Q4 2022 International Business Machines Corp Earnings Call
Welcome and thank you for standing by at this time, all participants are in a listen only.
Today's conference is being recorded.
Any objections you may disconnect at this time.
Turn the meeting over to MS. Patricia Murphy with IBM Ma'am you may.
Again.
Thank you Patricia Murphy and I'd like to welcome you to Ibm's fourth quarter 2022 earnings presentation.
I'm here today, with Arvind Krishna Ibm's, Chairman and Chief Executive Officer, and Jim Kavanaugh.
I'm, the senior Vice President and Chief Financial Officer.
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.
To provide additional information to our investors our presentation includes certain non-GAAP measures.
For example, all of our references to revenue growth are at constant currency.
Provided reconciliation charts for these and other non-GAAP measures at the end of the presentation.
It is posted to our investor website.
Finally, some comments made in this presentation may be considered forward looking.
Private Securities Litigation Reform Act of 1995.
<unk> involve factors that could cause our actual results to differ materially.
Additional information about these factors is included in the company's SEC filings.
So with that I'll turn.
Turn the call over to Arvind.
Thank you for joining us.
Our fourth quarter and full year results demonstrate the execution of our hybrid cloud and AI strategy.
We delivered strong revenue growth in our business the growth was broad based across our software consulting and infrastructure segments as well as across geographies.
Our clients recognize that technology continues to be a fundamental source of competitive advantage.
Over the last several quarters. It has become clear that technology is playing a significant role in boosting productivity.
Pace of inflation demographic shifts.
Hi chain challenges and sustainability requirements.
We entered 2022 and more focused company and took steps to reinforce our position.
We strengthened our consulting expertise and expanded strategic partnerships to bolster our software portfolio, we invested in hybrid cloud and AI capabilities.
So delivered significant innovations in infrastructure with our <unk> and power platforms.
All of this was brought to market with a more technical and experiential sales approach.
Looking back on the year, we are pleased with the progress we made we.
We delivered revenue growth above our mid single digit model.
And we delivered solid free cash flow.
Electronics it has more to do.
This year will unlock more productivity expand our strategic partnerships and put more investment in specific growth markets.
For 2023, we see revenue growth in line with our mid single digit model range.
And about 10, and a half billion dollars of free cash flow. This keeps us on a path of sustainable growth.
I will now provide some color on the progress we are making in the execution of our strategy.
Our perspective is clear.
Hybrid cloud and AI are the two most transformative technologies for business today.
These technologies work together to drive business outcomes.
Hybrid cloud is where the world is going.
Containers are the preferred destination for application.
Hybrid cloud offers more value than relying on a single public cloud.
It enables organizations to drive business value across multiple clouds.
On premise or at the edge.
This includes scale security and ease of use flexibility of deployment seamless experiences and faster innovation cycles.
Our platform.
It'll turn Red hat is the leading container platform, allowing clients to harness the power of open source software innovations.
IBM software and infrastructure technologies have been optimized for this platform all consultants and others.
Leverage their extensive technical and business expertise to accelerate clients' digital transformation journeys.
Clients are realizing real value from working with Ibm's hybrid cloud platform approach for.
For example.
We worked with the Canadian Imperial Bank of Commerce CIBC.
Adopt a hybrid cloud approach.
Using red hat technology, CIBC manages and scaled infrastructure with greater speed and flexibility.
Cannot develop applications in a private cloud and quickly deploy them to a public cloud.
Hundreds of new applications and reduced provision provisioning time by 95% and deployment time by 50%.
We are helping Delta airlines leverage hybrid cloud modernize options automated operations and integrate security Ivy.
IBM consulting deployed Red hat on Amazon Web services, and IBM cloud fax to provide a consistent platform.
Delta now has more lever that can use to booth developer productivity reduce time to market and improve employee satisfaction.
<unk> and Delta are both great examples of the value hybrid cloud can provide.
Let's now talk about artificial intelligence or AI.
AI is projected to contribute 16 trillion dollars.
To the global economy by 2030.
Including a massive boost in productivity by infusing AI into every enterprise process.
We have been cooperating with many clients to deploy AI at scale.
<unk> automated the drive through experience for quick serve restaurants.
Celebrated the rollout of COVID-19 vaccines by automating the processes that assist millions of customers with inquiries that appointment.
By applying AI and automation.
Have helped security analysts will use the time to respond to threats from all of those are days two minutes.
Recently, the U S patent and trademark office.
With IBM to leverage also AI capabilities that.
It's easier for people to glean insights from the vast database of patents.
The BBC is not using our <unk> software to automate the management of its it infrastructure.
What businesses deploying AI can be challenging because it takes time to train each model.
But by using large language models.
These cannot create multiple models using the same dataset.
This means businesses can deploy AI with a fraction of the time and resources.
That is why we are investing in large language all foundation models for our clients.
They are infused these capabilities across our AI portfolio.
Our quarter ecosystem plays a critical role in the execution of our strategy.
The fourth quarter, we made a series of new IBM software offerings available as a service in the AWS marketplace.
Likewise Red hat continued the expansion of its offerings in Hyperscale marketplaces, making ansible automation platform available on both Azure and AWS.
Adobe and Salesforce are also leveraging open source innovation.
Just on Red hat technologies in their offerings.
Business with our strategic partners continues to grow with S&P, Microsoft and AWS, all over a $1 billion in revenue for the year.
We've had great success with our strategic partners and as we enter the new year, we are expanding and better enabling a broader ecosystem.
Recently launched <unk>, plus a new simplified program that increases our reach and scale through new and existing IBM partners.
We remain focused on delivering new innovations that matter to our clients.
The fourth quarter.
Introduced red hat device edge lightweight solution to flexibly deployed traditional or containerized workloads on small devices.
Such as robots, Iot gateways point of sale and public transport.
We also formed a collaboration with the Japanese consortium rapid is to leverage the depth of our intellectual property on advanced semiconductors.
We unveiled osprey, a 433 qubit quantum processor that brings us closer to delivering our goal of building a thousand qubit system later this year.
At the same time, we continue to acquire companies that complement our organic innovation and.
In the fourth quarter, we acquired acto, which improves our footprint in the U S federal market.
This caps a year with eight acquisitions across software and consulting.
As sustainability becomes more of a priority companies need digital technologies to analyze data, creating a baseline and improve the way they operate.
Our software has helped IBM reduce its own carbon footprint.
Across Ibm's global real estate presence.
To reduce carbon emissions by over 61% when compared to <unk> 10.
Using IBM sustainability software, we have simplified and automated our sustainability reporting processes and reduced reporting costs by 30%.
Let me wrap by saying I am pleased with the progress we have made with our portfolio our go to market at our ecosystem.
Confident in our ability to leverage hybrid cloud and AI to help clients business challenges into opportunities.
Our strategy continues to strongly resonate with clients and partners.
And this gives us a solid foundation to build upon in this year.
While there is more to be done we enter the new year as a more capable and nimble company well equipped to meet our clients' needs.
I will now turn it over to Jim who will give you more detailed information on our performance and expectations.
Thanks, Arvind I'll start with the financial highlights for the fourth quarter we.
We delivered $16 $7 billion in revenue.
$3 8 billion of operating pre tax income.
Operating earnings per share of $3 60.
In our seasonally strongest quarter, we generated $5 $2 billion of free cash flow.
Our revenue for the quarter was up over 6% at constant currency.
While the dollar weakened a bit from 90 days ago, It's still impacted our reported revenue by over $1 billion and six three points of growth.
As always I'll focus my comments on constant currency.
And I'll remind you that we wrapped on the separation of kindred at the beginning of November the.
The one month contribution to our fourth quarter revenue growth was offset by the impact of our divested health business.
Revenue growth this quarter was again broad based.
Software revenue was up 8% and consulting up 9%.
These are growth factors and represent over 70% of our revenue.
Infrastructure was up 7%.
Within each of these segments our growth was pervasive.
We also had good growth across our geographies with mid single digit growth or better in Americas, EMEA and Asia Pacific and for the year, we gained share overall.
We had strong transactional growth in software and hardware to close the year.
At the same time, our recurring revenue, which provides a solid base of revenue and profit also grew led by software.
I'll remind you that on an annual basis about half of our revenue is recurring.
Over the last year, we've seen the results of a more focused hybrid cloud and AI strategy.
Our approach to hybrid cloud is platform centric as.
As we land a platform, we get a multiplier effect across software consulting and infrastructure.
For the year, our hybrid cloud revenue was over $22 billion up 17% from 2021.
Looking at our profit metrics for the quarter, we expanded operating pre tax margin by 170 basis points.
This reflects a strong portfolio of mix and improving software and consulting margins.
These same dynamics drove a 60 basis point increase in operating gross margin.
<unk> expense was down year to year, driven by currency dynamics within our base expense. The work we're doing to digitally transform our operations provides flexibility to continue to invest in innovation and in talent.
Our operating tax rate was 14%, which is flat versus last year and our operating earnings per share of $3 60.
<unk> was up over 7%.
Turning to free cash flow, we generated $5 2 billion in the quarter and $9 $3 billion for the year.
Our full year free cash flow is up $2 $8 billion from 2021.
As we've talked about all year, we have a few drivers of our free cash flow growth.
First I'll remind you 2021 cash flow results included can drill related activity.
Including the impact of spin charges and Capex.
Second we had working capital improvements driven by efficiencies in our collections and mainframe cycle dynamics.
Despite strong collections the combination of revenue performance above our model and the timing of the transactions in the quarter led to higher than expected working capital at the end of the year.
This impacted our free cash flow performance versus expectations.
Our year to year free cash flow growth also includes a modest tailwind from cash tax payments and lower payments for structural actions.
Partially offset by increased Capex investment for today's IBM.
In terms of cash uses for the year, we invested $2 $3 billion to acquire eight companies across software and consulting.
Mitigated by over $1 billion in proceeds from divested businesses.
And we returned nearly $6 billion to shareholders in the form of dividends.
From a balance sheet perspective, we ended the year in a strong liquidity position with cash of $8 8 billion.
This is up over $1 billion year to year.
And our debt balance is down nearly $1 billion.
Our balance sheet remains strong and I say the same for our retirement related plans.
At yearend our worldwide tax qualified plans are funded at 114% with the U S. At 125% both are up year to year.
Youll recall back in September we took another step to reduce the risk profile of our plants.
We transferred a portion of our U S qualified defined benefit plan obligations to insurers without changing the benefits payable to plan participants.
This resulted in a significant noncash charge in our GAAP results in the third quarter.
And we will see a benefit in our non operating charges going forward.
You can see the benefit of this and other pension assumptions to the 2023 retirement related cost in our supplemental charts.
Turning to the segments software revenue grew 8% fueled by growth in both hybrid platform and solutions and transaction processing.
We concluded the year with seasonally strong transactional performance as well as a solid and growing recurring revenue base and software.
And hybrid platform and solutions revenue was up 10% with pervasive growth across our business areas.
Red hat automation data and AI and security.
Our platform based approach to hybrid cloud and AI is resonating with clients.
As a proof point <unk> shift our industry, leading hybrid cloud platform now has $1 billion in annual recurring revenue.
And we modernized and optimized our software capabilities, including through cloud packs across automation data and AI and security for that platform.
Red hat revenue grew 15% in the quarter led by strength in open shift and ansible, both growing double digits and gaining market share.
Automation revenue was up 9% growth was led by business automation application servers and integration as clients look to automate business workflows and improve application.
Data and AI revenue grew 8% with enterprise needs to organize store and manage their data.
This performance reflects demand in areas, including data management data fabric and asset and supply chain management.
Security delivered 10% revenue growth.
We're helping clients detect prevent and respond to security incidents.
Which led to strength across threat management data security and identity.
Across these businesses the annual recurring revenue or <unk> for hybrid platform of solutions is $13 3 billion.
And for all of software hybrid cloud revenue is now more than $9 $3 billion over the last year up 16%.
And transaction processing revenue was up 3% demand for this mission critical software as filed increases in Z systems installed based capacity over the last couple of product cycles.
And strong renewal rates continued this quarter.
Both are evidence of the importance of this platform and our hybrid cloud environment.
Moving to software profit our pre tax margin was up two points this quarter contributing to a full year margin of nearly 25%.
Consulting revenue grew 9% clients are leveraging ibm's hybrid cloud leadership and deep industry expertise to navigate the complexity of their digital transformation journeys.
Revenue growth was broad based.
Across all business lines and geographies.
And I'll remind you that this is on top of the 16% growth consulting delivered in the fourth quarter of 2021.
Strong demand for our offerings led to signings growth of 17%.
With this fourth quarter had the best quarterly book to Bill of the year and we sequentially improved our trailing 12 month book to Bill ratio to one that one.
Clients are partnering with IBM consulting as they decide what applications to modernize and how to migrate those applications across hybrid multi cloud environments.
Over the last 12 months consulting delivered $9 billion and hybrid cloud revenue, which is up 23%.
This quarter, our Red hat practice was again a meaningful contributor to this growth.
Revenue from strategic partnerships also grew at a strong double digit rate.
We continue to see momentum in this space.
In aggregate, our strategic partnership bookings were up over 50%.
With Azure and AWS more than doubling.
Turning to our lines of business business transformation revenue grew 7%.
Growth their business transformation was once again, driven by data and client experience transformations.
Along with supply chain and finance optimization.
Our partnerships with key ISP partners like SAP.
Salesforce and Adobe enable IBM consulting to transform critical workloads at scale.
And technology consulting, where we architect and implement clients cloud platforms and strategies revenue was up 10%.
Growth was led by cloud application development practices.
Red hat engagements, along with our strategic Hyperscale or partnerships contributed to the growth.
Application operations revenue grew 12%.
We help clients to optimize their operations and reduce costs by.
By taking over the management of applications and hybrid and multi cloud environment.
Our incumbency and understanding of clients' applications are key differentiators.
Moving to consulting profit our pre tax margin was 11% for the quarter and nearly 9% for the year.
Our fourth quarter margin is up nearly two points year to year and over one point sequentially.
We are starting to see the benefit from pricing actions and productivity and our acquisitions have become more accretive.
Turning to infrastructure segment revenue grew 7% driven by hybrid infrastructure, which was up 11%.
Within hybrid infrastructure Z systems revenue grew 21% this quarter.
The new <unk> 16 capabilities clients are leveraging cyber resiliency to comply with business regulations and proactively avoid outages in their operation.
And the new on Chip AI accelerator for example has been helping mitigate risk and detect fraud and credit card application process.
Our distributed infrastructure revenue was up 5%.
This performance was fueled by strength in power.
Knowing the extension of power 10 innovation throughout the product line.
Infrastructure support performance was flat.
Including the impact from client adoption of new hardware with the latest <unk> product cycle.
Moving to infrastructure profit pre tax margin was down less than a point in the quarter.
For full year, our pre tax margin was nearly 15%.
Now, let me bring it back up to the IBM level to wrap up.
At our Investor briefing 15 months ago, we laid out our hybrid cloud and AI strategy and.
And our priorities of revenue growth and free cash flow generation.
Since then we've been focused on our portfolio our go to market model, our ecosystem and our capital allocation to execute that strategy and create value through focus.
We now just completed the first year as today's IBM.
Our 2022 revenue was up nearly 12%, including nearly four points of incremental <unk> contribution.
That's above our model a mid single digit growth.
Over 70% of our revenue within our growth factors of software and consulting.
And about half of our revenue is recurring.
With this high value mix and contribution from the incremental Kindjal revenue, we expanded our full year operating pre tax margin by two five points.
And our free cash flow was $9 $3 billion up $2 $8 billion from the prior year.
We invested organically and Inorganically and returned significant value to shareholders through dividends.
Now there were some external factors that we faced this past year that impacted our profit and cash we exited a profitable business in Russia.
We are dealing with a much stronger dollar.
And we are operating in a highly inflationary environment, which put pressure on our margins, especially in consulting.
Putting it all together we are pleased with the fundamentals of our business and the progress we have made in executing our strategy.
Our 2022 performance demonstrates that we now have a higher growth higher value company with higher return on invested capital and a strong and growing free cash flow.
For 2023, we again expect solid growth in our two most important measures of success revenue and free cash flow.
<unk> talked about the important role technology plays in this environment and how our solutions are closely aligned to the needs of our clients.
With this we expect constant currency revenue growth for the year to be in line with our mid single digit model.
As we entered this year I think it's prudent to expect the low end of the mid single digit model.
And for free cash flow, we would expect to generate about $10 $5 billion in 2023.
Which is up over $1 billion year to year.
Let me spend a minute on our expectations for constant currency revenue and pre tax profit performance by segment.
And software with continued momentum in our recurring revenue stream and both hybrid platform and solutions.
And transaction processing, we expect revenue growth in line with software is mid single digit model. This revenue growth generate operating leverage and we would expect software our pretax margin to expand by about two points year to year.
Consulting model is to deliver high single digit revenue, we're coming off a strong year with revenue growth of 15%.
As we help clients with their digital transformations.
This momentum and strong book to Bill ratio support consulting revenue growth at the high end of its model despite the tough compare.
We expect to expand consulting pre tax margin by at least a point as we continue to realize more of the price increases and improved utilization.
Infrastructure revenue is roughly flat over the mid term model horizon.
Our performance in any year, reflecting product cycle dynamics.
We're entering the year three quarters into the <unk> cycle.
And we'll also wrap on power Ted.
As a result, we expect 2023 infrastructure revenue below its model and pre tax margin in the low teens.
For perspective infrastructure should impact Ibm's overall revenue growth by over a point.
With these segment dynamics, we would expect Ibm's operating pre tax margin to expand by about a half a point.
That's in line with our model.
And our tax rate should be in the mid to high teens range.
Let me comment on a few items within our expectation.
First as I said currency was a significant headwind in 2022.
Impacting revenue by $3 $5 billion.
With the movement of spot rates over the last 90 days currency translation would be fairly neutral to revenue in 2023 with.
With a headwind in the first half flipping to a tailwind in the second.
But I'll remind you that we had over $650 million of hedging gains in 2022.
Which will not repeat in 2023, resulting in an impact to our profit and cash on a year to year basis.
Second.
As you know we've taken a number of significant portfolio actions over the last couple of years, which has resulted in some stranded costs in our business.
We expect to address these remaining stranded costs early in the year and anticipate a charge of about $300 million in the first quarter.
We would start to see benefits in the second half and payback by the end of the year.
And then third we regularly review of the useful lives of our assets due.
Due to advances in technology, we're making an accounting change to extend the useful life of our server and networking equipment effective the first of January .
Based on our year end asset base, we expect this change to benefit 2023 pretax profit by over $200 million, primarily in our infrastructure segment.
Given this is a change to the depreciation there's no benefit to cash.
Looking at the first quarter, our constant currency revenue growth should be fairly consistent with the full year.
Reported growth will also include about a three point currency headwind at current spot rates.
With the operating leverage we would expect operating pre tax margins to expand 50 to 100 basis points in the first quarter and Thats before the charge I just mentioned for the remaining stranded costs.
Given the timing of currency and stranded cost dynamics, we'd expect about one third of our net income in the first half and about two thirds in the second half.
To sum it all up.
We have made a lot of progress this past year.
Well Theres always more work to do.
We're confident in the fundamentals of our business and how we're positioned as we enter the new year.
Patricia let's go to the Q&A.
Thank you Jim before we begin the Q&A I'd like to mention a couple of items.
First supplemental information for the quarter and the year is provided at the end of the presentation and then second 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 will begin the question and answer session of the conference to ask a question. Please press star one and record your name clearly if you need to withdraw your question Press Star Q again to ask a question. Please press star one our first question will come from Amit <unk> with Evercore.
Your line is open.
Thanks, a lot for taking my question I guess my question is around the free cash flow numbers, and perhaps you could spend a little bit of time on.
You touched on kind of the 22 levers a fair bit and how you got there, but you know as you think about calendar 'twenty three free cash flow of $10 5 billion of uplift of $1 2 billion.
What are the puts and takes a lot of the bridge that gets you there.
And then maybe related to that as I think about what you did in 'twenty, two and 'twenty three.
It does imply do you get to the $35 billion number over the over three years 24 would have to be 14 billion plus so perhaps you can level set that I do think from when you provided a $35 billion number a fair bit of change so maybe a bridge for 'twenty three and just an update on how you think about that 35 billion number over three years as well. Thank you.
Thanks, Amit this is Jim I appreciate the question so let's start there.
Solid free cash flow generation in 2022.
Up to $8 billion year over year now as you remember we entered 2022, we talked about a very strong free cash flow generation engine and we put in place a guidance for 2022, well in excess of our model is $750 million year to year.
First as we were very transparent we were going to get at least about a half of that out of the 10 drove related spend dynamics, that's the charges and capex and we were going to get a little bit more than half of that out of our base operations overall and I think when you look at 2000.
'twenty two what happened we got impacted by two external factors number one the unfortunate and mandatory in crisis with the war on Russia and Ukraine.
And we exited that business the right decision.
Second is unprecedented U S. Dollar appreciation I think last time I looked the rate the breadth and magnitude of the change is the most we've seen in multiple decades, we got hit with that but we're able to overcome some of that with the fundamental underpinnings of our business overall, it's still delivered almost 3 billion.
There's a free cash flow year over year by the way, Russia currency by themselves is over $600 million of profit in cash we had to absorb so now to your question about 2023, we guided as you heard in our prepared remarks at $10 5 billion, that's up $1 $2 billion year over year.
And again above our $750 million.
Year to year, the underpinnings of that though can be very different in 'twenty three given the improving business fundamentals of our now sustainable revenue growth.
At a high value mix contribution.
We see then continued operating leverage so our cash PCI is going to deliver a substantial amount of that free cash flow generation year over year, we're still going to get working capital efficiency. So our realization will definitely be up over 100%, but that's really given the volume dynamics of what happened in the.
Fourth quarter with a very strong and accelerated growth profiles. We went through fourth quarter. We finished extremely strong on our transactional business in the month of December so that now creates an opportunity for free cash flow generation in 'twenty, three and Thats in our guidance and then theres some other puts and takes.
We'll get modest structural actions tailwind, but theyre going to be offset by a cash tax headwind for the year. So that kind of plays out two.
2022, and 2023 now.
How does that relate to our mid term model first of all we're one year into that mid term model and as I've talked about the dynamics in dealing with the decision to exit our Russia business and the significant U S dollar appreciation.
Quantified it for you over $600 million impact on profit and cash, but as you all know quite well that's not a onetime impact.
That will continue over a multi period and definitely puts pressure on our mid term model.
Attune cumulatively about over $2 $5 billion. So we are entirely focused on how we execute this company.
Sustainable revenue growth profile, and generating that $10 $5 billion of free cash flow. So it enables us with the right ample financial flexibility to continue to invest in our business and return value to our shareholders overall.
Thank you Amit Sheila let's go to the next question.
Our next question comes from <unk> Mohan with Bank of America. Your line is open.
Hi, yes. Thank you.
And nice to see the revenue guide here I was wondering if you could share some thoughts around what's happening in software in particular you've had.
Really strong performance in transaction processing over the past year.
How are you thinking about the trajectory of that I know historically, you've kind of thought about this as a mid single digit or higher decliner and clearly we are tracking very differently here, if you could share some.
What's around the trajectory of that in 2023 and beyond that'd be that'd be very helpful. Thank you.
Yeah. Thanks Andre for the question. So I'll address here transaction processing question first and then all of software right after that.
So some of you have heard me talk about that transaction processing it would be a mid single digit decliner in the past and that effectively is what he asked what's going to be different as.
As we look at our business there and we look both at the underlying Mips growth as well as the criticality of that software as well as our ability to have some very modest pricing uplifts.
Now look at that business as being a slight increase there as opposed to a modest decliner. So I think if you are looking at that one.
<unk>.
Low single digit increases.
<unk> processing is what we think is appropriate for the short to medium term.
Model looking forward.
Now that does help in overall software.
First let's look at software and decompose it suffer as Jim mentioned in his prepared remarks is almost 80% recurring revenue.
We see that recurring revenue increasing consistent with our model of the mid single digits.
Based on both the consumption usage as well as what we have seen through 'twenty, two and people renewing that base of software business.
And then I.
I will acknowledge to you that 'twenty two was a great deal a year 23 will be not as good as 22, but with the transactional piece of the business being less than 20% that is a much smaller impact on the overall growth rate as you put all that together.
See the mid single digits as being appropriate for the software business.
Excellent. Thank you one day, let's go to the next question.
Our next question comes from Toni <unk> with Bernstein. Your line is open.
Yes.
Yes. Thank you I was wondering if you could just comment on <unk>.
Operating profit more broadly I think your target at the beginning of the year was two weeks was for operating profit to improved 400 basis points.
And it came in at 270, I think your target for the fourth quarter was 250 basis point improvement in operating margin. It came in at $1 70.
And so.
And that's manifesting itself into a free cash flow number that was lower than you had expected.
This year and potentially for next year relative to your $35 billion target. So you you have a dual mandate arvin one is to try and grow mid single digits and the others to deliver very strong cash flow, which is impacted by margins.
<unk> was not as strong this year and I'm wondering if you can highlight what was different from your expectations.
And what were the challenges in forecasting that.
And how investors should think about that.
And free cash flow realization going forward.
Yes, Toni thanks so.
So you are completely accurate that these numbers are slightly below our expectations from the beginning of the year.
I will ask Jim to comment and give you a lot more color on it but let me first comment on your statement of we have a double mandate of revenue growth and free cash flow growth.
So, but what I want to also be clear.
Our revenue growth as which manifests itself in client satisfaction higher NPS from our clients better consumption of both software and consulting from our clients, which allows them to consume more and more over time is what we are focused on and it's in and we have to deliver the free.
Cash flow growth.
Jim mentioned in a response to the first question that we were not expecting.
The business and Russia does get shutdown that impacted a little bit.
We were not expecting the currency headwinds to be as severe as it turned out to be that certainly impacted and all acknowledged in inflation.
Wage inflation showed up and impacted our margins in consulting a lot more than we were expecting now.
And answer could've been to not hire people and to not give that but that would have resulted in a lower capacity at the end of this year, which would not have allowed us the confidence into the no.
And to the growth both in consulting and software that we are now committing for 2023, so as we balance those it becomes a business decision to say, we are going to keep going on increasing capacity, which results in healthier revenue and it will result in improving margins, but that flows through into 2023.
As opposed to giving it all to us in 2022, So Tony you guys kind of how we think about balancing the investments of the business versus a quarterly result, and I'd ask Jim to comment a bit more on some of the specifics.
Yes, just just to put some numbers around this Tony you're exactly right we entered the year.
We talked about a business profile higher revenue growth company higher operating margin strong free cash flow yield and we had guided at mid single digit revenue growth and we guided at four points of operating margin improvement.
Two points of external debt, both Arvind and I have both talked about Russia and currency by the way that was about a half a point because.
Cause currency remember as we've talked about many times throughout these calls not only the right breadth and velocity and change in magnitude that we haven't seen in about two to three decades, but it impacts.
Human capital based consulting business very differently than a product technology based business as we talk about human capital is all pretty much a natural hedge because your cost is basically matched with your revenue outside of global delivery, but in a product based business our costs like the industry is predominantly.
U S dollar source and that's why you've seen pressure on the gross profit margin line and the pre tax profit margin lines around our technology base of business now underlying that I think youre seeing a fundamental improvement in our margins as we go forward. So about 50 basis points of currency the remainder.
100 basis points was consulting and.
And we talked about that thats been a rate and pace discussion.
You dial back 15 18 months ago.
<unk> called a very accelerated demand environment of our clients shifting to digital transformation and journey to cloud and starting in the second half of 'twenty. One we made the bet to make investments around skill capability ecosystems, and we opened up the aperture to build extend.
Capabilities Inorganically.
And we knew as we went through 2022 that we then we're operating in a highly inflationary environments and then it became a rate and pace discussion on how quick can you get price margin and optimization and realize through your backlog.
And I think we've acknowledged that we were pretty slow throughout the year.
Now with that said, we finished the year about nine points of margin in consulting.
We had nice improvement we exited fourth quarter at 11 point PCI model that was up almost 200 basis points year over year.
Our first half to second half, we saw an acceleration of three points of margin from about a seven point operating pgi model to well over 10 points of an operating PPI model and most importantly, the green shoots are starting to play out in the fourth quarter, our utilization of effective capacity one of the.
Three leverage we've talked about all year up three points in the fourth quarter our.
Our price margins third consecutive quarter are up year to year and Youre seeing that play out in that operating profit performance and finally acquisitions now we're on a steady state and our acquisitions are back to accretion. So we see nice green shoots that lead to our guidance in 2023.
At the high end of our high single digit model and consulting on revenue coming off of a very strong 15% growth in 'twenty, two and guiding another one point plus in operating margins going forward.
Thanks for the question Tony Let's go to the next question.
Our next question will come from Shannon Cross with Credit Suisse. Your line is open.
Shannon, we're not able to hear you in conference. Please check the mute feature on your phone.
Hi can you hear me yes.
Yes, we can hear you now you May go ahead okay.
Interesting.
Yes.
Can you talk a bit about AI and how it runs through your business. There's obviously so much discussion right now about open AI and Microsoft making investments and.
I guess I'm trying to think about how we should think about IBM monetizing it capitalizing on it how you think about your competitive position relative to others. I don't know if there are examples you can give us where you're utilizing it but I'm just I'm wondering is as AI gets more and more of it becomes more and more of a discussion planed apparently for.
2023.
And you have such a long history with it how we should think about where you are now and where you are going to take it. Thank you.
Thanks Shannon.
First let me acknowledge AI has become a big topic of conversation.
This year I was in Davos last week and it probably came up in almost every single discussion around technology, what's happening with AI as well as what's happening with open AI, if I think about it over the last decade I think there are three movements you can talk about and then I'll begin to translate those into a business impact.
One with IBM, one jeopardy with Watson I think it was a big moment and AI came onto everyone's roadmap.
We're in deep mined from Google or alphabet.
Winning competitions around for example goal that became another big moment, along with the protein folding that they did and now with open AI and Chad GBT.
But if I step back just a moment.
All of this latest version is based on what is called large language models as the underlying science universities do at Google does it IBM does it as does open AI.
To just get to why it's so exciting for example for US. It allows us to do 13 language models are going to be looking at.
Understanding different natural languages.
In the same cost as originally one.
That is what is so exciting about these technologies because if you can get an order of magnitude improvement in costs and speed and the resource consumed both in terms of hardware and people that is incredibly exciting.
Now let me translate this into how do we monetize this so our monetization of AI is very much focused on that 16 trillion dollars of productivity that I've talked about that we're going to get over the decade.
The vast majority of that comes from enterprise automation and when I say enterprise I include governments into it.
Some examples if you can automate the drive thru and order taking.
So quick serve restaurants. That's an example of what can happen. If we can get deflection rates of $40 $50, 60% at everyones call centers, that's a massive.
Operational efficiency for all of our clients.
He can help retirees get their pension through interacting with <unk>.
Watson forward AI Chatbot that is an enterprise use case, where all of these technologies come into play by the way all might see examples of real clients, where we are resulting in anywhere from hundreds to thousands of people.
FNC for each of these clients, but thats, how we get it.
I look inside IBM, all we do promotions how are we do people movement, how we begin to improve our quote to cash.
Through our customer service and people are complicated questions around triage of it systems going down are all very real examples where we're improving client service and saving money all at the same time.
And then thank you very much Sheila can we go to the next question.
Our next question comes from Erik Woodring with Morgan Stanley . Your line is open.
Hey, guys. Good afternoon. Thanks for taking the question I wanted to just touch on the consulting business.
Signings were very strong in the December quarter up 17% you. Your quarterly book to Bill was an improvement from the September quarter can you, maybe just again just step back and elaborate on the environment. We're in what you saw in <unk> that potentially stood out to you.
Where strength in signings is coming from changes to contract duration, maybe just double clicking on the consulting business just just to help us understand what gives you confidence to be kind of at the high end of your of your mid term model for 2023.
Thanks, Eric for the question I'll take this one.
When we entered the fourth quarter, we had a pretty solid pipeline and we talked about and reaffirmed mid teens growth for consulting for the year, which as you know is well above our model.
But again as I talked about on the previous question, we had made the investments and bringing in skill capability expanding ecosystem strategic partnerships and acquisitions, but we saw that pipeline entering the quarter.
We saw a very solid and pretty disciplined sales closure rate as we move through the year now how did the year and that positions us for 2023, and let me just put some stats really bring it home number one ecosystem velocity.
We saw continued to increase throughout the year of our strategic partnerships I think we said in the.
The prepared remarks strategic partnerships, one grew revenue 25% in 2022.
And was about 40%.
Our consulting base of business.
That is up about 50% year over year, we have saw seen extensive acceleration and by the way in the fourth quarter, our signings growth, which delivered a one three book to bill or Hyperscale or partnerships with Azure.
Sure and what AWS, our signings were two X.
And our <unk> portfolio.
With the likes of Sap's Salesforce Adobe, we were up over 50% and signings. So our book of business and the partnerships we have tremendous strength, that's fueling our backlog point number one point.
Point number two red hat.
We continue to see acceleration of consulting being the tip of the spear, that's really driving the scale and adoption of our hybrid cloud platform and Oh by the way is also dragging IBM technology and software.
Inception, a little over three years, we signed seven $4 billion of business in Red hat tremendous strength and that again fuels our backlog for 2023, and then you look at full year.
We grew both large <unk>.
Transformational deals and we grew small deals double digit both sides. So as pervasive across the board. So when we look at our backlog we look at all of our indicators of our business on the realization of that model, we look on the.
The acquisition portfolio and how it's scaling we feel pretty confident about the high end of our high single digit model in 2023, Oh by the way to Tony's question at operating margins.
Being accretive.
Eric Thanks for the question, let's go to the next one please.
Our next question comes from Lisa Ellis with SBB.
Your line is open.
Hi, good afternoon, Thanks for taking my question.
Maybe following on that I had a broader question Arvind on the overall demand environment, you're seeing I think with earnings coming in from various enterprise Tech players. So far we're seeing a pretty wide range of signals about how the demand environment is shaping up for 2023 can you just comment a bit on what you're seeing from your large clients they kind of relative to.
This past year. Thank you.
Yes, Thanks, Lisa for the question.
Look if I think about our overall client base. We will first really pleased that there wasn't much of a difference by geography as I sort of go through it.
And India, Australia, the Middle East.
Western Europe .
The U K, North America, but really pretty strong and demand across.
I think Lisa if I break it down into the two portions of our technology and consulting.
What do you see is.
Most of our clients do believe that even if there are some I'll call them minor are different headwinds in 2023.
Ergo to emerge stronger as the motor emerge stronger that means they're all deploying technology to help offset wage inflation cyber issues supply chain challenges and all the demographic shift, meaning there's just fewer skilled people to hire.
Consequently, we are seeing them double down and that is why we are focused on certain areas and certain partners both for consulting and in technology. So they all want to deploy automated ways to get from the front to the back maybe salesforce and Adobe play a very strong role in that they all want to leverage cloud technologies.
We can scale technology after better have a client demand.
The shifts with the Hyperscale is playing to that at all.
All want to leverage all more technology and they have before to counteract the wage inflation and other inflationary aspects and what we do with Red hat plays into that so I kind of see.
Please note that all of our clients play into that now you have mentioned a wide.
Vectren from the people Youre seeing recently.
I think the reason that we are remaining in this optimistic frame of mind, we have no consumer business I agree that our clients may have a consumer business that we don't have that directly and so I think consequently, we might be seeing a little bit different.
Subset of the economy, and those who might have a large direct exposure to consumer business.
Thanks, Lisa let's go to the next question. Please.
Our next question comes from David Grossman with Stifel. Your line is open.
Alright, thank you.
So you had a very good transactional momentum in software business in the fourth quarter and you provided some good high level commentary in your prepared remarks about.
The business in the broad based growth may reflect many of those changes that you've been talking about it and go to market strategy and sales changes.
That said Arvind can you just talk specifically identify any product specific changes in software is it.
Do you think maybe driving that momentum and that may suggest your competitive positioning.
Shifting.
Any of those three now and Brad have segments.
And then just one other thing just sorry about the two part question, but just for Jim I, just wanted to clarify whether that working capital headwind.
Fourth quarter that you talked about the vs.
In 2023.
Thank you.
Yeah. Thanks, David Let me talk a little bit about the product capabilities and as you said outside right at all focused on automation data AI and cyber if I look at those let's take automation I'm really pleased with the progress we have made around an area I'll call AI ops, but if you think about we made a couple of small.
Acquisitions in China and to economic we built our own AI ops portfolio and we are seeing tremendous pickup from that as our clients want to take out labor complexity, but also want to optimize their overall it.
Infrastructure hardware and software. They also want to have uptime that is now the talk about not just two lines or three 9%, but up to five nine and they also want to worry about how they make sure. Some go to always on and so I think our AI ops portfolio, there really advantages us and I believe we are in a unique.
Position, because we help our clients and our environment across multiple public clouds.
And on premise and with their private clouds in that space.
If I think about data and AI are focused on data fabric and allowing our clients to leverage that data wherever it is not always moving at but allowing them to catalog leveraging AI deep inside our products is another example of where we have unique capability and third.
If I look at Ciber.
We focus a lot on threat management.
And if we think about how we can leverage the inputs from all kinds of sources and these days and people really wanted about all of the threats coming whether from nation States. All from just bad actors and it allows them to leverage that portfolio better. Consequently, we remained very focused on these areas.
You should expect both organic and inorganic investment and David I can't help but say, we are giving our clients the ability to deploy these capabilities on multiple public clouds as well as on premise and I believe that does advantage them because it gives them a lot more flexibility and freedom.
Half from some other windows.
Got it.
I would just build on that.
Urban I mean.
Software our book of business today, it's an integral part of our hybrid cloud.
Form thesis it is the foundation, we eclipsed $25 billion for the first time ever here.
2020 to over 40% of Ibm's revenue and two thirds of our EBITDA.
You look at it we are a hybrid cloud AI platform centric company overall and software is right at that core so.
Why that recurring revenue stream and the improvements we've been seeing throughout 2022, and as Arvind answered earlier getting that back to week growing contribution not only helps the competitiveness and market share of our top line, but I think all of you understand them.
Marginal dollar of that book of business.
Is in the 90 plus percent range as we move forward. So David I think you also asked a question about clarification free cash flow growth $10 5 billion about up $1 billion to year to year above our model of 750 that will be driven based on the fundamental.
<unk> improvements of our underlying revenue growth and operating leverage and cash PPI, but there were also be yes, working capital efficiency contribution to our cash generation next year really just the volume dynamics are what played out in the fourth quarter, we will get that back.
Thanks, David we are past the top of the hour, but let's take one more question.
Our last question will come from Kyle Mcnealy with Jefferies. Your line is open.
Thanks, very much for squeezing it in.
This one is macro related as well, but it was pretty quick.
It seems like some of the slowing macro is implied in your 2023 guidance, but I don't think you talked specifically about whether youre seeing anything specifically slowing it sounded generally positive for you guys and even though theres a bit of a slowdown in putting the guidance.
Microsoft and <unk> talked about a divergence between new business new application seeing some growth.
Versus renewal business capacity expansions cross selling things like that are you seeing a similar thing in terms of new applications slowing a bit and some of the kind of recurring and cross selling capacity expansion is holding up.
How much of of either of those is driving your lower end of mid single digit growth guidance for 2023.
And kind of break it down if you can thanks.
Okay look I think that first.
To your point, a new application versus existing pretty directly.
The point about the lower end of the mid single digit is largely from the fact that infrastructure segment will be a headwind going into 2023, but it was a tailwind in 'twenty two.
I wouldn't read anything more than that and do our low end as opposed to.
The middle of the range now.
For us I don't really see that I see that our clients do want to do new development.
From our perspective, if somebody is doing an expanded sales force deployment I called out a new application. If somebody is doing a new application on azure, although they are moving.
<unk> never really directly move you always talk about re factoring putting a new function integrating with other applications. They might have a dash of order the buyer SaaS properties, we consider all of that new development and so for US our consulting teams are largely doing that new development for our clients and.
In that process. They tend to use open shift from red hat to use right athletics that tend to use our AI automation or AI automation that surrounds all those things to make them much more resilient much more robust much more secure and those are the capabilities. We bring so we are not really seeing that.
Vergence I would tell you straightforwardly, but.
There is likely a focus that in that new application is it helping automate things more is it helping make things are call. It straight through as opposed to with a lot of manual intervention that is probably a bigger focus maybe we don't see it because we've got all that play in late 'twenty, one because we kind of.
All of those things coming and becoming more important and we decided to invest in them both in technology and in consulting.
But this year, but that being the last question. Let me now make a couple of very quick comments to wrap up the call.
<unk> was an important year for us.
As Jim said it was the first full year of the new IBM.
The results, we delivered reinforce our confidence in our strategy and our model.
While there is always more to do we are pleased with our position as we enter 2023 and I look forward to continuing this dialogue as you move through the year.
Thank you Arvind Sheila let me turn it back to you to close out the call.
Thank you. Thank you for participating on today's call. The conference has now ended you may disconnect at this time.
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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.
I will 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 2022 earnings presentation.
I'm here today 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 re.
Replay will be available by this time tomorrow.
To provide additional information to our investors. Our presentation includes certain non-GAAP measures. For example, all of our references to revenue growth are at constant currency.
We've provided reconciliation charts for these and other non-GAAP measures at the end of the presentation, which is posted to our investor website.
Finally, some comments made in this presentation may be considered forward looking.
The private Securities Litigation Reform Act of 1995.
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.
So with that I'll turn the call over to Arvind.
Thank you for joining us.
Fourth quarter and full year results demonstrate the execution of our hybrid cloud and AI strategy.
Delivered strong revenue growth in our business.
Growth was broad based across our software consulting and infrastructure segments as well as across geographies.
Our clients recognize that technology continues to be a fundamental source of competitive advantage.
For the last several quarters. It has become clear that technology is playing a significant role in boosting productivity.
In the face of inflation demographic shifts.
Challenges and sustainability requirements.
We entered 2022 and more focused company.
Took steps to reinforce our position.
We strengthened our consulting expertise and expanded strategic partnerships to bolster our software portfolio, we invested in hybrid cloud and AI capabilities. We also delivered significant innovations in infrastructure with our <unk> and power platforms.
All of this was brought to market with a more technical and experiential sales approach.
Looking back on the year, we are pleased with the progress we made.
We delivered revenue growth above our mid single digit model.
And we delivered solid free cash flow.
Electronics it has more to do.
This year will unlock more productivity expand our strategic partnerships and put more investment in specific growth markets.
For 2023.
We see revenue growth in line with our mid single digit model range and about 10, and a half a billion dollars of free cash flow. This keeps us on a path of sustainable growth.
I will now provide some color on the progress we are making in the execution of our strategy.
Our perspective is clear.
Hybrid cloud and AI are the two most transformative technologies for business today.
These technologies work together to drive business outcomes.
Hybrid cloud is where the world is going.
Containers are the preferred destination for application.
Hybrid cloud offers more value than relying on a single public cloud.
It enabled organizations to drive business value across multiple cloud on.
On premise or at the edge.
This includes scale security and ease of use flexibility of deployment seamless experiences and faster innovation cycles.
Our platform.
Built on Red hat is the leading container platform, allowing clients to harness the power of open source software innovations.
IBM software and infrastructure technologies have been optimized for this platform, our consultants and others leverage their extensive technical and business expertise.
Accelerate clients' digital transformation journeys.
Clients are realizing real value from working with Ibm's hybrid cloud platform approach for.
For example.
We worked with the Canadian Imperial Bank of Commerce CIBC.
Adopt a hybrid cloud approach.
Using red hat technology, CIBC manages and scaled infrastructure with greater speed and flexibility.
Cannot develop applications in a private cloud and quickly deploy them to a public cloud.
The delivered hundreds of new applications.
And reduced provision provisioning time by 95% and deployment time by 50%.
We are helping Delta airlines leverage hybrid cloud to modernize options automated operations and integrate security.
IBM consulting deployed Red hat on Amazon Web services.
IBM cloud box to provide a consistent platform.
<unk> now has more lever that can use to both developer productivity reduce time to market and improve employee satisfaction.
CIBC and Delta are both great examples of the value hybrid cloud can provide.
Let's not talk about artificial intelligence or AI.
AI is projected to contribute 16 trillion to.
To the global economy by 2030 <unk>.
Including a massive boost in productivity by infusing AI into every enterprise process.
We've been co, creating with many clients to deploy AI at scale.
We automated the drive through experience for quick serve restaurants.
Celebrated the rollout of COVID-19 vaccines by automating the processes that assist millions of customers with inquiries that appointment.
By applying AI and automation, we have helped security analysts will use the time to respond to threats from hours or days to minutes.
Recently, the U S patent and trademark office.
With IBM to leverage also AI capabilities that make it easier for people to glean insights from their vast database of patents.
The BBC is not using our AI ops software to automate the management of its it infrastructure.
For businesses deploying AI can be challenging because it takes time to train each model.
But by using large language models companies cannot create multiple models using the same dataset.
This means businesses can deploy AI with a fraction of the time and resources.
That is why we are investing in large language all foundation models for our clients and have infused these capabilities across our AI portfolio.
Our quarter ecosystem plays a critical role in the execution of our strategy.
The fourth quarter, we made a series of new IBM software offerings available as a service in the AWS marketplace like.
Likewise <unk> continued the expansion of its offerings in Hyperscale marketplaces.
Ansible automation platform available on both Azure and AWS.
Adobe and Salesforce are also leveraging open source innovation.
Just on Red hat technologies in their offerings.
Business with our strategic partners continues to grow with S&P, Microsoft and AWS, all over a $1 billion in revenue for the year.
We've had great success with our strategic partners and as we enter the new year, we are expanding and better enabling a broader ecosystem.
Recently launched <unk>, plus a new simplified program that increases our reach and scale through new and existing IBM partners.
We remain focused on delivering new innovations that matter to our clients.
Fourth quarter, we introduced Red hat device edge.
Lightweight solution to flexibly deployed traditional or containerized workloads on small devices.
As robots.
Gateways point of sale and public transport.
We also formed a collaboration with the Japanese consortium rapid is to leverage the depth of our intellectual property on advanced semiconductors.
The unveiled osprey, a 433 qubit quantum processor that brings us closer to delivering our goal of building a thousand qubit system later this year.
At the same time, we continue to acquire companies that complement our organic innovation.
In the fourth quarter, we acquired acto, which improves our footprint in the U S federal market.
This capped the year with eight acquisitions across software and consulting.
As sustainability becomes more of a priority companies need digital technologies to analyze data, creating a baseline and improve the way they operate.
Our software has helped IBM reduce its own carbon footprint.
Across Ibm's global real estate presence, we were able to reduce carbon emissions by over 61% when compared to <unk> 10.
Using IBM sustainability software, we have simplified and automated our sustainability reporting processes and reduced reporting costs by 30%.
Let me wrap by saying I am pleased with the progress we have made with our portfolio our go to market and our ecosystem.
Confident in our ability to leverage hybrid cloud and AI to help clients turn business challenges into opportunities.
Our strategy continues to strongly resonate with clients and partners.
And this gives us a solid foundation to build upon in this year.
While there is more to be done we enter the new year as a more capable and nimble company well equipped to meet our clients' needs.
I will now turn it over to Jim who will give you more detailed information on our performance and expectations.
Thanks, Arvind I'll start with the financial highlights of the fourth quarter we.
We delivered $16 $7 billion in revenue.
$3 8 billion of operating pre tax income.
And operating earnings per share of $3 60.
In our seasonally strongest quarter, we generated $5 $2 billion of free cash flow.
Our revenue for the quarter was up over 6% at constant currency.
While the dollar weakened a bit from 90 days ago. It is still impacted our reported revenue by over $1 billion and six three points of growth.
As always I'll focus my comments on constant currency.
And I'll remind you that we wrapped on the separation of kindred at the beginning of November .
The one month contribution to our fourth quarter revenue growth was offset by the impact of our divested health business.
Revenue growth this quarter was again broad based.
Software revenue was up 8% and consulting up 9%.
These are growth factors and represent over 70% of our revenue.
Infrastructure was up 7%.
Within each of these segments our growth was pervasive.
We also had good growth across our geographies with mid single digit growth or better in Americas, EMEA and Asia Pacific and for the year, we gained share overall.
We had strong transactional growth in software and hardware to close the year.
At the same time, our recurring revenue, which provides a solid base of revenue and profit also grew led by software.
I'll remind you that on an annual basis about half of our revenue is recurring.
Over the last year, we've seen the results of a more focused hybrid cloud and AI strategy.
Our approach to hybrid cloud as a platform centric.
As we land the platform, we get a multiplier effect across software consulting and infrastructure for.
For the year, our hybrid cloud revenue was over $22 billion up 17% from 2021.
Looking at our profit metrics for the quarter, we expanded operating pre tax margin by 170 basis points.
This reflects a strong portfolio of mix and improving software and consulting margins.
These same dynamics drove a 60 basis point increase in operating gross margin.
Our expense was down year to year, driven by currency dynamics within our base expense. The work we're doing to digitally transform our operations provides flexibility to continue to invest in innovation and in talent.
Our operating tax rate was 14%, which is flat versus last year and our operating earnings per share of $3 60.
Was up over 7%.
Turning to free cash flow, we generated $5 2 billion in the quarter and $9 $3 billion for the year are.
Our full year free cash flow is up $2 $8 billion from 2021.
As we talked about all year, we have a few drivers of our free cash flow growth.
First I'll remind you 2021 cash flow results included Ken drove related activity.
Including the impact of spin charges and Capex.
Second we had working capital improvements driven by efficiencies in our collections and mainframe cycle dynamics.
Despite strong collections the combination of revenue performance above our model and the timing of the transactions in the quarter led to higher than expected working capital at the end of the year.
This impacted our free cash flow performance versus expectations.
Our year to year free cash flow growth also includes a modest tailwind from cash tax payments and lower payments for structural actions.
Partially offset by increased Capex investment for today's IBM.
In terms of cash usage for the year, we invested $2 $3 billion to acquire eight companies across software and consulting.
Mitigated by over a $1 billion in proceeds from divested businesses.
And we returned nearly $6 billion to shareholders in the form of dividends.
From a balance sheet perspective, we ended the year in a strong liquidity position with cash of $8 8 billion.
This is up over $1 billion year to year.
And our debt balance is down nearly $1 billion.
Our balance sheet remains strong and I say the same for our retirement related plans.
At yearend our worldwide tax qualified plans are funded at 114% with the U S. At 125% both are up year to year.
Youll recall back in September we took another step to reduce the risk profile of our plans.
We transferred a portion of our U S qualified defined benefit plan obligations to insurers without changing the benefits payable to plan participants.
This resulted in a significant noncash charge in our GAAP results in the third quarter.
And we will see a benefit in our non operating charges going forward.
You can see the benefit of this and other pension assumptions to the 2023 retirement related cost in our supplemental charts.
Turning to the segments software revenue grew 8% fueled by growth in both hybrid platform and solutions and transaction processing.
We concluded the year with seasonally strong transactional performance as well as a solid and growing recurring revenue base in software.
And hybrid platform and solutions revenue was up 10% with pervasive growth across our business areas.
Red hat automation data and AI and security.
Our platform based approach to hybrid cloud and AI is resonating with clients.
As a proof point <unk> shift our industry, leading hybrid cloud platform now has $1 billion in annual recurring revenue.
And we modernized and optimized our software capabilities, including through cloud packs across automation data and AI and security for that platform.
Red hat revenue grew 15% in the quarter led by strength in open shift and ansible, both growing double digits and gaining market share.
Automation revenue was up 9% growth was led by business automation application servers and integration as clients look to automate business workflows and improve application.
Data and AI revenue grew 8% with enterprise needs to organize store and manage their data.
This performance reflects demand in areas, including data management data fabric and asset and supply chain management.
Security delivered 10% revenue growth.
We're helping clients detect prevent and respond to security incidents.
Which led to strength across threat management data security and identity.
Across these businesses the annual recurring revenue or <unk> for hybrid platform solutions is $13 3 billion.
And for all of software hybrid cloud revenue is now more than $9 $3 billion over the last year up 16%.
In transaction processing revenue was up 3% demand for this mission critical software as filed increases in Z systems installed based capacity over the last couple of product cycles.
And strong renewal rates continued this quarter.
Both are evidence of the importance of this platform and our hybrid cloud environment.
Moving to software profit our pre tax margin was up two points this quarter contributing to a full year margin of nearly 25%.
Consulting revenue grew 9% climb.
Clients are leveraging ibm's hybrid cloud leadership and deep industry expertise to navigate the complexity of their digital transformation journeys.
Revenue growth was broad based across all business lines and geographies.
I'll remind you that this is on top of the 16% growth consulting delivered in the fourth quarter of 2021.
Strong demand for our offerings led to signings growth of 17%.
With this.
Quarter had the best quarterly book to Bill of the year and we sequentially improved our trailing 12 month book to Bill ratio to one that one.
Clients are partnering with IBM consulting as they decide what applications to modernize and how to migrate those applications across hybrid multi cloud environments.
Over the last 12 months consulting delivered $9 billion and hybrid cloud revenue.
Which is up 23%.
This quarter, our Red hat practice, it was again a meaningful contributor to this growth.
Revenue from strategic partnerships also grew at a strong double digit rate.
We continue to see momentum in this space.
In aggregate, our strategic partnership bookings were up over 50%.
With Azure and AWS more than doubling.
Turning to our lines of business business transformation revenue grew 7%.
Well their business transformation was once again, driven by data and client experience transformations.
Along with supply chain and finance optimization.
Our partnerships with key ISP partners, So I guess.
Salesforce and Adobe enable IBM consulting to transform critical workloads at scale.
And technology consulting, where we architect and implement clients cloud platforms and strategies revenue was up 10%.
Growth was led by cloud application development practices.
Red hat engagements, along with our strategic Hyperscale or partnerships contributed to the growth.
Application operations revenue grew 12%.
We help clients to optimize their operations and reduce costs by.
By taking over the management of applications and hybrid and multi cloud environment.
Our incumbency and understanding of clients applications are key differentiators.
Moving to consulting profit our pre tax margin was 11% for the quarter and nearly 9% for the year.
Our fourth quarter margin is up nearly two points year to year and over one point sequentially.
We are starting to see the benefit from pricing actions and productivity and our acquisitions have become more accretive.
Turning to infrastructure segment revenue grew 7% driven by hybrid infrastructure, which was up 11%.
Within hybrid infrastructure Z systems revenue grew 21% this quarter.
The new <unk> 16 capabilities clients are leveraging cyber resiliency to comply with business regulations and proactively avoid outages and their operation.
And the new on Chip AI accelerator for example has been helping mitigate risk and detect fraud and credit card application process.
Our distributed infrastructure revenue was up 5%.
This performance was fueled by strength in power following the extension of power tend to innovation throughout the product line.
Infrastructure support performance was flat.
Including the impact from client adoption of new hardware with the latest <unk> product cycle.
Moving to infrastructure profit pre tax margin was down less than a point in the quarter.
For the full year, our pre tax margin was nearly 15%.
Now, let me bring it back up to the IBM level to wrap up.
At our Investor briefing 15 months ago, we laid out our hybrid cloud and AI strategy and.
And our priorities of revenue growth and free cash flow generation.
Since then we've been focused on our portfolio our go to market model, our ecosystem and our capital allocation to execute that strategy and create value through focus.
We now just completed the first year as today's IBM.
Our 2022 revenue was up nearly 12% <unk>.
Including nearly four points of incremental kindred contribution.
That's above our model a mid single digit growth.
Over 70% of our revenue was in our growth factors of software and consulting and about half of our revenue is recurring.
With this high value mix and contribution from the incremental <unk> revenue, we expanded our full year operating pre tax margin by two five points.
And our free cash flow was $9 $3 billion up $2 $8 billion from the prior year.
We invested organically and inorganically.
And returned significant value to shareholders through dividends.
Now there were some external factors that we faced this past year that impacted our profit and cash we exited a profitable business in Russia.
We are dealing with a much stronger dollar.
And we are operating in a highly inflationary environment, which put pressure on our margins, especially in consulting.
Putting it all together we are pleased with the fundamentals of our business and the progress we have made in executing our strategy.
Our 2022 performance demonstrates that we now have a higher growth higher value company with higher return on invested capital and a strong and growing free cash flow.
For 2023, we again expect solid growth in our two most important measures of success revenue and free cash flow.
Arvind talked about the important role technology plays in this environment and how our solutions are closely aligned to the needs of our clients.
With this we expect constant currency revenue growth for the year to be in line with our mid single digit model.
As we entered this year I think it's prudent to expect the low end of the mid single digit model.
And for free cash flow, we would expect to generate about $10 $5 billion in 2023.
Which is up over $1 billion year to year.
Let me spend a minute on our expectations for constant currency revenue and pre tax profit performance by segment.
And software with continued momentum in our recurring revenue stream and both hybrid platform and solutions.
And transaction processing, we expect revenue growth in line with software is mid single digit model. This revenue growth generate operating leverage and we would expect software our pre tax margin to expand by about two points year to year.
Consulting is model is to deliver high single digit revenue, we're coming off a strong year with revenue growth of 15% as.
As we help clients with their digital transformations.
This momentum and strong book to Bill ratio support consulting revenue growth at the high end of its model despite the tough compare.
We expect to expand consulting pretax margin by at least a point as we continue to realize more of the price increases and improved utilization.
Infrastructure revenue is roughly flat over the mid term model horizon.
Our performance in any year, reflecting product cycle dynamics.
We're entering the year three quarters into the <unk> cycle.
And we'll also wrap on powered Ted.
As a result, we expect 2023 infrastructure revenue below its model and pre tax margin in the low teens.
For perspective infrastructure should impact Ibm's overall revenue growth by over a point.
With these segment dynamics, we would expect Ibm's operating pre tax margin to expand by about a half a point.
That's in line with our model.
And our tax rate should be in the mid to high teens range.
Let me comment on a few items within our expectation.
First as I said currency was a significant headwind in 2022.
Impacting revenue by $3 $5 billion.
With the movement of spot rates over the last 90 days currency translation would be fairly neutral to revenue in 2023 with.
With a headwind in the first half flipping to a tailwind in the second.
But I'll remind you that we had over $650 million of hedging gains in 2022, which will not repeat in 2023, resulting in an impact to our profit and cash on a year to year basis.
Second.
As you know we've taken a number of significant portfolio actions over the last couple of years, which has resulted in some stranded cost in our business.
We expect to address these remaining stranded costs early in the year and anticipate a charge of about $300 million in the first quarter.
We would start to see benefits in the second half and payback by the end of the year.
And then third we regularly review of the useful lives of our assets due.
Due to advances in technology, we are making an accounting change to extend the useful life of our server and networking equipment effective the first of January .
Based on our year end asset base, we expect this change to benefit 2023 pretax profit by over $200 million, primarily in our infrastructure segment.
Given this is a change to the depreciation there's no benefit to cash.
Looking at the first quarter, our constant currency revenue growth should be fairly consistent with the full year.
Reported growth will also include about a three point currency headwind at current spot rates.
With the operating leverage we would expect operating pre tax margin to expand 50 to 100 basis points in the first quarter and Thats before the charge I just mentioned for the remaining stranded costs.
Given the timing of currency and stranded cost dynamics, we'd expect about one third of our net income in the first half and about two thirds in the second half.
To sum it all up.
We have made a lot of progress this past year.
While there's always more work to do.
We're confident in the fundamentals of our business and how we're positioned as we enter the new year.
Patricia let's go to the Q&A.
Thank you Jim before we begin the Q&A I'd like to mention a couple of items.
First supplemental information for the quarter and the year is provided at the end of the presentation.
And second 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 will begin the question and answer session of the conference to ask a question. Please press star one and record your name clearly if you need to withdraw your question Press Star Q again to ask a question. Please press star one.
Our first question will come from Amit <unk> with Evercore. Your line is open.
Okay.
Yes.
Thanks, a lot for taking my question I guess my question is around the free cash flow numbers, and perhaps you could spend a little bit of time on.
You touched on kind of the 22 levers a fair bit and how you got there, but as you think about calendar 'twenty three free cash flow of $10 $5 billion of uplift of $1 2 billion.
What are the puts and takes of what are the bridges that gets you there.
And maybe related to that as I think about what you did in 'twenty, two and 'twenty three.
It does imply do you get to the $35 billion number over that over three years 24 would have to be 14 billion plus so perhaps you can level set that I do think when you provided the $35 billion number a fair bit that's changed so.
Maybe a bridge for 'twenty, three and just an update on how you think about that 35 billion number or treated as well. Thank you.
Thanks, Amit this is Jim I appreciate the question. So let's start there we saw solid free cash flow generation in 2022.
Up to $8 billion year over year now as you remember we entered 2022, we talked about a very strong free cash flow generation engine and we put in place a guidance for 2022, well in excess of our model is $750 million year to year.
First as we were very transparent we were going to get at least about a half of that out of the 10 drove related spend dynamics, that's the charges and capex and we were going to get a little bit more than half of that out of our base operations overall.
I think when you look at 2022, what happened we got impacted by two external factors number one the unfortunate and monetary crisis with the war in Russia and Ukraine.
And we exited that business the right decision.
<unk>.
Is unprecedented U S. Dollar appreciation I think last time I looked the rate the breadth the magnitude of the change is the most we've seen in multiple decades, we got hit with that when we were able to overcome some of that with the fundamental underpinnings of our business overall, it's still delivered almost $3 billion of free cash flow.
Year over year by the way, Russia and currency by themselves is over $600 million of profit in cash we had to absorb so now to your question about 2023, we guided as you heard in our prepared remarks at $10 5 billion, that's up $1 $2 billion year over year and again above.
$750 million.
Year to year.
<unk> of that though we're going to be very different in 'twenty three given the improving business fundamentals of our now sustainable revenue growth.
Our high value mix contribution.
We see then continued operating leverage so our cash <unk> is going to deliver a substantial amount of that free cash flow generation year over year, we're still going to get working capital efficiencies. So our realization will definitely be up over 100%, but that's really given the volume dynamics of what happened in the <unk>.
Fourth quarter would have very strong and accelerated growth profile as we went through fourth quarter. We finished extremely strong on our transactional business in the month of December so that now creates an opportunity for free cash flow generation in 'twenty, three and that's in our guidance and then theres. Some other puts and takes.
We will get modest structural.
Actions tailwind, but theyre going to be offset by a cash tax headwind for the year, so that kind of plays out two.
2022, and 2023 now.
How does that relate to our mid term model first of all we're one year into that mid term model and as I talked about the dynamics in dealing with the decision to exit our Russia business and the significant U S dollar appreciation.
Quantified it for you over $600 million impacting profit in cash, but as you all know quite well that's not a onetime impact.
That will continue over a multi period and definitely puts pressure on our mid term model.
The tune cumulatively about over $2 $5 billion. So we are entirely focused on how we execute this company on a sustainable revenue growth profile and generating that $10 $5 billion of free cash flow. So it enables us with the right ample financial flexibility.
Flexibility to continue to invest in our business and return value to our shareholders overall.
Thank you Amit Cielo, let's go to the next question.
Our next question comes from <unk> Mohan with Bank of America. Your line is open.
Hi, yes. Thank you.
Nice to see the revenue guide here I was wondering if you could share some thoughts around.
What's happening in software in particular you've had.
A really strong performance in transaction processing over the past year.
Uh huh.
How are you thinking about the trajectory of that I know historically, the kind of thought about this as a mid single digit or higher decliner and clearly we are tracking very differently here, if you could share some.
Thoughts around the trajectory of that in 2023 and beyond that'd be that'd be very helpful. Thank you.
Yeah. Thanks, Amit for the question. So I'll address your transaction processing question first and then all our software right after that.
So some of you have heard me talk about that transaction processing would be a mid single digit decliner in the past and that effectively is what you asked what's going to be different.
As we look at our business there and we look both at the underlying Mips growth as well as the criticality of that software as well as our ability to have some very modest pricing uplift.
Now look at that business as being a slight increase there as opposed to a modest decliner.
I think if you looking at that one.
Z.
Low single digit increases.
<unk> processing is what we think is appropriate for the short to medium term model looking forward.
Now that does help and overall software, but first let's look at software and decompose. It software as Jim mentioned in his prepared remarks is almost 80% recurring revenue.
We see that recurring revenue increasing consistent with our model of the mid single digits.
Based on both the consumption usage as well as what we have seen through 'twenty, two and people renewing that base of software business.
Then I will acknowledge to you that <unk> two was a great deal a year.
Three will be not as good as 22, but with the transactional piece of the business being less than 20% that is a much smaller impact on the overall growth rate as you put all that together, we see the mid single digits as being appropriate for the software business.
Excellent. Thank you want to say, let's go to the next question.
Our next question comes from Toni <unk> with Bernstein. Your line is open.
Yes.
Yes. Thank you I was wondering if you could just comment on <unk>.
Operating profit more broadly I think your target at the beginning of the year was two weeks was for operating profit to improved 400 basis points.
And it came in at 270, I think your target for the fourth quarter was 250 basis point improvement in operating margin. It came in at $1 70.
And so.
And that's manifesting itself into a free cash flow number that was lower than you had expected.
This year and potentially for next year relative to your $35 billion target.
So you you have a dual mandate arvin, one is to try and grow mid single digits and the others to deliver very strong cash flow, which is impacted by margins.
Margin was not as strong this year and I'm wondering if you can highlight what was different from your expectations.
And what were the challenges in forecasting that.
And how investors should think about that.
And free cash flow realization going forward.
Yes, Toni thanks so.
So you are completely accurate that these numbers are slightly below our expectations from the beginning of the year.
I will ask Jim to comment and give you a lot more color on it but let me first comment on your statement of we have a.
Double mandate of revenue growth and free cash flow growth.
So, but what I want to also be clear.
The revenue growth as which manifests itself in client satisfaction higher NPS from our clients better consumption of both software and consulting from our clients, which allows them to consume more and more over time is what we are focused on and it's in and we have to deliver the free.
Cash flow growth.
Jim mentioned in a response to the first question that we were not expecting.
The business and Russia does get shutdown that impacted a little bit.
We were not expecting the currency headwinds to be as severe as it turned out to be that certainly impacted.
Alex Nice and inflation.
Wage inflation showed up and impacted our margins in consulting a lot more than we were expecting.
Now and answer could've been to not hire people and to not give that but that would have resulted in a lower capacity at the end of this year, which would not have allowed us the confidence into the <unk>.
Into the growth both in consulting and software that we are now committing for 2023.
<unk> balanced those it becomes a business decision to say, we are going to keep going on increasing capacity, which results in healthier revenue and it will result in improving margins, but that flows through into 2023 as opposed to giving it all to us in 2022, So Tony Thats kind of how we think about balancing the investments.
As a business.
As a quarterly result, and I'd ask Jim to comment a bit more on some of the specifics of what you were asking yes, just just to put some numbers around this Tony you're exactly right. We entered the year, we talked about a business profile higher revenue growth company higher operating margin strong free cash flow yield.
And we had guided at mid single digit revenue growth and we guided that four points of operating margin improvement.
Two points of external that both Arvind and I have both talked about Russia and currency by the way that was about a half a point this currency remember as we've talked about many times throughout these calls not only the right breadth and velocity and change in magnitude that we haven't seen in about two.
Two to three decades, but it impacts our human capital based consulting business very differently than a product technology based business as we talk about human capital is all pretty much a natural hedge because your cost is basically matched with your revenue outside of global delivery, but in a product based business.
Our costs like the industry is predominantly U S dollar source and that's why you've seen pressure on the gross profit margin line and the pre tax profit margin line around our technology base of business now underlying that though I think youre seeing a fundamental improvement in our margins as we go forward.
About 50 basis points of currency, the remaining 100 basis points was consulting.
And we talked about that thats been a rate and pace discussion.
You dial back 15 18 months ago.
<unk> called a very accelerated demand environment of our clients shifting to digital transformation and journey to cloud and starting in the second half of 'twenty. One we made the bet to make investments around skill capability ecosystems, and we opened up the aperture to build extended.
Capabilities Inorganically.
And we do as we went through 2022 that we then we're operating in a highly inflationary environment. Then it became a rate and pace discussion on how quick can you get price margin and optimization and realize through your backlog.
And I think we've acknowledged that we were pretty slow throughout the year now.
Now with that said, we finished the year about nine points of margin in consulting.
We had nice improvement we exited fourth quarter at 11 point PCI model that was up almost 200 basis points year over year, our first half to second half we saw an acceleration of three points of margin from about a seven point operating pgi model to well over 10 points.
From an operating <unk> model and most importantly, the green shoots are starting to play out in the fourth quarter, our utilization of effective capacity one of the three levers we've talked about all year up three points in the fourth quarter, our price margins third consecutive quarter are up year to year and Youre seeing.
That play out in that operating profit performance and finally acquisitions now we're on a steady state and our acquisitions are back to accretion. So we see nice green shoots that lead to our guidance in 2023 at the high end of our high single digit model and consulting on revenue coming off of a very.
<unk>, 15% growth in 'twenty, two and guiding another one point plus in operating margins going forward.
Thanks for the question Tony Let's go to the next question.
Our next question will come from Shannon Cross with Credit Suisse. Your line is open.
Shannon, we're not able to hear you in conference. Please check the mute feature on your phone.
Hi can you hear me.
Yes, we can hear you now you May go ahead.
Interesting.
Yes, I think can you talk a bit about AI and how it it runs through your business. There's obviously so much discussion right now about open AI and Microsoft making investments in.
Yes, I'm trying to think about how we should think about IBM monetizing it capitalizing on it how you think about your competitive position relative to others. I don't know if there are examples you can give us where you're utilizing that but I'm just.
I'm wondering is as AI gets more and more of it becomes more and more of a discussion point apparently for 2023.
And you have such a long history with it how we should think about where you are now and where you are going to take it. Thank you.
Thanks, Shannon so first.
Let me acknowledge AI has become a big topic of conversation this.
This year I was in Davos last week and it probably came up at almost every single discussion around technology, what's happening with AI as well as what's happening with the open AI, if I think about it over the last decade I think there were three movements you can talk about and then I'll begin to translate those into a business impact.
One when IBM, one jeopardy with Watson I think it was a big moment in AI came onto everyone's roadmap.
And we're in deep mined from Google or alphabet started winning competitions around for example goal that became another big moment, along with the protein folding that they did and now with open AI and Chad GBT.
But if I step back just a moment.
All of this latest version is based on what is called Lodge language models as the underlying science universities do at Google does it IBM does it as does the open AI.
To just get to why it's so exciting.
For example for US it allows us to do 13 language models. When we are looking at understanding.
Understanding different natural languages.
And the same cost as originally one.
That is what is so exciting about these technologies because if you can get an order of magnitude improvement in costs and speed and the resource consumed both in terms of hardware and people that is incredibly exciting.
Now let me translate this into how do we monetize this but our monetization of AI is very much focused on that 16 trillion dollars of productivity that I've talked about that we're going to get over the decade.
The vast majority of that comes from enterprise automation and when I say enterprise I include government into it <unk>.
Some examples.
You can automate the drive thru and order taking.
So quick serve restaurants. That's an example of what can happen if we can get deflection rates of 40%, 50%, 60% at everyones call centers, that's a massive.
Operational efficiency for all of our clients.
He can help retirees get their pension through interacting with <unk>.
Watson Bollywood AI Chatbot that is an enterprise use case, where all of these technologies come into play by the way all my three examples of real clients, where we are resulting in anywhere from hundreds to thousands of people.
FNC for each of these clients so thats, how we get it.
I look inside IBM, all we do promotions how are we do people movement, how we begin to improve our quote to cash.
Through our customer service and people are complicated questions around triage of it systems going down are all very real examples where we are improving client service and saving money all at the same time.
Shannon. Thank you very much Sheila can we go to the next question.
Our next question comes from Erik Woodring with Morgan Stanley . Your line is open.
Hey, guys. Good afternoon. Thanks for taking the question I wanted to just touch on the consulting business you know.
Signings were very strong in the December quarter up 17% Youre quarterly book to Bill was an improvement from the September quarter can you, maybe just again just step back and elaborate on the environment. We're in what you saw in <unk> that potentially stood out to you.
Where strength in signings is coming from changes to contract duration, maybe just double clicking on the consulting business just just to help us understand what gives you confidence to be kind of at the high end of your mid of your mid term model for 2023.
Thanks, Eric for the question I'll take this.
When we when we entered the fourth quarter, we had a pretty solid pipeline and we talked about and reaffirmed mid teens growth for consulting for the year, which as you know is well above our model.
But again as I talked about on the previous question, we had made the investments and bringing in skill capability expanding ecosystem strategic partnerships and acquisitions, but we saw that pipeline entering the quarter.
We saw a very solid and pretty disciplined sales closure rate as we move through the year now how did the year end that positions us for 2023, and let me just put some stats really bring it home number one ecosystem velocity.
We saw continued to increase throughout the year of our strategic partnerships I think we said in the.
The prepared remarks strategic partnerships, one grew revenue 25% in 2022.
And was about 40%.
Our consulting base of business.
That is up about 50% year over year.
Have saw seen extensive acceleration and by the way in the fourth quarter, our signings growth, which delivered a one three book to bill or Hyperscale or partnerships with Azure and with AWS, our signings were two X and our.
Our <unk> portfolio.
With the likes of Sap's Salesforce Adobe, we were up over 50% and signings. So our book of business and the partnerships we have tremendous strength, that's fueling our backlog point number one point.
Point number two red hat.
We continue to see acceleration of consulting being the tip of the spear, that's really driving the scale and adoption of our hybrid cloud platform and Oh by the way is also dragging IBM technology and software.
Since inception, a little over three years, we signed seven $4 billion of business in Red hat tremendous.
Tremendous strength and that again fuels our backlog for 2023.
Then you look at full year.
We grew both large transformational deals and we grew small deals double digit both sides. So as pervasive across the board. So when we look at our backlog we look at all of our indicators of our business on the realization of that model we look on.
The acquisition portfolio and how it's scaling we feel pretty confident about the high end of our high single digit model in 2023, Oh by the way to Tony's question at operating margins being accretive.
Eric Thanks for the question, let's go to the next one please.
Our next question comes from Lisa Ellis with SBB Moffett Nathanson Your line is open.
Hi, good afternoon, Thanks for taking my question.
Maybe following on that I had a broader question Arvind on the overall demand environment, you're seeing I think with earnings coming in from various enterprise Tech players. So far we're seeing a pretty wide range of signals about how the demand environment is shaping up for 2023 can you just comment a bit on what you're seeing from your large clients say kind of relative to.
This past year. Thank you.
Yes, Thanks, Lisa for the question.
If I think about our overall client base.
First really pleased that it wasn't much of a difference by geography.
As I sort of go through it.
And India, Australia, the Middle East.
Western Europe .
The U K, North America, but really pretty strong and demand across I.
I think Lisa if I break it down into the two quarters around technology and consulting.
Do you see is.
Most of our clients do believe that even if there are some I'll call them minor are different headwinds in 2023.
They are going to emerge stronger as the water emerged stronger that means they're all deploying technology to help offset wage inflation cyber issues supply chain challenges and all the demographic shift, meaning there's just fewer skilled people to hire.
Consequently, we are seeing them double down and that is why we are focused on certain areas and certain partners both for consulting and in technology. So they all wanted to deploy automated ways to get from the front to the back.
<unk> Salesforce and Adobe play a very strong role in that they all want to leverage cloud technologies, because they can scale technology after better hydro client demand.
Partnerships with the Hyperscale is playing into that.
All want to leverage all of our technology.
Before to counteract the wage inflation and other inflationary aspects and what we do with Red hat plays into that so I kind of see.
Lays out at all of our clients play into that now you had mentioned a wide spectrum from the people Youre seeing recently I think the reason that we are remaining in this optimistic frame of mind, we have no consumer business I agree that our clients may have a consumer business that we don't have that direct.
And so I think consequently, we might be seeing a little bit different.
The subset of the economy, and those who might have a large direct exposure to a consumer business.
Thanks, Lisa let's go to the next question. Please.
Our next question comes from David Grossman with Stifel. Your line is open.
Thank you.
So you had a very good transactional momentum in the software business in the fourth quarter you provided some good high level commentary in your prepared remarks about.
The business in the broad based growth enable us like many of those changes that you've been talking about it and go to market strategy and sales changes.
That said Arvind can you just talk specifically identify any product specific changes in software.
Do you think maybe driving that momentum and that may suggest your competitive positioning.
<unk> any of those three non Brad had segments.
And then just one other thing just sorry about the two part question, but just for Jim I, just wanted to clarify whether that working capital headwind in the fourth quarter that you talked about versus.
2023.
Thank you.
Thanks, David Let me talk a little bit about the product capabilities and as you said outside right at Pall focus on automation data AI and cyber if I look at those let's take automation I'm really pleased with the progress we have made around an area I'll call AI ops, but if you think about we made a couple of smaller.
Acquisitions and such.
China and to a anomic, we built our own AI ops portfolio and we are seeing tremendous pickup from that as our clients wanted to take out labor complexity, but also want to optimize their overall it infrastructure hardware and software. They also want to have uptime that is now the talk about not just two lines at <unk>.
Three 9%, but up to five nines and they also want to worry about how they make sure. Some go to always on and so I think our AI ops portfolio, there really advantages us and I believe we are in a unique position because we help our clients and our environment across multiple public cloud and on premise.
And with their private clouds in that space.
If I think about the data and AI are focused on data fabric and allowing our clients to leverage that data wherever it is not always moving at but allowing them to catalog leveraging AI deep inside our products is another example of where we have unique capability and third.
If I look at Ciber.
We focus a lot on threat management.
And if we think about how we can leverage the inputs from all kinds of sources.
These days when people really wanted about all of the threats coming whether from nation States all from just bad actors and it allows them to leverage the portfolio better. Consequently, we remained pretty focused on these areas you should expect both organic and inorganic investment and David I can't help but say.
We are giving our clients the ability to deploy these capabilities on multiple public clouds as well as on premise and I believe that does advantage them because it gives them a lot more flexibility and freedom that they might have from some other vendors.
Got it.
I would just build on that.
I mean.
Software book of business today, it's an integral part of our hybrid cloud platform thesis is the foundation, we eclipsed $25 billion for the first time ever here.
In 2020 to over 40% of Ibm's revenue and two thirds of our EBITDA, but when you look at it we are a hybrid cloud AI platform centric company overall and software is right at that core so.
Why that recurring revenue stream and the improvements we've been seeing throughout 2022, and as Arvind answered earlier getting that back to week growing contribution not only helps the competitiveness and market share of our topline, but I think all of you understand them.
Marginal dollar of that book of business.
Is in the 90 plus percent range as we move forward. So David I think you also asked a question about clarification free cash flow growth $10 5 billion about up $1 billion to year to year above our model of 750 that will be driven based on the fundamental.
Improvements of our underlying revenue growth and operating leverage and cash PCI, but there were also be yes, working capital efficiency.
<unk> to our cash generation next year really just the volume dynamics are what played out in the fourth quarter, we will get that back.
Thanks, David we are past the top of the hour, but let's take one more question.
Our last question will come from Kyle Mcnealy with Jefferies. Your line is open.
Thanks, very much for squeezing it in.
This one is macro related as well, but it was pretty quick.
It seems like some of the slowing macro is implied in your 2023 guidance, but I don't think you talked specifically about whether youre seeing anything specifically slowing it sounded generally positive for you guys, even though theres a bit of a slowdown in providing the guidance.
Microsoft and <unk> talked about a divergence between new business new application seeing some growth.
Renewal business capacity expansions cross selling things like that are you seeing a similar thing in terms of new applications slowing a bit and some of the kind of recurring and cross selling capacity expansion is holding up.
How much of either of those is driving your lower end of mid single digit growth guidance for 2023.
And kind of break it down if you can thanks.
Okay look I think that first and I'll address your point, a new application versus existing pretty directly.
The point about the lower end of the mid single digit is largely from the fact that infrastructure segment will be a headwind going into 2023, but it was a tailwind in 'twenty two.
I wouldn't read anything more than that and do our low end as opposed to.
The middle of the range now.
For us I don't really see that I see that our clients do want to do new development.
From our perspective, if somebody is doing an expanded sales force deployment I call that a new application. If somebody is doing a new application on azure, although they are moving they never really directly move always talk about re factoring putting a new function integrating with other application.
They might have in their shop or they buy a SaaS properties, we consider all of that new development and so for US. Our consulting teams are largely doing that new development for our clients and in that process. They tend to use open shift from red hat to use right athletics that tend to use our.
AI automation or AI automation dents around all of those things to make them much more resilient much more robust much more secure and those are the capabilities. We bring so we are not really seeing that divergence I would tell you straightforwardly, but.
There is likely a focus that in that new application is it helping automate things more is it helping make things are call. It straight through as opposed to with a lot of manual intervention that is probably a bigger focus maybe if you don't see it because we got all that play in late 'twenty, one because we kind of.
All those things coming and becoming more important and we decided to invest in them both in technology and in consulting.
But this year, but that being the last question. Let me now make a couple of very quick comments to wrap up the call.
<unk> was an important year for us.
As Jim said it was the first full year of the new IBM.
The results, we delivered reinforce our confidence in our strategy and our model.
While there is always more to do we are pleased with our position as we enter 2023 and I look forward to continuing this dialogue as you move through the year.
Thank you Arvind Sheila let me turn it back to you to close out the call.
Thank you. Thank you for participating on today's call. The conference has now ended you may disconnect at this time.