Q4 2020 International Business Machines Corp Earnings Call
Yeah.
[noise] III.
Okay.
Yeah.
Welcome and thank you for standing by at this time all participants are in a listen only mode. Today's conference is being recorded if you have any objections you may disconnect. At this time now I would like to turn the meeting over to Ms. Patricia.
Murphy with IBM Ma'am you may begin.
Thank you this is Patricia Murphy and I'd like to welcome you to Ibm's fourth quarter 2020 earnings presentation, I'm here with Arvind Krishna Ibm's, Chairman and Chief Executive Officer, and Jim Kavanaugh, Ibm's, Senior Vice President and Chief Financial Officer.
We'll post today's prepared remarks on the IBM investor website within a couple of hours and a replay will be available by this time tomorrow.
Some comments made in this presentation may be considered forward looking under the private Securities Litigation Reform Act of 1995.
These statements involve factors that could cause our actual results to differ materially.
Additional information about these factors is included in the company's SEC filings.
Our presentation also includes non-GAAP measures to provide additional information to investors.
For example, we present revenue and signings growth at constant currency throughout the presentation. In addition to provide a view consistent with our go forward business, we'll focus on constant currency growth adjusting for the divested businesses for the impacted lines of total revenue.
<unk> and our geographic performance. We've provided reconciliation charts for these and other non-GAAP measures at the end of the presentation and in the 8-K submitted to the SEC.
So with that I'll turn the call over to Arvind.
Hello, everyone. Thank you for joining today and I am pleased to be speaking with the investment community again.
Over the next 15 minutes I'll talk about very standard the execution of our strategy as we begin 2021, and how we're running the company to align with the strategy.
I'll provide a perspective on the current environment and our results.
Then in the spirit of being as transparent with you as possible I will speak to our expectations for the next two years.
Jim Kavanaugh, who's going to cover the quarter in more detail on the separation process for our managed infrastructure services business.
I've also asked Martin Schroeter to join Us to make a few comments as the recently named CEO of this business.
Jim will conclude with additional follow on our 'twenty to 'twenty, one expectations, and then Jim and I will take your questions.
Ask you to please bear with us if we go slightly longer than usual on this call.
When I was appointed CEO in April I laid out my approach to growing the value of the company, which is straightforward.
We will significantly increase our focus on our hybrid cloud and AI capabilities.
Two most important conformational journey for our clients.
In the nine months. Since then we have taken a series of important actions to redefine our future as a hybrid cloud platform and AI company.
This is where we are focusing the bulk of our efforts and investments.
In spite of the many challenges in 2020, we have made good progress.
In 2021, we believe you will see that progress showing up in our results.
With that said, we know it's not necessarily going to be a straight line.
The operating environment remains difficult because of what clients are experiencing at the moment.
We can see that in the quarter just past.
Our revenue was slightly behind typical seasonality, but we finished strong and free cash flow.
Which is important as it is the fuel for investments.
Our performance reflects the fact that our clients continue to deal with the effects of the pandemic and broader uncertainty of the macro environment.
This put additional pressure on larger software transactions this quarter and project delays and some services engagements.
Our revenue growth was also impacted by IBM specific headwinds of a product cycle and compare challenges.
Notwithstanding the short term market dynamics, we believe we have the plans in place and the focus inside the business to be able to grow in 2021.
That said in the midst of all this I'm seeing an ever greater need from clients to accelerate their digital transformation.
This bodes very well for us now and over the long term.
As I've told you before the opportunity in hybrid cloud and AI is enormous.
In fact, we see the hybrid cloud opportunity at a trillion dollars with less than 25% of workloads, having moved to the cloud so far.
Our approach is platform centric.
Linux along with containers and Kubernetes provides the foundation of our hybrid cloud platform.
And Red hat open shift is the core product that captures all of this and more.
Our hybrid cloud approach is also differentiated by a vast software portfolio modernize to run cloud native.
And our GBS expertise, which plays a key role in driving consumption and is currently helping hundreds of major clients on their own hybrid cloud journeys.
With this foundation in place we are successfully leveraging red hat as a unique platform to address what our global complex and highly regulated clients need.
A hybrid cloud platform that is open flexible and secure.
Our hybrid cloud approach allows clients to connect it back office to the front office to modernize mission critical workloads to build cloud native apps and to securely deploy and manage data and applications across various cloud.
We are confident that we have the right strategy for our clients and for IBM.
Let me comment on some of the proof points, we have seen over the last few months as we execute on our hybrid cloud platform and AI strategy.
First to drive leadership and focus as a hybrid cloud platform company.
A key element of the strategy is to win the architectural battle in cloud and.
And with our cloud foundation in place client consumption continues to grow.
Now have 2800 clients using our platform.
A number which has grown 40% over the last year.
In the fourth quarter clients, such as Barclays Walmart Geico Airbus Board ABB are all leveraging our hybrid cloud platform to accelerate their own digital transformation journeys.
We're also making good headway and are focused on industry cloud, which are designed to tackle the specific needs of mission critical and highly regulated industries.
Following the successful launch of our cloud for financial services last year with more than 75 <unk> Suisse.
SaaS partners, including Adobe Infosys Finical persistent systems and many others, we launched our cloud for telecommunications in November.
So far more than 35 partners have joined our cloud for telecommunications for example.
Armstrong is working with IBM and Red hat to develop new user experiences for business.
We're also helping major companies like Verizon Vodafone idea, Bharti, airtel and AT&T to transform their it and telecom network operations.
Second to be the profit partner of clients for data and AI.
The opportunity is massive while the current enterprise deployment rate is in the single digits.
Clients are now at the point, where they're moving from experimenting with AI to deploying it at scale.
To seize this opportunity our AI platform is focused on data automation and security and now includes more than 30000 clients, who have turned to IBM to unlock value from their data.
We are helping clients across industries built intelligent workflows by infusing AI into their core business processes, such as hiring supply chain and customer service.
When it comes to data and AI craft is paramount.
IBM is unique and that we make a hard commitment not to monetize all use our clients' data.
We also offer the industry's strongest commercially available cryptographic technology.
And we give clients the ability to regain control of their own encryption keys.
In the fourth quarter clients, such as Air Canada Sprint T Mobile State Street, and Humana use our rich data and AI capabilities to drive business outcomes.
As we look forward, we're also investing to develop an address future market opportunities such as quantum computing.
Long term has the potential to unlock hundreds of billions of dollars of value for our clients by the end of the decade.
To seize this opportunity we have a roadmap to build a thousand plus qubit quantum computer by 'twenty two 'twenty three and we have expanded our afraid of quantum computers on which our clients are working today.
I want to now spend a couple of minutes on a series of significant changes, we are making to the company.
Most since just the beginning of October.
We know that a platform centric strategy requires a fundamentally different way of doing business.
This is why our operating model has been quietly but substantially reshaped.
These decisive moves are all aimed at creating value through greater focus on our portfolio, our operating model and the needs of our clients.
And as they take hold they will help us to deliver sustainable mid single digit revenue growth post separation.
To drive greater focus on our portfolio, we announced the separation of our managed infrastructure services business in October.
As I just mentioned this month, we appointed Martin Schroeter as this new company CEO.
Martin has a unique understanding of the business is global talent base.
And 4600 clients Youll hear from him shortly.
Though much remains to be done we are on track to complete the spin by the end of the year.
We are working closely with clients to ensure a smooth transition.
While we are also renewing business and signing new deals.
We have a comprehensive project management office to establish the new entity and to optimize the business.
I can tell you theres a great deal of excitement among our employees about the opportunities ahead for this new company.
To strengthen our hybrid cloud and AI portfolio.
We have announced 10 acquisitions since I became CEO and seven acquisitions just since October.
This includes five in global business services, which add skills to help our clients with their journey to cloud Red Hat's first acquisition is part of IBM.
<unk> cloud native security capabilities for open shift.
Our investments in organic and in organic growth and in our people will continue to be sharply focused on both hybrid cloud and AI.
Two accelerated consumption of our hybrid cloud platform. We are also rapidly expanding our ecosystem by adding hundreds of new partnerships.
With global system integrators independent software vendors and major third party software partners and also elevating the role of partners we.
We are investing a $1 billion and our ecosystem. So that our partners can play a much bigger role in fulfilling the many needs of our clients.
As an example, we recently teamed up with sales force to deliver a new strategic contact tracing platform for the U K National Health services to help them in their fight against COVID-19.
Salesforce and IBM have also joined forces to address E challenges, such as vaccine management, using IBM Sterling supply chain solution and a blockchain based digital health pass together with sales force with vaccine management and CRM capabilities.
To simplify and transform the way we engage clients earlier this month, we announced a new go to market model.
The first aspect is that we have simplified our sales model by adopting a single consistent segmentation.
Which will make it easier for clients to work with us.
Mark a great deal of productivity.
In addition, we are providing clients with a more technical and experiential approach with investment in pre sales garages that allow us to co create with our clients earlier in the sales process.
And we are ensuring our sales organization is fully incentivize towards our strategic growth areas.
Finally, we're investing in and elevating the role of our ecosystem partners to deliver more value to clients.
Let me say a few words about the changes we are bringing to our culture.
Since I became CEO I've talked at great length about the importance of culture and the need to instead of growth an entrepreneurial mindset.
As part of that Peter encouraging more business risk, taking and ensuring a higher tolerance for failure across the business.
This should allow us to more quickly respond to clients seize more opportunities and drive better business outcomes.
I'm only scratching the surface of all the actions you've taken to sharpen our focus.
As a result, we are running the company differently as we begin 2021.
I am convinced that all these changes will allow us to deepen our client footprint and open up new avenues for growth.
Now, let me speak to our expectations for the next two years.
All of the actions we've taken are designed to drive growth.
And we expect to deliver sustainable mid single digit revenue growth post separation.
With strong free cash flow performance.
How do we achieve this.
First through the continued strong growth of Red hat, which has grown 18% on a normalized basis in 2020 and will be an even larger contributor to revenue growth post separation.
Second with.
With improvement in the global business services project Cree, we expect GBS to return to its pre pandemic growth rate by the middle of the year.
Third by leveraging our expanded ecosystem to further contribute to both GBS and software.
And we will finally start to see the benefit from the investments we are making both organic and inorganic.
These will all contribute to an improving software trajectory as well.
In the first half of the year, we expect our results to continue to reflect some of our current challenges as well as a product cycle dynamics.
And of course, all year, we've been working on the separation of manage infrastructure services.
But these are not long term trends in the business and these headwinds will dissipate.
In 2021, the significant changes we've made to focus on hybrid cloud and AI will also begin to take hold that.
The company will look different at the end of the year, particularly with the execution of the spin up but also with the operational changes to sharpen our focus.
At a high level in 2021, we expect to grow revenues at current spot rates with better performance in the second half than the first half.
This is the first step towards achieving mid single digit revenue growth post separation.
And we expect to generate between 11% to $12 billion.
Adjusted free cash flow.
These are the measures we are focused on.
This is where we stand today and how we will operate to achieve our growth goals.
Jim will cover all of this in more detail.
To you Jim.
Thanks, Arvind I'll go through our performance and then wrap up with a perspective on how the actions we've taken in 2020 position us to deliver on these financial objectives.
In the fourth quarter, we delivered $24 billion of revenue, we expanded our gross profit margin.
With a significant charge for structural actions that improve our go forward position, we reported operating earnings per share of $2 seven.
We generated free cash flow of $10 8 billion for the year and we have strong liquidity with a cash position of over $14 billion.
The fourth quarter is our seasonally largest transactional quarter and I'll remind you that a year ago, we had a very strong software performance and our first full quarter of <unk> availability.
We knew that given our product cycle dynamics and the pressure from the current environment.
The fourth quarter of 2020 would be our most challenging in terms of year to year revenue performance.
90 days ago, we expected revenue and operating earnings per share to be in line with historical third to fourth quarter seasonality in.
In 2020, our fourth quarter revenue came in slightly below our typical seasonality while EPS was at the higher end of the historical range before the charge for structural actions and we had a good finish to the year and free cash flow.
The challenging environment, we've seen since March continued with a shift in clients buying behaviors and priorities.
Given the level of macroeconomic uncertainty where clients tended to move towards shorter duration engagements impacting our software revenue.
But we did have a good IBM Z performance relative to where we're at in our product cycle.
We also continue to see good demand in offerings that support our clients' digital transformations and we are driving strong adoption of our hybrid cloud platform <unk>.
Robert mentioned, we now have 2800 clients using our hybrid cloud platform for perspective, that's more than 1000, new enterprise clients since we acquired Red hat.
<unk> continued its strong performance with normalized revenue growth of 17%.
That's slightly higher than the third quarter rate driven by subscription growth strong.
Strong subscription bookings contributed to over 20% backlog growth and the Red hat backlog is over $5 billion for the first time.
Global business services continues to drive adoption of open shift and IBM cloud packs and over the course of 2020, we accelerated the number of GBS engagements using red hat technology with 260 engagements for the year.
We've discussed the economics of a platform model with the software and services revenue multiple anywhere from three ex the eight ex the platform revenue.
Our full stack cloud capabilities from infrastructure up through our cloud services generated over $25 billion of cloud revenue in 2020, which is up 20% over the prior year.
IBM is a high value business generating ample profit and free cash flow to invest for future growth and support our dividend policy.
We again expanded our operating gross profit margin up 70 basis points in the fourth quarter and 130 basis points for the year with expansion across software services and systems.
This operating leverage at the gross margin level enables higher investment in innovation and skills and an ecosystem.
Our fourth quarter pre tax profit also reflects a charge of over $2 billion for structural actions to simplify and optimize our operating model and reinvest the savings to accelerate growth.
Discharge is $260 million or about 25 of EPS less than what we discussed back in October driven by a few countries primarily in Europe with government restrictions on certain employment actions in the current environment. This charge did not have much impact on our fourth quarter cash.
Cash flow and we generated over $6 billion of free cash flow in the quarter and $10 8 billion for the year our.
Our free cash flow performance in 2020 was driven by working capital improvements and contribution from Red hat net of related interest. This was offset by increases in net capital expenditures to scale, our cloud infrastructure and workforce rebalancing payments from previous actions.
We continue to have high free cash flow realization, which was well above 100% as expected.
We ended the year with a cash balance of $14 $3 billion, which is up over $5 billion, while our debt was down $1 $4 billion with $4 $5 billion of debt maturities in the fourth quarter.
Now, let me turn to the segments, starting with cloud and cognitive software.
Revenue was down 7% in the quarter and gross margin was up 20 basis points. This year has proven to be a challenging transactional environment, especially in the fourth quarter, which is our largest transactional base.
As I said, we are particularly strong software performance a year ago. When revenue was up 10%. The fourth quarter of 2019 was the peak of our enterprise license agreement or SLA cycle, which renew about every three years on average.
With the uncertainty our clients are facing in the current environment, we're seeing many of them opt for shorter duration elas.
This dynamic in combination with the large seasonal volume of Elas in the fourth quarter pressured the fourth quarter software revenue performance.
At the same time, our renewal rates for subscription and support improved this quarter. In fact, it was the strongest year to year increase in some time.
This is evidence of our clients extending their commitment to our software solutions.
In this environment, our hybrid cloud and AI solutions like Red hat and cloud packs are resonating with clients.
In cloud and data platforms revenue was up 6%.
Red hat delivered double digit growth in both infrastructure and App development and emerging technologies.
We continue to gain share in both product areas instantiating, the importance of our hybrid cloud platform and the Linux Foundation to our clients earlier. This month Red had announced plans to acquire stack rocks, a leader and innovator in container and Kubernetes Native security.
This further enhances red hat open shift the industry's leading enterprise hybrid cloud platform.
Within cloud and data platforms. We're also building out our integration offerings, bringing AI powered automation across the portfolio through key partnerships and new innovation.
During the quarter, we acquired in standup and application performance monitoring and Observer ability company. We also expanded our partnership with service now to develop a joint solution around Watson AI ops, and IBM solution, which helps enterprises to self detect diagnose and respond to.
Anomalies in real time.
And we continue to enhance the cloud Pak for automation, which grew at a strong double digit rate this quarter.
Our cognitive application revenue was down less than 2%.
We had growth in security fueled by our modernized cloud Pak for security and services.
This was offset by a weaker performance in solutions concentrated in the industry is more impacted by the current environment.
<unk>, which is focused on commercial real estate.
As expected our software performance was most impacted by transaction processing platforms clients prioritization of Opex over Capex was amplified this quarter with our strong seasonal mix toward transactional revenue and the <unk> dynamics I just described.
In cloud and cognitive software, we remained focus on our hybrid cloud and AI strategy and we'll continue to invest in our portfolio as we head into 2021.
In global business services revenue declined, 5%, which was about a point sequential improvement from the third quarter and we had gross margin expansion of 260 basis points. Our book to Bill in the quarter was strong contributing to backlog growth for GBS.
While there remains some market uncertainty clients are looking to accelerate their digital reinventions by leveraging business transformation services built on hybrid cloud our offerings are aligned to this high value opportunity with a clear focus on reimagining workflows, using AI and modernizing the underlying <unk>.
Vacation infrastructures through hybrid cloud.
We see this in our GBS results first our GBS cloud revenue grew at a double digit rate for the quarter and the year and is now almost $6 billion annually.
Second our global process services revenue returned to growth as we deliver efficiency and flexibility to our clients' processes by infusing innovative technology and redesigning workflows and.
And third our consulting signings grew 8% driven by advisory work for application modernization and enabled by our unique and experiential garage methodology.
In application management, our performance reflects a continued shift from traditional on Prem services to building and managing cloud applications. Our incumbency in application management creates the opportunity and trust to be the partner of choice for their digital journey.
This GBS incumbency plays an important role in driving adoption of Red hat hybrid cloud platform.
As I mentioned earlier, our GBS red hat engagements accelerated through the year, we had 75 engagements in the fourth quarter with clients, including BMW Humana, Samsung electronics, Ikea and Cosco.
And similar to last quarter, approximately one third of our quarterly cloud Pak revenue resulted from GBS engagements.
To continue this momentum, we're investing and ecosystems resources offerings and skills.
Arvind mentioned, we have announced five GBS acquisitions in the last few months.
Nord cloud and <unk> provide cloud native development, multi cloud migration and platform engineering solutions that advance our clients' cloud journeys and seven summit's, a leading salesforce partner Truecar, a leading partner and expert to us a leading digital payments.
<unk> solutions provider are collectively at the center of our clients' digital transformations.
Finally, the investments we have made in our delivery capabilities such as our innovative dynamic delivery model have resulted in improved delivery quality, which are reflected in our net promoter scores and our gross margin expansion.
Turning to systems revenue was down 19% driven by product cycle dynamics, while our gross margin expanded 380 basis points. We saw the product cycle dynamics play out in IBM Z power and storage power revenue was down at a level consistent with last quarter.
In storage revenue was also down driven by high end storage tied to the IBM Z cycle.
IBM Z revenue was down 24% as we've wrapped on the strong growth in the fourth quarter last year, when we were up 63%.
90 days ago, I mentioned that clients in sectors like banking and financial markets made purchases early in the cycle to manage through robust market volatility while those in select other industries focused on cash preservation elongated Z 15 adoption.
We've made up ground in the quarter and improved adoption in some of the lagging industries IBM Z deliver growth for the year. Despite a second half rep on the product cycle and within a challenging environment.
This reflects the importance of this high value secure and scalable platform with cloud native development capabilities.
Based on this performance, we expect <unk> to be fairly consistent with prior cycles and looking back over a longer period of time, our installed base of Mips is over three five times the level of a decade ago with 60% of our installed base now in new workload areas like Linux.
<unk>.
The systems portfolio continues to deliver critical and lasting value to our enterprise client base in support of our hybrid cloud strategy.
Turning to GTS, while revenue was down 8%, we expanded gross margin by 70 basis points, we had strong contract renewals and added a number of new clients.
As Arvind mentioned at the beginning of October we announced the spinoff of our manage infrastructure services business into a separate public company, which we're referring to as newco for now.
We are making good progress on that work and remain on track to complete by the end of the year.
As we discussed in October this process is complex and includes working with clients to ensure a smooth transition to newco as the world's leading infrastructure services provider.
Optimizing the business model to improve its financial profile and executing upon the necessary financial legal and regulatory milestones to enable the transaction I'll give you some additional color on each of these three areas.
First from a client perspective, we are deeply engaged with our clients that make up the $62 billion of backlog and they are strongly supportive.
We are seeing client confidence in nucor's long term value proposition to manage and modernize mission critical infrastructures.
This quarter, we had wins at clients such as Dutch Ministry of Defense phone group and bank and <unk> and.
In the fourth quarter, we signed 11, new logo deals, which is more than double the prior year and one of the highest in the last couple of years, our renewal rates of existing contracts. This quarter. We're also at the higher end of our historical performance. However, while we had a strong pipeline as we entered the queue.
<unk> with the announcement as expected some negotiations were extended resulting in some deals moving out of the quarter.
Secondly, we are optimizing the new co business to have a leaner and more efficient operating model.
We continue to take a disciplined approach to improving our margins and overall financial profile.
As part of this a considerable portion of the $2 billion charge for structural actions was for GTS we.
We also have taken steps to restructure existing contracts and further reduced activity and lower value offerings.
These actions impacted our revenue performance this quarter, but contributed to the gross margin expansion of 70 basis points.
All of this positions newco for an improved margin profit and cash generation profile.
Lastly, Nucor has an unparalleled operational footprint. It is approximately 90000 employees and operates in roughly 115 countries and as you know manage infrastructure services is an integrated business not only within IBM, but within GTS.
We are executing on our detailed plan to achieve the milestones to create a standalone company today.
Today, we are working with works councils unemployment terms, establishing new closed legal entities across the world.
Drafting the agreements, which outlined the ongoing relationship between IBM and newco and developing audited financials we.
We expect a form tend to be available in the fall at which time, we will conduct investor outreach, we will continue to update our progress as we move through the year.
This is a good place to pause and turn it over to Martin Schroeter, New <unk> New CEO.
Thank you Jim.
Delighted and honored to be briefly speaking with you today on Ibm's earnings call as the CEO of Newco and yes, we are working on a name.
And Arvind and I began talking about this role let me speak with all the teams who are working on it and as I did my due diligence it became very clear to me that I, absolutely want it to be a part of us.
With the outstanding talent and Newco, the nature of <unk> work for the leading companies in every industry and the freedom of action or the mandate that newco will have I could not be more excited about the future of this business of.
Of course as Jim noted, we have a lot of work to do prior to newco being a separate publicly traded company and as we put all of that together I'll tell you more of the story about what newco will look like.
In the meantime, we do know what we have to get right in order to realize the tremendous potential we see.
First we know that we must continue to serve our clients. These industry leaders new coast clients Trust us to deliver some of their most important workloads in challenging environments and newco will continue to do that it's what our clients expect and deserve.
It's always been newco true north and will continue to be.
And over time, our clients will see our strong investments bring new capabilities into their environments to help their ongoing journey into a more digitized world.
Second we must continue to invest and develop our teams. The teams are clients see a need every day to our clients. Our people are the face of newco and they are the people who know how to make these complex systems work. So we'll build the right inclusive culture around client service innovation and talent of our clients.
We continue to see how our team shine brighter than any other.
Third and in support of the other elements of our business, we must establish the financial model for Newco that ensures our long term success.
IBM has already provided at a high level some of the characteristics of new coast financial profile when it becomes independent and we're working on the specifics now in order to give you a complete and clear view of new coast profile, but we know that nucor's long term success requires the right starting point and we will make sure Newco has launched the right way and have.
Of course, we must build a strong relationship with our owners and the broader stakeholder community.
To that point I look forward to discussing the opportunities, we see and how we intend to capture them in due course.
And as I said I was not going to miss the opportunity to be a part of this with a sharper focus and broad freedom of action, we have a tremendous opportunity to drive client value and translate that into a compelling investment thesis now I'll turn it back to Jim.
Thanks, Martin now before the Q&A I wanted to bring it back up to the IBM level with a summary of the actions we are taking and the resulting expectations for 2021.
These actions span our portfolio, our operating model and our capital structure.
After building a foundation in hybrid cloud and accelerating Red hat platform adoption. We are now separating manage infrastructure services to better align to our platform strategy and improve the financial profile of both businesses.
At the same time, we are increasing investments organic and inorganic innovation expertise and ecosystems.
We're investing in platform capabilities, including security and industry specific clouds, we're investing in data and AI and in technologies like quantum to create future market opportunities.
As we bring these innovations to market, we're adding GBS skills and expertise.
Making changes to our go to market to engage our clients in a more technical and experiential way and we're expanding our ecosystem to drive platform adoption and broaden our reach.
And in the fourth quarter, we executed structural actions to simplify and streamline our business. These actions will improve the EBITDA profile of newco address stranded costs from the separation and generate savings that will be reinvested to extend our position in hybrid cloud.
And AI and accelerate our growth.
We have also taken actions to enhance our balance sheet and liquidity, resulting in a stronger financial position.
We have focused our captive financing business on Ibm's hybrid cloud and AI offerings.
We've exited OEM commercial financing and have entered into an agreement to sell our IBM commercial financing receivables as a result, our financing receivables has declined from $32 billion to $18 billion over the last two years, reducing our external debt.
Leads.
Looking at our retirement related plans as you know we have shifted our asset base to a lower risk lower return profile.
At the end of the year, our plans remain well funded our overall returns in 2020, we're well ahead of expected returns and the funded status of our worldwide qualified plans was consistent with last year.
Bringing it all together we feel good about the path, we're on moving into 2021 and as Arvind said, we expect an improving financial profile throughout the year.
For the full year, we expect to grow revenue at current spot rates and.
In the first half we expect our results to continue to be impacted by the shift to shorter duration software transactions as clients deal with uncertainty and by our IBM Z product cycle dynamics.
At the same time, we expect GBS to return to pre pandemic revenue growth rates by mid year.
As I mentioned, we weren't able to execute the structural actions in all countries in the fourth quarter.
We anticipate the restrictions will be lifted over the next several months and are planning to execute the remaining structural actions in the first half of 2021, which will result in $260 million of pre tax charges.
Looking at our cash flows we expect $11 billion to $12 billion of adjusted free cash flow. In 2021. This reflects a year to year cash tax headwind of about $1 billion, but to be clear. This adjusted free cash flow does not include the cash impact of the <unk>.
Structural actions or the transaction costs associated with the spinoff of our manage infrastructure services business.
For perspective at this point, we expect to pay about $4 billion for these items over the next 18 months with about $3 billion in 2021.
As we look to 2022, we expect to build on this with adjusted free cash flow in the range of $12 billion to $13 billion.
I also want to comment on our balance sheet as we enter 2021, we're in a strong liquidity position with over $14 billion of cash on hand.
Our plan is to continue to deleverage and we expect debt reduction throughout the year aligned with our scheduled maturities. So we will have further progress in reducing debt since our peak debt balance when we financed the red hat acquisition in mid 2019.
This together with the actions to focus our financing business give us confidence in operating at a single a credit rating, while we continue to delever.
In sum, we expect to continue our progress as a leading hybrid cloud and AI company in 2021 with an improving financial profile.
So with that let's go to Q&A I'll turn it back over to Patricia.
Thank you before we begin the Q&A with Arvind and Jim I'd like to mention a couple of items first we have included supplemental information for the quarter and the year at the end of the presentation and finally as always I'd ask you to refrain from multi part questions.
Operator, let's please open it up for questions.
Thank you at this time, we'll begin the question and answer session of the conference. If you would like to ask a question. Please UN mute your phone press star one and record your name clearly when prompted if you would like to withdraw. Your question. You May you start to again that is star one to ask a question. Our first question comes from <unk> Mohan from Bank of America Your line.
Is open.
Yes. Thank you.
I was hoping you might be able to double click a bit on your on your comments on this on the software turnaround.
Realizing you had a tough compare in transaction processing, you still had cognitive apps decline, what specifically is being done to turn that business around to growth as we get into 2022 and what are the assets that will drive the growth there and if I could Jim could you just bridge the $12 billion to $13 billion in free cash flow in.
<unk> 22 versus the $10 8 billion. It seems if you hit the mid single digit growth rate. There, that's an incremental maybe $3 billion in revenues versus the $1 billion to $2 billion in incremental cash flow, which seems like very high cash flow margins. So if you could clarify that bridget. Thank you so much.
Hi, Amit. Thanks for the question look we expect to see improving software performance through the year, both in 'twenty, one and headed into 'twenty two.
As Jim said in the prepared remarks.
A lot of the shortfall in software came from the TPP segment and in that segment. As you know we tend to have very large deals that tend to come in the fourth quarter. So it was somewhat unique.
2020, and that is not something we expect to see at the same scale going forward. So the headwinds in some sense will reduce because of the reduction in that aspect.
And then on the positive side, we expect to see continued revenue growth, we expect to see continued growth.
Our cloud box, we expect to see continued growth as the sales force changes we have made drive a much greater focus across IBM on this part of the portfolio both in cloud and data platform.
And on the <unk>.
AI applications. We also expect to see as Jim mentioned that as the security and Iot assets within the applications become larger and larger with the growth there David will more than compensate for some of the other pieces that may not be so big because just the law of compounding is going to get us there.
And lastly, remember other than all the organic actions. We're also doing inorganic actions you saw us announce both in scatter and <unk> in the last couple of months.
These and other future acquisitions, but also drive growth because they help that our portfolio not just acquired basis Jim.
Okay. Thanks, Arvind and thanks Romsey for the question very important as many of our investors have been asking us about the free cash flow generation profile of this company why it's because it's going to be the engine to fuel the investments for that growth that we committed here in 2021.
Take a step back because I think it's important to understand coming off of a strong finish on free cash flow in 2020, delivering $10 $8 billion of 143% free cash flow realization first how does that bridge go to 2021 at 11% to $12 billion of adjust.
And free cash flow and then I think youll see how we then continue to accelerate that to $12 billion to $13 billion. Overall, so as we said in the prepared remarks first revenue growth, which is going to be essential here.
Second I think you've seen this over the last couple of years, we have driven the productivity and operating leverage out of this business with our gross margin expansions, but I think now for about eight to 10 quarters in a row. So not only are we going to now turn around to revenue growth, we're going to get operating leverage.
And that's going to deliver a significant amount of operating profit.
Contribution to free cash flow, coupled with red hat being accretive net of interest expense are ready as we achieved our accretion in the third quarter now what's happening from 2020 to 2021, we're gonna get substantial operating profit, but we've got a big cash tax.
Ex headwind in 2021, so while you're seeing nice growth from $10 8 billion to 11 to 12, we're already overcompensating for $1 billion roughly of cash tax headwind now when you get to 'twenty 'twenty, two we're going to get that same level of <unk>.
Operating profit contribution that has good leverage, but we have a much more de minimis cash tax headwind in 2022, which makes us very confident in our ability to give guidance at those levels for the next two years.
Okay. Thank you want to see can we go to the next question. Please.
Our next question comes from Amit <unk> from Evercore ISI. Your line is open.
Thanks, a lot for taking my question and nice to hear you always Martin.
Yeah.
Question really is on the GTS side and in the spin up new call. It the revenue trajectory on GTS. The drop was sort of notable I think went down to 8% decline versus a four 5% trend line.
The last few quarters.
Love to understand from our vendor Martin what are you hearing from your customers I mean do you see this as a reflection that the perhaps pausing that decision until the spin is done or perhaps in picking up calls from your competition. As this is going on I would just love to understand what's driving that dynamic there and then Jim If you could remind me when does the form 10 get publicly.
David That'd be great.
Okay, Hi, Amit.
So in terms of the client feedback.
We had talked about that we're going to do a lot of.
Hi, touch treatment of all of these client is a really important clients for us.
Both driven Martin said they are our most important clients and very important industry for the overall economy.
As we have talked to all of our clients.
Line large gotten very positive feedback or 98% of them are quite satisfied with our description of what will happen. Both in terms of their contracts the services they'll get from us and the assured guaranty of access to technical resources, both from the new company and from IBM overtime.
As that plays through we see that as Jim mentioned, the industrial it very briefly we do measure how our clients think of US we call. It net promoter score measurement and we're seeing that those have gone up not down. So we feel comfortable that the clients will go through it now all that said.
Maybe a few clients are going to pause.
<unk>.
Certain project elements given their own business.
And so in that in the end the GTS business clients are allowed to dial volumes up a little bit or down a little bit based on their own performance that is built into these contracts, but given what's happening in the overall economy, you see some of that play through in both directions.
That is the large cause.
That the other side of it which is the new logos gives us confidence that day performance should be on an improving trajectory going into 2021.
With that let me give it to Jim but to sort of add a little bit more color on the financials, there and to just to repeat what he said about the form 10, yes, thanks, Arvind and thanks, Amit for the question.
Just to put it in perspective, GTS six $6 billion here in the quarter to your point down what five 5% external down seven and a half give or take it at constant currency. It was though up 2% quarter to quarter. So we saw nice seasonality and by the way pretty consistent with what our normal.
<unk> <unk> to <unk> would be in GTS now with that said in addition to what Arvind had talked about which is what we've been dealing with for the last four quarters or so given the external economic environment with lower client base business volumes, we actually took as I said in my prepared remarks, we took proactive.
Actions to restructure some of our contracts to optimize our manage infrastructure services business to get ready for the spin which is what your second question is.
As we talked about on October eight.
We are going to create value through focus and both IBM and in newco and in Newco. The focus is on getting the fundamentals of this business in terms of value that's margin profit and cash and with these actions we will improve on the financial profile.
As we prepare for the spinoff leading to again and improve that you've got a profile approaching double digits post spin a solid balance sheet targeting investment grade rating and a strong free cash flow yield and dividend yield that should be attractive to a financial value based investors.
Overall now with regards to your second question on the form 10, I think I addressed that in the prepared remarks.
A lot of work being done.
<unk> of this as we learn each and every day Arvind talked about the client transition and we're very pleased with where that's going with our new logo signings and very strong renewal rates, but if you think about the legal regulatory financial that carve out work.
Right now I think we're well on track to achieve what we said on October eight which is the end of the year and you should see the form 10 sometime in the fall period.
Thank you Amit let's go to the next question. Please Amy.
Our next question comes from Toni <unk> from Bernstein. Your line is open.
Yes. Thank you.
If I if I just kind of stand back from the results. This quarter typically your revenues are up $3 4 billion from Q3 to Q4, that's the average of your last three years and there's very little movement off of that average. This year was two eight so at least in my eyes. It looks.
Significantly.
Worse and I I understand you know there are some issues around transaction processing I understand year over year comps, but this is a sequential.
The change, which which seems to be notably below trend.
And I hear your assurances around the current spending environment I guess the question is and the elephant in the room is how do you know that there isn't something more sinister afoot here that there is an accelerated migration to the cloud that.
You are not IBM has not.
Participating in.
Or you're.
Particularly some of your software offerings in cloud and cognitive.
Are not as competitive as you might think and that's ultimately what's being reflected here.
And I guess to that end as well, maybe Arvind you can directly address.
Why the confidence in mid single digit growth in 2022, it sounds like at constant currency.
IBM is going to be flattish or maybe slightly down in 2021. So.
What drives the 500 basis point improvement, which on a huge company like IBM has is really really notable how much of that do you expect to be inorganic. Thank you.
Okay. Toni Thank you very much Arvind I'll I'll address the front end piece and then you could talk about the.
The second part as Tony's question overall, Tony you are correct with regards to the last two to three years. When you look at the sequential normal seasonality of our business top line. It's in the neighborhood of 333 $4 billion, but I think you know quite well and many of our investors don't quite well.
That sequential trajectory.
Trajectories been distorted by a couple of things one the red hat deferred revenue and acquisition.
And two a major mainframe product cycle as you know, which is why 90 days ago I think when you asked the question to me I answered it.
On a five year CAGR and I was very specific and now that average is about $3 billion now with that said, we delivered to your point $2 8 billion and I think we've been open and transparent.
We fell short against that expectation and we fell short specifically in software. If you look at the balance of our portfolio, which is the remaining 65% of the revenue profile of the business, we were pretty much well within and some slightly above given our our strong mainframe finish.
To the to the year end and that software shortfall as we talked about was the culmination of the confluence of the wrap on the peak Elas from last year.
I think I'll understand our elas cycle, which has tremendous value to our clients and tremendous value to our financial equation on average sales are about three year cycles. We had the peak cycle in <unk> 19, we grew software revenue, 10% off of that and underpinning that to transactional volume.
And that software was up close to 30% overall, so we were in a trough year, we knew fourth quarter was going to be the most challenging quarter all year long and we've been talking about that now it's really the confluence of one that peak cycle wrap, which we know about because our volumes came in pretty much.
What we expected.
But what you're seeing into the second part of your question is yes is there shifts that are moving to the cloud, yes, and by the way I think we're capitalizing on that we got a $25 billion cloud base of business, that's growing 20% and we've got continued acceleration in our hybrid cloud platform with very good performance.
<unk> and Red hat, which we can talk about later, but the confluence of what happened to software is really given the uncertainty in the environment clients are reluctant to commit long term duration of deals and that really hurt our what you would call an AUR or a deal value size now.
There's some positives to that which I'm sure Arvind will get into number one we got shorter term durations now so we have a much higher E. L. A pool in 2021 number two we had a very strong in fact record.
Renewal rates, which led to a record deferred income balance $17 $1 billion overall, and even stripping out red hat, we had the strongest quarter to quarter.
Deferred income and renewal rate in our core software organic business that we've seen in 10 years I think that's a great instantiation of our clients committing to the value of our software portfolio overall, so with that let me turn it over to Arvind you can address the second piece, thanks, James and Tony.
I'll address some of the software pieces, but he asked a question about the mid single digit growth in 2022.
Turning to epic line, just deconstruct a little bit Red hat continues to have very strong performance.
Good day, maybe high teens growth and as it gets bigger and bigger that's a bigger contributor to the total.
Second GBS is going to return to pre pandemic levels by midyear and we actually expect it to accelerate from there.
<unk> 22, we will see better growth from there.
And systems as you know, we are not going to see the product cycle dynamics or headwinds, but as tailwind going into 2022, albeit the absolute numbers are not as let's say that bank our ecosystem investments that we're making day benefit both GBS and software and ecosystem I mean, both small.
Paul and Big partners that we work with.
Pulling both services and software so when we say for example, a sales force already Dolby service now our work day. They all tend to fill a lot of our services book, We also partner by the way with the other Hyperscale and cloud, both Microsoft and Amazon and that tends to pull a lot of GBS.
On the other side. We are also partnering with a lot of smaller software vendors and they tend to pull a lot of our software along with it. So that is there now you asked about the inorganic and organic.
The business as usual inorganic is included in my mid single digit.
Assessment, so by business as usual, it's just what we do you've seen US do this for the last.
Three quarters now the deals like that would be included and that for example, we did instead of in stock Crocs and software now we did five other than services.
They're not very large, but they do tend to pull the overall business that is what gives me confidence that as we get through all of this we got.
123.
Growth vectors, and one kind of flat going into 'twenty 'twenty two that is what gives us confidence about the overall growth.
Going back.
Okay. Thank you Tony can we please take the next question.
Our next question comes from Katy Huberty with Morgan Stanley. Your line is open.
Thank you. Good afternoon can you just clarify whether you expect revenue growth at constant currency.
This year and then you provided pretty specific commentary around the revenue trajectory and revenue growth on a reported basis for 'twenty, one as well as normalized free cash flow, but you didn't speak to EPS. So is there a reason that there is less visibility into earnings. This year and can you talk just broadly about what some of the headwinds and <unk>.
<unk>.
It would be on the EPS line this year.
Yeah, So why don't I.
Thought on why we gave the guidance on revenue and on free cash flow and then I think Jim will get into the details on your other part of the question.
Look I've been sort of clear.
I want to measure the company on revenue growth revenue growth is the most important metric that I'm focused on.
And so we talked about the revenue growth both for this year and for next year, which is unusual for us.
The second thought in order to get revenue growth, we need to be able to do investments.
<unk> are driven by free cash flow.
On free cash flow, it's a very clean number. So you can see what that is as we've talked about that with complete transparency. Both on what it is going to be and wider growth also from 'twenty one to 'twenty two.
That's also what we're going to measure our people on internally and that will that then our investors know what we're measuring on so that's why those are the two numbers that we are focused on.
Driving that's the numbers we are focused on giving you. So you can hold us accountable to those.
Okay, Okay, and Katy, let's talk a little bit about the revenue profile I think urban just answered the two metrics and by the way I can tell you. We've flipped the whole operational management system. Marvin spent a lot of time about the operating model changes the actions. He has taken on how we drive signpost milestones to deliver.
On those two fundamental objectives, which by the way after the third quarter Arvind and I did.
An extensive outreach to many of our investors and we got unanimous feedback on what those two measures should be which is sustainability of revenue and operating free cash flow to fuel the investment overall, well, let's talk about revenue. So we talked about growth at current spot rates.
You see in the supplemental charts, you see where the U S. Dollar has weakened right now at current spot rates, we expect the full year somewhere around two points of a tailwind overall pretty unique position on where we've been for the last 10 years, but underneath that.
We did say that we expect the fundamentals of the business trajectory.
Across our segments to improve first half the second half and that is going to be important because to an earlier question that acceleration has to position us for an exit velocity to get into 2022 around having a credible path for mid single digit growth growth.
Which is what our objective is I would tell you overall, we expect.
IBM remain co to grow both at actual rates and at constant currency. So that trajectory overall should give you a perspective right off the bat about where we should and go forward Newco, given where we ended on our backlog, we see improving trends.
But not getting back to growth because again as I said earlier, we are focused on the fundamentals of that business margin profit cash and the strong EBITDA profile to set it up with a investment grade balance sheet to absorb and deliver a free cash flow yield and dividend yield overall.
Underneath that you can imagine our two growth engines, Arvind talked about software and GBS and by the way both of them we see growth.
Accelerating throughout the year software being driven by strong red hat Red hat as we talked about we exited over $5 billion of backlog too.
$2 8 billion of deferred revenue, we already replenished more than what we acquired pre acquisition and by the way that backlog of $5 billion has grown mid twenties.
So the acceleration coming off the trough in third quarter up 16, we just posted plus 17 that should continue to accelerate as we move through and then GBS, we exited our backlogs up.
Our signings of small deals were up nicely and accelerated from <unk> to <unk>, we got acquisitions, we're going to continue to scale, our book to Bill exiting <unk>.
Fourth quarter was $1 three the strongest it's been in a long period of time and we've got a nice backlog revenue run out in 'twenty, one that shows that acceleration, which gives us confidence that we can get back to pre pandemic growth as early as the mid year.
Okay. Thank you Katy I think Lee please take the next question.
Our next question comes from Matt Cabral with credit Suisse.
Your line is open.
Yeah. Thank you I wanted to build on those last comments around GBS and just dig a little bit more it looks like apps management was still the major drag despite a little bit of an easier compare versus the third quarter. Just wondering if you could unpack what's going on underneath there.
Going forward, just how would you think about the potential of some pull through from Red hat related work is you have like a re platform and modernized them legacy on Prem apps, and just bigger picture the path back to growth, perhaps management of what that looks like from here.
Yes, Thanks, Matt I'll I'll take this one.
To your question.
Application.
Management services overall is an integral part of our overall hybrid cloud platform thesis.
As Arvind talked about already and we shared even the prepared chart that platform has an economic equation that has a multiplier effect and we talked about what for every dollar of platform. We get three to $5 of software, we get six to eight $8 of services, both IBM and <unk>.
Even as we scale with our ecosystem partnerships that we've accelerated over the last six months.
They get.
Get into that return also well, let's talk about Ams, we've been speaking about this for the last few quarters. There definitely is a secular shift we know it.
A shift from on Prem enterprise application component clients are prioritizing stability of applications in this environment and we all know the reducing discretionary spend components, but there's a flip side to that shift that's happening overall and that's exactly where you went which clients are excel.
<unk> their digital transformation and journeys to cloud and we participate in there look at GBS as cloud business, we exited the year with almost a $6 billion book of business accelerating throughout the year. We finished the year up double digits overall up 11% and the Ams underneath.
That is up almost 10% so a very big component of that is it's essential from a cloud transformation services as part of that hybrid cloud platform underneath that what's driving it is application modernization work, that's where we participate in the full spectrum from advise two two.
Build to move and to manage the front end of that advice and build is predominantly a consulting base play and so things up nicely and our backlog, 17%, but as that journey continues we will start seeing the Ams come back in just a few data points for you number one with that said.
<unk> shifted to cloud we are capitalizing as I said Ams sub up 8% and our total cloud book of business. We return Ams back in total to signings growth in the quarter, our backlog improved five points quarter to quarter and to the heart of your question 80% of our.
Our red hat and cloud Pak placements are a M. S. Incumbency enterprise clients. So it is tremendous value in leveraging that overall and which is why we think is essential to have a differentiated value proposition for our hybrid cloud platform.
Thank you Matt can we please take the next question.
Our next question is from Tien Tsin Huang from Jpmorgan. Your line is open.
Hi, Thanks, Thanks for extending the call for US here I think Kenny asked about EPS I'm not sure if I heard in your answer any any callouts on EPS cadence first half versus second half beyond the 260 million in charges in <unk>.
Enormous seasonality I know, you're not giving formal guidance, but I thought I'd ask anyway, but on the revenue side, just thinking about I know you've said a lot again on revenue, but if youre looking at revenue growth for fiscal 'twenty. One I know you talked about revenue growth in fiscal 'twenty, but of course, COVID-19 hit and the world changed. So how is your outlook this year for growth.
From this time last year in terms of your conviction.
<unk> heard some of the drivers, but just really here asking about conviction in visibility.
Hi, Tien tsin, So maybe let me start about the conviction on revenue growth. So.
From what we can see compared to what we saw last year, which is why we did not provide guidance in 2020 are rather we pulled guidance back in April.
We feel that the economy, while there is uncertainty certainly better than it was last year. So we don't expect to see anything worse compared to last year.
If anything we talked about the second half being better because we expect as we get through that.
There is going to be more demand. These projects are going to go forward and as we look underneath because also the question that Matt at about right at it modernization. You can also see that people are signing up for bigger and bigger projects around modernization because they need to move on with their business is also there is only so long that you can belt tightening and not.
Come out well so there are getting foster belt tightening we take somewhere in the next six months.
That is why we have a lot more conviction that that is why you heard Jim talk about the color from first half to second half.
And going forward into 'twenty 'twenty, two of an increasing tragic tree and they talked about how that is going to be growth.
The remaining company.
Both current.
Both spot rates and at constant currency.
So that is why we have conviction when we look at our underlying backlogs when we look at our pipelines and we look at the demand profile across those parts of the business, hence our conviction and the revenue growth Jim Yeah, I would just add to that Tien tsin. Thank you for the question again as Arvind talk this is a mindset change on how we went to <unk>.
Operate the company.
We've defined the strategy all in focused aligned our portfolio aligned our operating model now it's about growth and it's about driving that operating free cash flow, which is going to fuel that investment. So around that we talked about the trajectory overall first of all I Should've mentioned I mean as you.
Could see in the supplemental chart, although we said revenue growth at current spot rates you see that that's predominantly a first half discussion it's about three to four points of tailwind in the first half and that dissipates quickly in the second half overall, which is why the fundamentals of the underlying business by segment, we'll have to.
Improve and we expected them to improve as we move through the year. The other thing I will tell you underpinning.
A fair question as I stated I think we built the credibility over the last few years that we know how to drive operating leverage within this business. So you can expect we grew gross.
Margins. This year I think about 130 basis points 70 basis points in the fourth quarter. You can expect that we're going to continue to drive operating leverage in this business and we will have margin expansion in 'twenty, one and second the other variable that you always ask me and we talk about and we try to be very transparent underneath it.
<unk> is our tax rate and while we operate in 100 plus countries around the world the geographic product mix.
It can impact that dramatically tax.
Structures audits et cetera can change it you know.
From our perspective, we finished fourth quarter at what I think 10, four from an operating tax rate pretty consistent by the way of third quarter and pretty consistent last year and just given what I said earlier one on a book tax rate, we're going to have a headwind on cash taxes I would expect our tax rate to go up.
A few points from that 10.4. So it gives you a little bit more color underneath the revenue profile the operating leverage in tax and again, we're just trying to change your mindset here.
Tien Tsin, let's go to the next question. Please.
Our next question comes from David Grossman from Stifel. Nicholas Your line is open.
Thank you.
Arvind, perhaps it could be.
A little more specific about what you were seeing in the line.
We're going to see sales and marketing structure, which precipitated the re Oregon in.
And maybe identify what changes you expect to be most impactful in Y and sorry for the two part question for Jim Perhaps you could reflect on whether there is or how much if any free cash tailwind youre seeing in.
In 'twenty and 'twenty, one and 'twenty two from the change in our IGF receivables. Thanks.
Hi, David.
Look this is something I'm deeply deeply passionate about so I'm happy to talk about this.
Look.
Every model has its time and then it's time to evolve.
Evolving in reaction to client needs and we've sort of operated with I'll call. It a more homogeneous model that kind of went across all our segments. All our clients for a long time. So what are we doing.
There is a set of clients, who do tend to buy I'll call. It a lot of IBM.
Call them, they need the integrated value of IBM with <unk>.
That the first segment.
In this first segment, we're also going to make extra investments and then being able to experience IBM technically. So we are using the term garages will have people that will go in there and work side by side with our clients, while virtually right now as well as being able to have a lot of focus on deployment and we'll pay the people.
On deployment not on Sally.
This first segment is going to have that attention with extra this thing. So they should see a lot of positive and we expect to see growth coming out of our garages and our deployment manages.
Then there is a segment, which is largely going to be channel ready. So there we do get as Jim talked about operational leverage you don't need the other people the channel is quite capable, but rather put more money into the channel and work with them to go after that that's the other end of the spectrum.
There is a set of clients lets call. It between these two spectrums they tend to buy mostly from wanted to parts of IBM.
Deeply value the specialists, but they don't need the generalists, who will cover them. So we're going to take that money and supported into more specialists, who can then cover those clients, but they're the first segment.
Which does have a integrated value there is a.
The top half of the second segment, which is going to be much more specialists, who can think of them as being technology led sales by and large and then there is going to be a large part which is ecosystem glad where the system integrators resellers distributors et cetera.
We believe that this simplicity is going to drive a lot more outcome for us and for our clients and by the way. We are also going to ensure that this is the structure that all parts of IBM have so it's not that different parts of IBM, but slightly different client segmentation, it's completely consistent cross.
All of this we believe unlocks a few points of revenue growth that you saw.
Net impactful I expect that this will unlock a few points of revenue growth, albeit let me acknowledge that it probably takes six months to flow through the system.
Hey, David Let me address your.
Good question around.
The IGF business and the tailwind overall first to just taken a step back.
Within that overall IGF consistent with our strategy. We are focusing this part of our portfolio directly aligned to be a captive financing aligned to our hybrid cloud and AI platform strategy overall, and you've seen us take a disciplined approach around global portfolio.
And financial management.
What am I, saying one early in 2009, we started winding down our OEM financing business.
In 2020 is part of prudent.
A sturdy measures as we prioritize liquidity, we actually announced.
Heard that in the fourth quarter sales.
Our IBM commercial financing receivables as part of our risk mitigation cash and liquidity management practices. So now let me bring this all back together because I think these actions that we've taken and resulted in a more focused and healthier financing pull for portfolio with a very.
Much better overall debt level and refinancing requirements.
That are not going to be needed overall, so if you look at the strengthening of our balance sheet, our liquidity position exiting 2020.
We talked about $14 $3 billion of cash on our balance sheet, we talked about $11 billion to $12 billion of adjusted free cash flow.
We got about $4 billion to $5 billion in 2020 around leveraging and focusing that strategy about IGF and I would assume probably something very similar to that overall, so when you take the.
The power of those three buckets 14 billion of cash, which I should tell you is about two ex the operating level that we need to run this company. So the excess cash there the strong free cash flow generation.
In the IGF actions of $3 billion to $5 billion. So let's call. It you got about 30 billion of firepower now that that's a source of cash view now we all know and use of cash view, what do we know one I talked about the $3 billion.
Which will be cash out the door with regards to the structural actions and the cash taxes based on the transaction.
We are very committed to our secure and modestly growing dividend policy. That's about $6 billion and then third we continue to plan to Delever and our normal maturities are a little bit less than $7 billion. This year, you add those up you're about $15 billion plus so we've got firepower.
Here that gives us the financial flexibility to continue to invest in our business de lever to get back to our targeted leverage ratios and also support that secure and modestly growing dividend.
So we've got a pretty long hair and why don't we just start off and do you want to make just a quick comment to wrap it up thanks. Thanks, Matt.
So.
We got a lot today, but let me just make a couple of really quick comments to wrap this up.
We are confident in our strategy.
Taking the actions that will accelerate this change we expect to grow in 2021 with an improving trajectory through the year.
And with all of that we will look different at the end of 'twenty 'twenty one than we do today and I look forward to continuing this dialogue with you.
Thank you everyone Ivy can I turn it back to you to close out the call. Please.
Absolutely.
Thank you for participating in today's call. The conference has now ended you may disconnect at this time.
That's clear.
Yeah.
[music].
[music].
[music].