bn, which is 10,738 / 7,327 = 1.47 times 2025 revenue: about 3.2 years at 12.5% growth, 4.4 years at 9% and 7.8 years at 5%. Cash and capital: acquisitions plus dividends 2025 8,294 + 6,255 = 14,549, and 14,549 / 14,734 = 98.7% of free cash flow; first half 2026 acquisitions 10.5bn / free cash flow 4.8bn = 2.2 times; dividends 6,255 / 10,593 = 59.0% of net income; Consulting backlog 31.9bn / 21.055bn = 1.5 years of revenue; remaining performance obligations 71bn - 68bn = 3bn lower in six months; pension risk transfers 16 + 6 + 1.2 = 23.2bn; defined-benefit obligations 14,460 + 29,872 = 44,332 against plan assets 18,073 + 26,733 = 44,806; free cash flow guidance 14.7bn + 1.0bn = 15.7bn. Further: revenue per employee 67,535 / 264.3 thousand = about 255,500 dollars; Q2 2026 Software share of segment profit 2,502 / 4,092 = 61.1%; first-half Software 14,813 / 13,722 - 1 = 8.0%; amortisation of acquired intangibles 2,166 / 1,627 - 1 = 33.1%; free cash flow 14.7 / 6.5 = 2.3 times (2021-2025); Q2 2026 Transaction Processing 2,208 - 2,030 = 178 lower, Data 1,782 - 1,499 = 283 higher, Hybrid Cloud 1,998 - 1,796 = 202 higher, Transaction Processing above Hybrid Cloud by 2,030 - 1,998 = 32; share price 225.51 / 332.46 - 1 = -32.2% from the 52-week high; first half 2026 Hybrid Cloud 3,903 / 3,483 - 1 = 12.1%, Transaction Processing 3,963 / 4,037 - 1 = -1.8%, Hybrid Infrastructure 4,678 / 4,512 - 1 = 3.7%, Infrastructure Support 2,483 / 2,515 - 1 = -1.3%, Automation 3,692 / 3,467 - 1 = 6.5%, Data 3,256 / 2,736 - 1 = 19.0%, Financing 406 / 357 - 1 = 13.7%, Strategy and Technology 5,829 / 5,702 - 1 = 2.2%, Intelligent Operations 4,770 / 4,680 - 1 = 1.9%; Strategy and Technology Q2 2026 2,933 / 2,920 - 1 = 0.4%; Infrastructure Support 2021 share 6,021 / 14,188 = 42.4%; Infrastructure 2020 pre-tax margin 1,654 / 14,533 = 11.4%; Consulting 2020 pre-tax margin 1,034 / 16,257 = 6.4%; buybacks 2015-2019 4,609 + 3,502 + 4,340 + 4,443 + 1,361 = 18,255; Hybrid Cloud 7,327 / 67,535 = 10.8% of revenue, about a tenth; acquisitions 2023 to June 2026 5.1 + 3.3 + 8.3 + 10.5 = 27.2bn; HashiCorp net of acquired cash and securities 7,433 - 929 - 331 = 6,173; ARR 24.6 - 21.3 = 3.3bn from end-2024 to June 2026; net interest excluding Financing 1,312 / 984 - 1 = 33.3%; 2024 signings 25,103 / 20,692 = 1.21, about 21% above revenue; generative AI book 12.5 - 9.5 = 3.0bn added in Q4 2025; EMEA growth gap 14.2 - 9.0 = 5.2 points; revenue 57,350 / 73,620 - 1 = -22.1% from 2020 as filed to 2021. Trailing twelve months to June 2026: revenue 67,535 - 31,519 + 33,079 = 69,095; net income 10,593 - 3,249 + 3,381 = 10,725; P/E 212,460 / 10,725 = 19.8; P/S 212,460 / 69,095 = 3.07 - revenue mix, segment shares and concentration. — FY2015-Q2 2026 · publ. September 2026 · source ↗
    Method: Arithmetic on figures reported in IBM's Annual Reports, Forms 10-Q, results releases and market data; operands shown in the source line.
  11. ReportedIt was $21.3 billion at the end of 2024, up about $1 billion; $23.6 billion at the end of 2025, up about $2 billion; and $24.6 billion in June 2026, up about $2 billion on a year earlier.
    IBM 2025 Annual Report (Form 10-K exhibit) - management discussion, consolidated financial statements and notes - segment note: segment revenue, segment profit, margins and reconciliation to reported revenue. — FY2025 · publ. 24 February 2026 · source ↗
  12. ReportedIt was $21.3 billion at the end of 2024, up about $1 billion; $23.6 billion at the end of 2025, up about $2 billion; and $24.6 billion in June 2026, up about $2 billion on a year earlier.
    IBM 2025 Annual Report (Form 10-K exhibit) - management discussion, consolidated financial statements and notes - segment note: segment revenue, segment profit, margins and reconciliation to reported revenue. — FY2025 · publ. 24 February 2026 · source ↗
  13. ReportedIt was $21.3 billion at the end of 2024, up about $1 billion; $23.6 billion at the end of 2025, up about $2 billion; and $24.6 billion in June 2026, up about $2 billion on a year earlier.
    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