Q3 2023 International Business Machines Corp Earnings Call
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Welcome and thank you for standing by at this time, all participants are in a listen.
Okay.
Today's conference is being recorded if you have any objections you may disconnect at this time no.
I will turn the meeting over to MS. Patricia Murphy Ibm's, Vice President Investor Relations Ma'am you may begin.
Thank you I'd like to welcome you to Ibm's third quarter 2023 earnings presentation as the operator, just mentioned I'm, Patricia Murphy and I am here today with Arvind Krishna Ibm's, Chairman and Chief Executive Officer, and Jim Kavanaugh, Ibm's, Senior Vice President and Chief Financial Officer.
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 and signings growth or constant currency. We've provided reconciliation charts for these and other non-GAAP financial 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 under the private Securities Litigation Reform Act of 1095. These statements involve factors that could cause our actual results to differ materially.
Additional information about these factors is included in the company's SEC filings.
So with that I'll turn the call over to Arvind.
Thank you for joining us.
Before we start let me address the outbreak award in Israel.
We condemn all acts of terrorism.
We had also saddened over the loss of innocent lives and joined the global community and the hope that recent safety can be restored.
Let me now turn to our business performance.
In the third quarter, we had solid growth across revenue profit and free cash flow, while delivering innovations and positioning our business to capture future opportunities.
On the broader trends, we are seeing in the market.
Technology continues to serve as a fundamental source of competitive advantage businesses and governments around the world.
Looking for opportunities to address demographic shifts make the supply chain is more resilient and improve sustainability.
More recently geopolitical events and the reality of higher for longer add to the growing uncertainty.
<unk> technology helps organizations better deal with the many challenges they face.
We see both tailwind and headwind to overall spending.
Nearly every business, we talk to wants to leverage technology to offer better services.
More quickly and fuel growth without increasing their footprint.
This has been driving demand for technologies that boost productivity and competitiveness.
Hybrid cloud and artificial intelligence.
Overall, we believe the tailwind outweigh the headwinds and technology spend will continue to outpace GDP.
In this past quarter, we saw good revenue growth in software and consulting.
Infrastructure more than a year into the product cycle, we continue to see good adoption of <unk> 16.
Our overall growth reflects our ability to help clients to leverage data and AI for competitive advantage.
To make it environments and seamlessly integrate hybrid cloud solutions.
We also continued to position our business for the future launching new products and offerings.
Operator: Welcome in. Thank you for standing by. At this time, all participants are in a listen on today's conference as being recorded. If you have any objections, you may disconnect at this time.
And expanding key partnerships investing in talent and skills and focusing our portfolio.
We have been taking concrete actions to deliver productivity in our own business.
Patricia Murphy: No, I will turn the meeting over to Ms. Patricia Murphy, IBM's Vice President Investor Relations.
All of this results in an IBM that is aligned to our clients' most pressing needs and has a stronger financial profile.
Patricia Murphy: Miami may begin. Thank you.
Patricia Murphy: I'd like to welcome you to IBM's third quarter, 2023 earnings presentation.
Third quarter results are another proof point.
Patricia Murphy: As the operator just mentioned, I'm Patricia Murphy, and I'm here today with Arvind Kavanaugh. I'm Patricia, IBM's Chairman and Chief Executive Officer, and Jim Kavanaugh, IBM Senior Vice President and Chief Financial Officer. We'll post today's prepared remarks on the IBM Investor website within a couple of hours, and a replay will be available by this time tomorrow.
Typically at this point I talk about hybrid cloud and the progress we have made.
Hybrid cloud remains vitally important to our clients and to our business.
Given the inflection in AI and more specifically generative AI.
Patricia Murphy: To provide additional information to our investors, our presentation includes certain non-gotten measures. For example, all of our references to revenue and signings growth are constant currency. We've provided reconciliation charts for these, and other non-gotten financial measures at the end of the presentation, which is posted to our investor website.
I want to spend more time today on AI and how we are approaching this opportunity.
We believe that generative AI will be multimodal.
Clients using a combination of Ibm's models.
Other companies models.
Their own proprietary models and open source models.
Patricia Murphy: Finally, some comments made in this presentation may be considered forward-looking under the Private Security's Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filing.
This hybrid approach to AI is similar to the hybrid approach to cloud.
Let me give you an overview of the capabilities we have been building.
Our generative AI software stack talked with Red hat open shift, which serves as a foundation that allows clients to operate in a hybrid environment.
Patricia Murphy: So with that, I'll turn the call over to Arvind. Thank you for joining us.
Data services helped make the data ready for AI.
Arvind Krishna: Before we start, let me address the outbreak of war in Israel. We condemn all acts of terrorism. We are also saddened over the loss of innocent lives and join the global community in the hope that peace and safety can be restored.
Watson X to the core platform that enables clients to train June validate and deploy AI models.
We are providing models that address specific domains cord.
God language and cyber security among others.
Arvind Krishna: Let me now turn to our business performance. We see both tailwinds and headwinds to overall spending. Nearly every business we talk to wants to leverage technology to offer better services, scale more quickly, and fuel growth without increasing their footprint. This has been driving demand for technologies that boost productivity and competitiveness like hybrid cloud and artificial intelligence. Overall, we believe the tailwinds outweigh the headwinds and technology spend will continue to outpace GDP.
Our AI assistant include the Watson Xcode assistant to augment developers Watson assistant to augment customer service agents.
And what's the next August rate to augment employees.
This quarter, we introduced new AI capabilities for our clients and partners.
We unveiled granite.
Multibillion Parramatta Foundation model on what's the next dot AI, which excels at both language in code.
We also introduced the Watson Xcode assistant.
This includes the Watson xcode assistant for Z to help clients accelerate the modernization of mainframe code and apps.
It's fueled by a 20 billion part of it our model and Gan as.
As an example swiftly translate cobalt of Java.
There are hundreds of billions of lines of code written in COBOL.
The opportunity is significant.
Looking forward, we plan to launch what's the next data governance before the end of the year.
That provides governance tools businesses need to mitigate risks and ensure compliance through the lifecycle.
This is a key consideration for clients as the golf beyond early proof of concept into real deployments.
To bring our AI capabilities to life, we have more than 20000 data and AI consultants, including a center of excellence for generative AI.
Arvind Krishna: In this past quarter, we saw good revenue growth in software and consulting in infrastructure. Sir, more than a year into the product cycle, we continue to see good adoption of the 2016. Our overall growth reflects our ability to help clients to leverage data and AI for comparative advantage, automate IT environments, and seamlessly integrate hybrid cloud solutions. We also continue to position our business for the future, launching new products and offerings, forging and expanding key partnerships, investing in talent and skills, and focusing our portfolio.
Our team's help clients navigate the landscape.
Crafting our strategy understanding how AI can be used and deploying AI responsibly.
These consultants also provide valuable real time feedback to our product teams.
As in hybrid cloud our ecosystem across GSI Isps in Hyperscale is plays a critical role in bringing generative AI to our clients.
The work we are doing clear patterns are emerging in terms of the AI enterprise use cases.
Arvind Krishna: We have been taking concrete actions to deliver productivity in our own business. All of this results at an IBM that is aligned to our clients most pressing needs and has a stronger financial profile. Our third core results are another proof point.
So an extensive feedback and trials to date three have risen to the top.
God modernization.
Customer service and digital labor, all have broad relevance and deliver tangible business benefits.
Also seen this internally as we apply our AI capabilities to areas such as client support.
Arvind Krishna: Typically, at this point, I talk about hybrid cloud and the progress we have made. Hybrid cloud remains vitally important to our clients and to our business.
<unk> it.
Optimization and source to pay.
To automate a significant portion of tasks and improve the productivity of our people.
Arvind Krishna: Given the inflection in AI and more specifically generative AI, I want to spend more time today on AI and how we are approaching this opportunity. We believe that generative AI will be multi-mortem with clients using a combination of IBM's models, other company's models, their own proprietary models, and open source models. This hybrid approach to AI is similar to the hybrid approach to cloud.
Our book of business in the third quarter, specifically related to generative AI was in the low hundreds of millions of dollars.
Interest is larger.
Thousands of hands on interactions with our clients.
These are across our largest clients and smaller clients, which lays the groundwork for future what the next opportunities.
Let me close the discussion on AI by talking about a couple of client examples.
Arvind Krishna: Let me give you an overview of the capabilities we have in building. Our generative AI software stack talks with Red Hat OpenShift, which serves as a foundation that allows clients to operate in a hybrid environment. Data services help make the data ready for AI. What's an X to the core platform that enables clients to train, tune, validate, and deploy AI models? We are providing models that address specific domains such as code, language, and cyber security among others. Our AI assistants include the what the next code assistant to augment developers, what the next assistant to augment customer service agents, and what the next orchestrate to augment employees.
John on broad Street is leveraging our consulting and software capabilities.
Fueled by what's the next to help their clients create proprietary generative AI solutions.
IBM and <unk> also just announced a new solution powered by what's the next August rates to enhance <unk> people advisory services.
We continue to bring innovations to the market in areas other than AI.
This includes new innovations to our industrial leading hybrid cloud platform Red hat open shift, which was recognized recently by both Gartner and Forrester as a leader in container management.
We completed the acquisition of <unk>, which complements our automation capabilities.
In quantum we are making good progress in building practical quantum computers that can solve hard problems in areas, such as risk finance and materials.
Arvind Krishna: This quarter, we introduce new AI capabilities for our clients and partners. We unveil granite, a multi-billion parameter foundation model on whatthenex.ai, which excels in both language and code. We also introduce the whatthenex code assistant. This includes the whatthenex code assistant for Z to help clients accelerate the modernization of mainframe code and apps. It's fueled by a 20 billion parameter model and can, as an example, swiftly translate cobalt to Java. There are hundreds of billions of lines of code written in cobalt, so the opportunity is significant.
Clothing.
We accomplished a lot this quarter.
We launched our generative AI platform and have good momentum in helping our clients use this important technology.
We've continued to take portfolio actions to increase our focus on hybrid cloud and AI.
And we are applying AI within our own business, improving execution speed and unlocking real value.
All of this reinforces my confidence in our future.
We're executing a strategy that closely resonates with our clients needs and this is propelling our business forward.
Arvind Krishna: Looking forward, we plan to launch whatthenex.governance before the end of the year that provides governance tools, businesses need to mitigate risks and ensure compliance through the AI life cycle. Michael, this is a key consideration for clients as they go beyond early proof of concepts into real deployments. To bring our AI capabilities to life, we have more than 20,000 data and AI consultants, including a center of excellence for generative AI. Our teams help clients navigate the AI landscape, for crafting a strategy, understanding how AI can be used, and deploying AI responsibly. These consultants also provide valuable real-time feedback to our product teams. As in hybrid cloud, our ecosystem across GSI, ISVs, and hyperscalers plays a critical role in bringing generative AI to our clients.
Three quarters into the year, we are well positioned to deliver on 2023 expectations for both revenue growth and free cash flow.
Now to offer you a more detailed view of our results and the rest of 2023 I'll hand, it over to Jim.
Thanks, Arvind I'll get right into the financial highlights of the quarter.
We delivered $14 $8 billion of revenue.
$2 $3 billion of operating pre tax income and $2 20 of operating earnings per share.
Through the first three quarters of the year, we generated $5 $1 billion of free cash flow.
Reported revenue growth was four 6% this.
This includes just over a point of growth from currency translation, which is significantly less than the currency rates suggested in July and.
In fact currency movements over the last 90 days impacted our third quarter revenue by about $250 million.
Arvind Krishna: In the work we are doing, clear patterns are emerging in terms of the AI enterprise use cases. Based on extensive feedback and trials to date, three have risen to the top. Code modernization, customer service, and digital labor all have broad relevance and deliver tangible business benefits. We have also seen this internally as we used to pay to automate a significant portion of tasks and improve the productivity of our people. Our book of business in the third quarter specifically related to generative AI was in the low hundreds of millions of dollars. The interest is larger with thousands of hands-on interactions with our clients. These are across our largest clients and smaller clients, which lays the groundwork for future what the next opportunities.
Constant currency, our revenue was up three 5%.
As is typical I'll focus the discussion on constant currency.
Arvind talked about clients' priorities in today's environment.
Which are driving solid growth in our software and consulting offerings I'll remind you software and consulting our two growth factors and together make up about three quarters of our revenue base.
Software revenue was up 6% as clients leverage their data for insights and automate their it in.
In a hybrid environment.
We had good growth in both hybrid platform solutions and transaction processing revenue.
Our consulting business had another solid quarter with 5% revenue growth strong signings performance.
And a book to bill ratio greater than 1.15 over the last year.
We are capitalizing on our continued momentum in the market as we help clients get value from hybrid cloud and AI and leverage our strategic partnerships.
Arvind Krishna: Let me close the discussion on AI by talking about a couple of client examples. Done on Bradstreet is leveraging our consulting and software capabilities fueled by what the next to help their clients create proprietary generative AI solutions. IBM and EY also just announced a new solution powered by what the next orchestrate to enhance EY's people advisory services.
Our infrastructure revenue was down 3% with growth in Z systems, more and more we are seeing clients embrace ibm's and their hybrid cloud environments, especially in regulated industries.
This growth was offset by declines in distributed infrastructure and infrastructure support.
Arvind Krishna: We continue to bring innovations to the market in areas other than AI. This includes new innovations to our industry-leading hybrid cloud platform, Red Hat OpenShift, which was recognized recently by both Godter and Forester as the leader in container management. We completed the acquisition of AppTO which complements our IT automation capabilities.
Ibm's revenue growth together with the good portfolio mix and yield from our productivity initiatives generated strong margin profit and free cash flow performance.
Operating gross margin expanded 160 basis points and operating pre tax margin expanded 170 basis points.
Arvind Krishna: In quantum, we are making good progress in building practical quantum computers that can solve hard problems in areas such as risk, finance and materials.
Within that PCI margin, we absorbed a year to year currency impact of over 150 basis points.
Despite that headwind our margin expansion was broad based with improvements in every business segment.
Arvind Krishna: In closing, we accomplished a lot this quarter. We launched our generative AI platform and have good momentum in helping our clients use this important technology. We continue to take portfolio actions to increase our focus on hybrid cloud and AI and we are applying AI within our own business, improving execution speed and unlocking real value. All of this reinforces my confidence in our We are executing a strategy that closely resonates with our client's needs and this is propelling our business forward.
Driving efficiency and productivity has always been part of our operating and financial models.
These ongoing productivity initiatives enable reinvestment in the business increase financial flexibility and contribute to margin expansion.
Our activities range from simplifying our application environment to digitally transforming our business processes by applying AI at scale.
We are ahead of pace to achieve our target of $2 billion in annual run rate savings by the end of 2024, while there is still more to do I am pleased with our progress.
Arvind Krishna: Three quarters into the year, we are well positioned to deliver on 2023 expectations for both revenue growth and free cash flow.
Jim Kavanaugh: Now to offer you a more detailed view of our results and the rest of 2023, I'll hand it over to Jim. Thanks Arvind, I'll get right into the financial highlights of the quarter. We delivered $14.8 billion of revenue, $2.3 billion of operating pre-tax income, and $2.20 of operating earnings per share. Through the first three quarters of the year, we generated $5.1 billion of free cash flow. Reported revenue growth was 4.6%. This includes just over a point of growth from currency translation, which is significantly less than the currency rates suggested in July.
The combination of our revenue and margin performance yielded strong profit growth operating.
Pretax profit was up 17% to $2 3 billion.
We generated $1 $7 billion of free cash flow in the quarter and over $5 billion year to date, which is up $1 billion versus last year.
Free cash flow growth through the first three quarters was primarily driven by cash source from our operating profit performance.
We also had working capital efficiencies driven by solid collections.
These growth drivers were partially offset by higher performance based compensation payments earlier in the year.
Jim Kavanaugh: In fact, currency movements over the last 90 days impacted our third quarter revenue by about $250 million. At constant currency, our revenue was up 3.5%. As is typical, I'll focus the discussion on constant currency. Arvind talked about clients' priorities in today's environment, which are driving solid growth in our software and consulting offerings. I'll remind you, software and consulting are our two growth factors, and together make up about three quarters of our revenue base.
In terms of cash uses year to date, we spent about $5 billion in acquisitions and returned $4 5 billion to shareholders through dividends.
Our resulting cash balance at the end of September was $11 billion, that's up over $2 billion from year end, but with the acquisition of <unk> in the third quarter cash is down over $5 billion from June.
Our debt balance is now $55 billion also down from June.
Putting this all together.
Jim Kavanaugh: Software revenue was up 6%, as clients leveraged their data for insights and automated their IT in a hybrid environment. We had good growth in both hybrid platform and solutions and transaction processing revenue. Our consulting business had another solid quarter with 5% revenue growth, strong signings performance, and a book-to-build ratio greater than 1.15 over the last year. We are capitalizing on our continued momentum in the market, as we help clients get value from hybrid cloud and AI and leverage our strategic partnerships.
Our business fundamentals are solid.
Sustainable revenue growth margin expansion solid cash generation and a strong balance sheet with financial flexibility to support our business into the future.
Turning to the segments software revenue grew 6% with contribution from hybrid platform and solutions and transaction processing.
This performance reflects growth in both our transactional revenue and our recurring revenue base, which is about 80% of our annual software revenue.
In hybrid platform and solutions revenue was up 7% with growth across Red hat automation and data in AI as we execute our platform based approach the hybrid cloud and AI.
Jim Kavanaugh: Our infrastructure revenue was down 3% with growth in these systems. More and more, we are seeing clients embrace IBM Z in their hybrid cloud environments, especially in regulated industries. This growth was offset by declines in distributed infrastructure and infrastructure support. IBM's revenue growth, together with the good portfolio mix, and yield from our productivity initiatives, generated strong margin, profit, and free cash flow performance. Operating gross margin expanded 160 basis points, and operating pre-tax margin expanded 170 basis points. Within that PTI margin, we absorbed a year-to-year currency impact of over 150 basis points. Despite that headwind, our margin expansion was broad-based, with improvements in every business sector.
Red hat revenue was up 8%, we continue to deliver good growth and open shift and ansible, both gaining share again this quarter.
Clients are committing to a hybrid cloud approach with annual bookings up 14% in the quarter.
This includes double digit growth across row open shift and ansible, partially offset by headwinds in consumption based services.
ITM business automation, our top client priorities and we've been investing to capture the opportunity.
This quarter, our automation revenue grew 13% with pervasive growth across all business areas.
We had strength in AI ops and management driven by good performance and in scanner turbine AMIC and now App.
Jim Kavanaugh: Benjamin. Driving efficiency and productivity has always been part of our operating and financial models. These ongoing productivity initiatives enable reinvestment in the business, increase financial flexibility, and contribute to margin expansion. Our activities range from simplifying our application environment to digitally transforming our business processes by applying AI at scale. We are ahead of the pace to achieve our target of $2 billion in annual run rate savings by the end of 2024. While there is still more to do, I am pleased with our progress.
As clients look to optimize business outcomes and boost productivity.
Data and AI revenue was up 6%.
Growth areas include data fabric and customer care as enterprise clients are both preparing for and adopting generative AI solutions leveraging Watson X.
We also grew in asset and supply chain management as we help enterprises run sustainable operations.
Security revenue declined 3%, we delivered growth in security software driven by data security and identity and access management.
Jim Kavanaugh: The combination of our revenue and margin performance yielded strong profit growth. Operating pre-text profit was up 17% to $2.3 billion. We generated $1.7 billion of free cash flow in the quarter. And over $5 billion a year to date, which is up $1 billion versus last year. Free cash flow of growth through the first three quarters was primarily driven by cash sourced from our operating profit performance. We also had working capital efficiencies driven by solid collections.
This was more than offset by declines in managed security services.
Looking across these businesses our hybrid platform of solutions <unk> has grown to $14 billion up 7% since last year.
And transaction processing revenue was up 5% throughout this year, we've been talking about how the success of the last couple of Z systems cycles is driving demand for this mission critical software.
This together with price increases contributed to year to date growth in both recurring and transactional software revenue and transaction processing.
Jim Kavanaugh: These growth drivers were partially offset by higher performance based compensation payments earlier in the year. In terms of cash uses, year to date we spent about $5 billion in acquisitions and returned $4.5 billion to shareholders through dividends. Our resulting cash balance at the end of September was $11 billion. That's up over $2 billion from year-end. But with the acquisition of Atheo in the third quarter, cash is down over $5 billion from June. Our debt balance is now $55 billion also down from June.
Moving to profit for the software segment, we expanded gross and pre tax margins. Our pre tax margin was up 120 basis points, even while absorbing over two points of impact from currency.
We continue to deliver operating leverage driven by our revenue scale and mix this quarter.
Our consulting revenue was up 5% with growth across all three lines of business and geographies with.
With another quarter of strong signings as I said, our trailing 12 month book to Bill ratio is now over 115 clients.
Jim Kavanaugh: Putting this all together, our business fundamentals are solid, with sustainable revenue growth, margin expansion, solid cash generation, and a strong balance sheet with financial flexibility to support our business into the future. Turning to the segments, software revenue grew 6% with contribution from hybrid platform and solutions and transaction processing. This performance reflects growth in both our transactional revenue and our recurring revenue base, which is about 80% of our annual software revenue. In hybrid platform and solutions, revenue was up 7% with growth across Red Hat, Automation, and Data NAI, as we execute our platform based approach, the Hybrid Cloud NAI.
Continue to prioritize transformation projects that enable cost savings and productivity.
These results are a proof point that we are well positioned to meet these needs in today's complex environment.
Ibm's focus hybrid cloud and AI strategy has become even more of a differentiator as clients interest in generative AI continues to ramp.
We are helping clients understand how AI can be used to automate tasks make better decisions with speed and improve customer experiences.
We made a series of AI announcements over the last few months demonstrated continued advancement of our strategic partnerships.
Jim Kavanaugh: Red Hat revenue was up 8%. We continue to deliver good growth in OpenShift and Ansible, both gaining share again this quarter. Clients are committing to our Hybrid Cloud approach with annual bookings up 14% in the quarter. This includes double-digit growth across Red Hat, OpenShift, and Ansible. I.T, and Business Automation are top client priorities, and we've been investing to capture their opportunity. This quarter, our automation revenue grew 13%, with pervasive growth across all business areas.
By providing clients with the opportunity to accelerate their transformation and deploy generally AI responsibly, whether that be leveraging AI capabilities of IBM, our partners or a combination.
Today, our strategic partnerships account for about 40% of consulting revenue and have continued to grow double digits across revenue and signings.
In aggregate, our Hyperscale or partnership revenue was up over 40% and signings essentially doubled year to year.
Additionally, our red hat practice, which helps clients optimize how they build deploy and manage applications for a hybrid cloud environment has continued to grow at a double digit rate.
Jim Kavanaugh: We had strength in AI ops and management, driven by good performance in Instana, Terminomic, and now APTO as clients looked to optimize business outcomes and boost productivity. Data in AI revenue was up 6%. Growth areas include data fabric and customer care, as enterprise clients are both preparing for and adopting generative AI solutions, leveraging Watson X. We also grew an asset and supply chain management, as we help enterprises run sustainable operations. Security revenue declined 3%.
With over $1 billion of signings in the quarter.
All of what I, just mentioned for market demand to how we're positioned and partnering to our investments to drive growth is reflected in our overall consulting revenue performance.
You can see that play out across our three lines of business and.
In business transformation revenue grew 5% again led by data and technology transformations, including AI and analytics focused projects.
Jim Kavanaugh: We delivered growth and security software, driven by data security, and identity and access management. This was more than offset by declines in managed security services. Looking across these businesses, our hybrid platform and solutions ARR has grown to $14 billion, up 7% since last year. In transaction processing, revenue was up 5%. Throughout this year, we've been talking about how the success of the last couple of Z system cycles is driving demand for this mission critical software.
Finance and supply chain transformations also contributed to growth.
And technology consulting revenue was up 1%.
And cloud based application development and modernization work was partially offset by declines in on Prem application focused projects.
And application operations revenue grew 7% driven by both cloud application management and platform Engineering services.
And platform engineering, we help clients design and application environment that run securely and smoothly at scale.
Jim Kavanaugh: This, together with price increases, contributed to year-to-date growth in both recurring and transactional software revenue in transaction processing. Moving to profit for the software segment, we expanded growths and pre-text margins. Our pre-text margin was up 120 basis points, even while absorbing over two points of impact from currency. We continue to deliver operating leverage driven by our revenue scale and mixed this quarter. Our consulting revenue was up 5% with growth across all three lines of business and geographies.
Moving to consulting profit, we expanded gross margin of 150 basis points.
Pre tax margin expanded 40 basis points to just over 10%.
Our year to year margin performance reflects productivity actions, we've taken mitigated by increased labor costs and about a point of pre tax margin impact from currency.
Moving to the infrastructure segment revenue was down 3%.
Hybrid infrastructure revenue was flat while infrastructure support declined 7%.
Within hybrid infrastructure Z systems grew 9% and a seasonally smaller revenue quarter.
Jim Kavanaugh: With another quarter of strong signings, as I said, our trailing 12-month book to bill ratio is now over 1.15. Clients continue to prioritize transformation projects that enable cost savings and productivity. These results are a proof point that we are in no position to meet these needs in today's complex environment. IBM's focus hybrid cloud and AI strategy has become even more of a differentiator as clients' interest in generative AI continues to ramp.
Z 16 revenue remains well ahead of prior cycles after six quarters of availability.
The program strength reflects both growing enterprise workload requirements and the economic value at scale of the platform in.
In traditional processing analytics consolidation.
In fact installed Mips capacity for Linux on Z has grown more than fourfold over the last decade.
<unk> continue to value the security resiliency and hybrid cloud capabilities of the Z systems platform.
Jim Kavanaugh: We are helping clients understand how AI can be used to automate tasks, make better decisions with speed, and improve customer experiences. We made a series of AI announcements over the last few months, demonstrated continued advancement of our strategic partnerships. We are providing clients with the opportunity to accelerate their transformation and deploy generative AI responsibly. Whether that be leveraging AI capabilities of IBM, our partners, or a combination. Today, our Strategic Partnerships account for about 40% of consulting revenue and have continued to grow double digits across revenue and signings.
Distributed infrastructure revenue was down 6% as compared to a strong growth and last year of 21% as we introduced innovation across storage and power 10.
This quarter, we had growth in power offset by declines in storage.
In the infrastructure segment, we had strong gross and pre tax margin performance pre.
Pre tax margin expanded 350 basis points, reflecting benefits from our portfolio mix with our Z systems performance and productivity.
While absorbing over a point of impact from currency.
Jim Kavanaugh: In aggregate, our hyper-scaler partnership revenue was up over 40% and signings essentially doubled year-to-year. Additionally, our Red Hat practice, which helps clients optimize how they build, deploy, and manage applications for a hybrid cloud environment, has continued to grow at a double digit rate, with over $1 billion of signings in the quarter. All of what I just mentioned, from market demand, the Howard position and partnering to our investments to drive growth, is reflected in our overall consulting revenue performance.
Now, let me bring it back up to the IBM level to talk about our expectations before we go to Q&A.
Just about two years ago, we introduce today's IBM.
A more focused business with a platform based approach to hybrid cloud and AI.
Since then we've continued to invest organically and inorganically.
Bring new products and innovation to market.
Expand our ecosystem and our talent base and drive productivity across our business.
The result is a business that addresses today's client needs with.
With a stronger financial profile.
Jim Kavanaugh: You can see that play out across our three lines of business. In business transformation, revenue grew 5%, again led by data and technology transformations, including AI and analytics focused projects. Finance and supply change transformations also contributed to growth. In technology consulting, revenue was up 1%, growth in cloud-based application development and modernization work was partially offset by declines in on-prem application-focused projects. In application operations, revenue grew 7%, driven by both cloud application management and platform engineering services.
Our third quarter performance reinforces this progress with three 5% revenue growth gross and pre tax margin expansion and strong free cash flow generation.
Now with three quarters of the year behind US we are holding our full year view of our two primary financial metrics revenue growth and free cash flow.
We continue to expect constant currency revenue growth of 3% to 5% and free cash flow of about $10 $5 billion, that's up $1 $2 billion over last year.
<unk> had solid revenue performance, all year, and our growth factors of software and consulting.
We still expect software revenue growth at the high end of its mid single digit model.
Jim Kavanaugh: In platform engineering, we helped clients design an application environment that runs securely and smoothly at scale. Moving to consulting profit, we expanded gross margin 150 basis points, pre-text margin expanded 40 basis points to just over 10%. Our year to year margin performance reflects productivity actions we've taken, mitigated by increased labor costs and about a point of pre-text margin impact from currency.
In consulting revenue in the 6% to 8% range.
Infrastructure revenue of course reflects product cycle dynamics in total with one quarter to go it's prudent to assume the low end of ibm's, 3% to 5% range.
We are making great progress in our productivity initiatives.
The work we are doing to digitally transform our business not only makes us more nimble by simplifying and streamlining our processes and operations, but it also frees up spend for reinvestment provides financial flexibility and delivers operating leverage.
Jim Kavanaugh: Moving to the infrastructure segment, revenue was down 3%. Hybrid infrastructure revenue was flat, while infrastructure support declined 7%. Within hybrid infrastructure, ZSystems grew 9% in a seasonally smaller revenue quarter. Z16 revenue remains well ahead of prior cycles after six quarters of availability. The program strength reflects both growing enterprise workload requirements and the economic value at scale of the platform, in traditional processing and Linux consolidation. In fact, install MIPS capacity for Linux on Z has grown more than fourfold over the last decade.
This contributes to solid margin and free cash flow performance.
We continue to expect about a half a point of operating pre tax margin improvement and we see a mid teens tax rate for the year.
Our free cash flow performance has been driven primarily from our profit performance.
Through the first three quarters were up a $1 billion year to year, and we delivered nearly 50% of our full year expectation, which is ahead of our historical attainment.
As always we are reliant on the seasonally strong fourth quarter, we're on track to achieve about $10 $5 billion for the year.
Jim Kavanaugh: Clients continue to value the security, resiliency, and hybrid cloud capabilities of the ZSystems platform. Distributed infrastructure revenue was down 6%, as compared to a strong growth in last year of 21%. As we introduced innovation across storage and power 10.
As I look specifically at the fourth quarter with the recent currency movements, we now see currency to be neutral to a one point headwind to revenue growth.
That's nearly $600 million worse than 90 days ago.
I would expect constant currency revenue growth in the fourth quarter to be similar to the third.
Jim Kavanaugh: Vincent. This quarter, we had growth and power offset by declines and storage. In the infrastructure segment, we had strong growths and pre-tax margin performance. Pre-tax margin expanded 350 basis points, reflecting benefits from portfolio mix with our Z systems performance and productivity, while absorbing over a point of impact from currency.
That's despite a tough compare from last year's strong <unk> contribution in software and the large these 16 transactional performance in infrastructure.
This demonstrates continued momentum in our underlying business.
Bringing it all together, we've clearly got a higher growth higher value business with strong cash generation, a business well positioned for the future.
Jim Kavanaugh: Now, let me bring it back up to the IBM level to talk about our expectations before we go to Q&A. Just about two years ago, we introduced today's IBM, a more focused business with a platform based approach to hybrid cloud and AI. Since then, we've continued to invest organically and organically, bring new products and innovation to market, expand our ecosystem and our talent base, and drive productivity across our business. The result is a business that addresses today's client needs with a stronger financial profile.
Arvind and I are now happy to take your questions.
Tricia, let's get started.
Thank you Jim before we begin the Q&A I'd like to mention a couple of items.
First supplemental information is provided at the end of this presentation and then second I'll try. This one last time, but ask you to refrain from multi part questions to allow time for more people to participate.
Operator, let's please open it up for questions.
Thank you at this time, we'll begin the question and answer session of the conference to ask a question. Please press star one and record your name clearly if you need to withdraw your question Press Star two.
Jim Kavanaugh: Our third quarter performance reinforces this progress with 3.5 percent revenue growth, growth and pre-tax margin expansion, and strong free cash flow generation. Now, with three quarters a year behind us, we are holding our full year view of our two primary financial metrics, revenue growth and free cash flow. We continue to expect constant currency revenue growth of 3 to 5 percent and free cash flow of about $10.5 billion that's up 1.2 billion dollars over last year.
Again to ask a question please press star one.
Our first question comes from Amit <unk> with Evercore. Your line is open.
Yeah. Thanks, a lot good afternoon, everyone and I will stick to Patricia Patricia has one last time I'll ask one question only rule.
I guess, there's a lot of macro concerns out there to say the least.
Hoping you could spend a little bit of time, just talking about when you talk to your customers and you know I'm sure you engage with a lot of the Fortune 500 company given this macro environment. How are they shifting are prioritizing their it budget dollars.
Jim Kavanaugh: We've had solid revenue performance all year in our growth factors of software and consulting. We still expect software revenue growth at the high end of single-digit model, and consulting revenue in the 6 to 8 percent range. Infrastructure revenue, of course, reflects product cycle dynamics. In total, with one quarter to go, it's prudent to assume the low end of IBM's 3 to 5 percent range. We are making great progress in our productivity initiatives.
I fully understand you're talking about generative AI and how yes.
How beneficial that is going to be but given the macro environment given the constrained budgets I guess where are they taking money away from to fund. These investments I'd love to just understand the customer feedback you're getting and how is the priority changing as they go forward.
Hi, Amit so thanks for the question.
And it's actually a wonderful to talk about this.
So generative AI just for me to very quickly reiterate the use cases, we found that our clients were really.
Moving on to.
Jim Kavanaugh: The work we are doing to digitally transform our business not only makes us more nimble by simplifying and streamlining our processes and operations, but it also frees up spend for reinvestment, provides financial flexibility, and delivers operating leverage. This contributes to solid margin and free cash flow performance. We continue to expect about a half a point of operating pre-tax margin improvement, and we see a mid-teens tax rate for the year. Our free cash flow performance has been driven primarily from our profit performance.
<unk> God.
On customer service.
And on I'll call. It general digital workers, which is productivity in every enterprise function.
So if you look at cord.
To a person every one of the client said, we don't intend to get rid of any developers, but this allows us to take care of the debt that we've accumulated and makes every develop a more productive.
I'll kind of point out most enterprises are very quick to realize if you are more productive that because you have a competitive advantage to your peers and if they are a competitive advantage to the Aps they'll take share without spending more on labor, that's an incredible long term competitive advantage when.
Jim Kavanaugh: Through the first three quarters, we're up a billion dollars year to year, and we deliver nearly 50 percent of our full-year expectation, which is ahead of our historical attainment. While as always, we are relying on a seasonally strong fourth quarter, we're on track to achieve about 10 and a half billion dollars for the year. As I look specifically at the fourth quarter, with the recent currency movements, we now see currency to be neutral to a one point headwind to revenue growth.
When you go to customer service that is a cost takeout aspect, but it's not 100%, but there is probably a 20% to 30%. If you can have more calls more chats answer by AI that means you can have much more volume with a smaller number of people. So there is both also I'll point out to our audience AI does not get.
Tired it doesn't get angry at doesn't get upset so there is a NPS improvement you get along with it and then on the third one on digital workers. There likely is a small productivity improvement, but I would call. It more in the four 5%, 10% not 20, 30% 40%.
Jim Kavanaugh: That's nearly $600 million worse than 90 days ago. I'd expect currency revenue growth in a fourth quarter to be similar to the third. That's despite a tough compare from last year's strong ELA contribution in software and the large Z16 transactional performance in infrastructure. This demonstrates continuum momentum in our underlying business.
So in the macro headwinds you're mentioning higher interest rates are tougher to get skilled people.
All of the issues around the Geo political uncertainty that causes some of the concern.
Might have caused a pause in some other environment.
AI side and to be candid the hybrid cloud side offers them a way through that without having to decrease their ambitions for next year and I think we're seeing every one of them play to that and I think that these are more fundamental these are more processes than some of the other areas that people are worrying about.
Jim Kavanaugh: Bring it all together, we've clearly got a higher growth, higher value business with strong cash generation, a business well position for the future.
Patricia Murphy: Arvind and I are now happy to take your questions, Patricia, let's get started. Thank you, Jim.
Two or three years ago, when two or three years ago people were worried a lot about what do I do to keep all our employees happy and can I add up all the tools for that I think there is much less of a focus on that area.
Patricia Murphy: Before we begin the Q&A, I'd like to mention a couple of items. First, supplemental information is provided at the end of this presentation. And then second, I'll try this one last time, but I ask you to refrain from multi-part questions to allow time for more people to participate.
Thanks, Amit let's go to the next question. Please.
Next we will hear from <unk> Mohan with.
Operator: Operator, let's please open it up for questions. Thank you. At this time, we'll begin the question and answer session of the conference. To ask a question, please press star one and record your name clearly. If you need to withdraw your question, press star two. Again, to ask a question, please press star one.
Bank of America, you May proceed.
Yes. Thank you so much.
I was wondering if you could comment a little further on the right had deceleration in <unk>, Jim sounded like it was driven partly by consumption based services that were done were somewhat weaker.
Amit Daryanani: Our first question comes from Amit Daria Nani with Evercore. Your line is open. Yep, thanks a lot. Good afternoon, everyone. And I will stick to Patricia's one last time my last one question only rule. I guess, Arvind, there's a lot of macro concerns out there to say the least. I'm hoping you could spend a little bit of time talking about when you talk to your customers and you engage in a lot of the Fortune 500 companies, given this macro environment, how are they shifting or prioritizing their IT budget dollars?
Are you still expecting <unk> growth in that 11% to 13% range for the year end can you unpack some of the software elements and in the fourth quarter between Red hat transaction processing and perhaps after you. Thank you so much.
Yes, thanks, Ron So I appreciate the question obviously, we're very pleased overall with our software segment performance growing 8% actual 6% at constant currency really led a pretty pervasive Lee with growth across the board automation led.
Red hat at 8% as you said and I'll come to that in a second but data and AI overall.
Amit Daryanani: And I fully understand every you're talking about generative AI and how beneficial it's going to be, but given the macro environment, given the constrained IT budgets, I guess, where are they taking money away from to fund these investments? I love just understanding the customer feedback you're getting and how's the priority changing as they go forward? Hi, Amit. So, thanks for the question. And it's actually wonderful to talk about this. So, generative AI, just for me to very quickly reiterate the use cases we found that our clients were really climbing on to on code, on customer service, and on, I'll call it general digital workers, which is productivity in every enterprise function.
Underpinning all of that is like we said starting the year one a very strong solid recurring revenue base high value, 80% of that portfolio by the way growing mid single digit growth you see that play out in our transaction processing that we call the growth factor and then also.
Amit Daryanani: So, if you look at code, two a person, every one of the clients said we don't intend to get rid of any developers, but this allows us to take care of the tech debt that we've accumulated and makes every developer more productive. Amit, I'll kind of point out, most enterprises are very quick to realize, if you are more productive, that means you have a competitive advantage to your peers, and if they have a competitive advantage to their peers, they will take share without spending more on labor.
Our hybrid platform and solution business $14 billion <unk> that's growing.
High single digit overall now within that you see red hat Red hat, we talked about in the prepared remarks first of all Arvind and I would acknowledge we came in a couple of points below our expectation.
And I think that's an execution discussion overall embedded in that where did that come from it came from because I think this is very important it came from the consumption based services and offerings side of the equation, which by the way, it's about 20% of our portfolio of shorter duration.
Overall and it went from last quarter high single digit which is about what the model is so low single digit overall.
Amit Daryanani: That's an incredible long-term competitive and digital workers. They're likely is a small productivity improvement, but I would call it more in the 4, 5, 10 percent, not 20, 30, 40 percent. So in the macro headwinds you're mentioning, higher interest rates are tougher to get skilled people, all of the issues around the geopolitical uncertainty that causes some of the concern or might have caused the pause in some other environments. The AI side and to be candid, the hybrid outside offers them a way through that without having to decrease their ambitions for next year.
If you look at that and compare that now let's look at the other part of the portfolio the remaining 80%.
That is our subscription based business, that's our rail franchise industry market leader, that's Red had open shift and that sensible, we had a very strong annualized bookings in the quarter, which against subscription based business model, we talked about all year long, where we're going to be backend loaded on renewals.
We grew that mid teens overall, including services by the way if I extract out at 20% portfolio of services and just look at the core subscription based businesses of Red hat open shift in Ansible, we grew 19% overall 110 plus percent.
And there are on that renewal.
<unk> of that business and within that 19% open shift and ansible, we're north of 40% with ROE growing double digits.
So putting all that together I think it's prudent right now when we look at fourth quarter, we're only building into our model again.
Amit Daryanani: And I think we're seeing every one of them play to that. And I think that these are more fundamental, these are more core processes. Then some of the other areas that people were worrying about two or three years ago, when two or three years ago people were worrying a lot about what do I do to keep all our employees happy and can I add up all the tools for that?
Software at the high end of our segment model, we're only building and high single digit we have to continue to monitor what happened to us in the third quarter.
The team focused on execution, but I would tell you just given the signings growth that we posted in the third quarter and by the way another good pipeline in the fourth quarter, we feel very confident in the long term posture.
Arvind Krishna: I think there's much less of a focus on that area. Thanks, summit.
Operator: Let's go to the next question, please.
Wamsi Mohan: Next to you will hear from Wamsi Mohan with Think of America. You may proceed. Yes, thank you so much. I was wondering if you could comment a little further on the right ahead deceleration in 3Q, Jim sounded like, you know, was driven partly by consumption based services that were somewhat weaker. Are you still expecting Red Hat growth in that 11 to 13 percent range for the year? And can you unpack some of the software elements in the fourth quarter between Red Hat transaction processing and perhaps after you?
Red hat growing double digits, we just got to get through and monitor what's happening to us on the services side. So thanks very much for the question.
Let's go to the next question please.
Our next question comes from Toni <unk> with Bernstein you May proceed.
Yes, Thank you for taking the question.
Jim It sounds like your guidance for Q4, Kevin you expect revenues at constant currency to be at the low end is somewhere around $17 3 billion.
Wamsi Mohan: Thanks so much. Thanks, Wamsi. I appreciate the question. Obviously we're very pleased overall with our software segment performance, growing 8 percent, actual 6 percent of constant currency. Really led pretty pervasively with growth across the board. Automation led Red Hat at 8 percent as you said, and I'll come to that in a second, but data and AI overall, really underpinning all that is like we said, starting the year, one a very strong solid recurring revenue base, high value, 80 percent of that portfolio.
Wamsi Mohan: By the way, growing mid-single digit growth, you see that play out in our transaction processing that we call the growth factor. And then also our hybrid platform and solution business, $14 billion ARR that's growing high single digit overall. Now, within that, you see Red Hat. Red Hat we talked about in the prepared remarks. First of all, Arvin and I would acknowledge we came in a couple of points below our expectation. And I think that's an execution discussion overall.
Which is quite a bit below normal seasonality. Despite the fact that you have <unk> and you had strong services signings.
So I'm wondering if you could confirm if that sort of the number that you're suggesting and was there some transactional pull forward and mainframe from Q4 to Q3.
This quarter.
Or are you expecting some deceleration in transaction processing.
You could kind of confirm the number for Q4, and then unpack it a little bit as to why it's below normal seasonality. Thank you.
Great Tony Thanks, very much for the question I appreciate it and I know Patricia really appreciate sticking to one question given it's her last call leading in piloting and we.
We thank her for all of our efforts, but we will have more time to celebrate and in January but as you stated we remain confident in what our guidance is overall with regards to topline revenue growth, 3% to 5%, albeit as we said low end and that just practically speaking given we have one more quarter to go we said we expect.
Wamsi Mohan: Embedded in that, where did it come from? It came from, because I think this is very important. It came from the consumption-based services and offering side of the equation, which by the way is about 20 percent of our portfolio's shorter duration overall. And it went from last quarter, high single digit, which is about what the model is, the low single digit overall. If you look at that and compare that now, let's look at the other part of the portfolio, the remaining 80 percent.
Similar performance fourth quarter.
As we just executed in third quarter constant currency revenue growth rate, let me unpack that to your 0.1st of all at the macro level.
Historically, we would generate quarter to quarter about 2.9 billion ish of revenue last year by the way, we did $2 6 billion up quarter to quarter on revenue that 17, three number in that ballpark youre not too far off is about equivalent to last year, it's about $2 6 billion.
Wamsi Mohan: That is our subscription-based business. That's our rail, franchise, industry market leader. That's Red Hat OpenShift, and that's Ansible. We had a very strong annualized bookings in the quarter, which against subscription-based business model, we talked about all year long, we were going to be back and loaded on renewals. We grew that mid-teens overall, including services, by the way. If I extract out that 20 percent portfolio services and just look at the course subscription-based businesses of Red Hat OpenShift and Ansible, we grew 19 percent overall.
But I would tell you one thing underneath that Tony is we've seen a very different dramatic change in the currency FX U S dollar strengthening.
Tune about $300 million. If you go look at the math back in 2019, 2000, 22021, so underneath it pretty consistent quarter to quarter performance as last year, which by the way I would highlight was the peak of our Elas cycle last year.
And it was our strong first fourth quarter and a <unk> environment, we're going to match that even taking into account the FX headwinds overall that we called out going forward. One last thing that I'll put and then I'll get into the color is on a profit basis, although you didn't ask.
Wamsi Mohan: 110 plus percent NRR on that renewal rate of that business. Within that 19 percent, OpenShift and Ansible were north of 40 percent with rail growing double digits. Putting all that together, I think it's prudent right now, when we look at fourth quarter, we're only building into our model. Again, software at the high end of our segment model, we're only building in high single digit. We have to continue to monitor what happened to us in the third quarter, get the team focused on execution, but I would tell you, just given the signings growth that we posted in the third quarter, and by the way, another good pipeline in the fourth quarter, we feel very confident in the long term posture of Red Hat growing double digits. We just got to get through and monitor what's happening to us on the services side, so thanks very much for the question.
At historically profit, we generate somewhere if I remember correctly studying over the weekend about one 1 billion three quarter to quarter.
You look at our operating pre tax margin, which we recommitted the half a point for the year that puts you in a profit range of I don't know billion 7 billion a quarter to quarter. So you see the fundamental operating leverage.
What's happening to our business. So you put all that together, we still believe we have a very confident here that 3% to 5% by the way led by software delivering three points of that IBM growth.
Consistent I would say very good performance competitively and consulting driving about two points of Ibm's growth infrastructure on the product cycle downside, we said beginning of the year and we're consistent it's about a point hurt to IBM and then you got the divestiture impact of about a half a point you put all that together I think that's a pretty good year.
Wamsi Mohan: Thanks, Momzie.
Tony Sakonegi: Let's go to the next question, please. Our next question comes from Tony Sakonegi with Bernstein. You may proceed. Yes, thank you for taking the question. Jim, it sounds like you're guidance for Q4, given you expect revenues to constant currency to be at the low end. It's somewhere around 17.3 billion, which is quite a bit below normal seasonality, despite the fact that you have FDO and you had strong services signings. So I'm wondering if you could confirm if that's sort of the number that you're suggesting, and was there some transactional pull forward in mainframe from Q4 to Q3 this quarter, or are you expecting some deceleration and transaction processing? Maybe you could kind of confirm the number for Q4 and then unpack it a little bit as to why it's below normal seasonality. Thank you. Great, Tony. Thanks very much for the question. I appreciate it.
Overall pretty much on top of our model.
Thanks, Sheila let's go to the next question. Please.
Next we will hear from Matt Swanson with RBC capital markets. Your line is open.
Yes. Thank you for taking my question, it's great to hear about some of the quantifiable success that you've seen in January of AI, So far, but maybe slipping a little bit whether it's too early consulting engagements and customer conversations where are you seeing some of the choke points that might hold up people from deploying as fast as they want.
And whether it's to foundation models or some of your other tools.
Our around the governance side kind of how thats developing your R&D.
<unk> solutions for those problems.
Yeah. Thanks, let me try to address your question here.
Think the concerns that people have.
Jim Kavanaugh: I know Patricia really appreciates sticking to one question given it's her last call leading and piloting. And we thank her for all her efforts, but we'll have more time to celebrate in January. But as you stated, we remain confident in what our guidance is overall with regards to top line revenue growth 3 to 5%. I'll be it as we said, low end, and that's just practically speaking given we have one more quarter to go.
Coming around.
All of these models accurate how accurate are they do they result in things that may cause long term liability people are worried about the conversation because they're here and they read that whether its artists whether it's <unk>, whether it's code writers.
Assuming some of the producers of large language models.
Jim Kavanaugh: We said we expect similar performance for quarter as we just executed in third quarter, constant currency revenue growth, right. Let me unpack that to your point. First of all, at the macro level, historically, we would generate quarter to quarter about 2.9 billionish of revenue. Last year, by the way, we did 2.6 billion up quarter to quarter to revenue. That's 17.3 number in that ballpark. You're not too far off is about equivalent to last year.
You alluded to governance that comes more around lifecycle and how do you carry it out over the long term.
Coupled with this are some people's concerns.
Jim Kavanaugh: It's about 2.6 billion. But I would tell you one thing underneath that, Tony, is we've seen a very different dramatic change in the currency effects US dollars strengthening to tune about 300 million dollars. If you go look at the math back into 19, 2020, 2021. So underneath it, pretty consistent quarter to quarter performance is last year, which by the way, I would highlight was the peak of our ELA cycle last year.
If you add their own private data into our model now what happens to the model, whereas that protected where does it stay to others learn from it.
So if you begin to unpack all of that.
We begin to say alright for models that are IBM produced we will give you indemnification, meaning we are confident in our ability to standby. The data we have used to train what is being used to be output and we'll stand behind the same indemnification as you provide for.
We're all enterprise software.
As you would expect that's hard for us to do for open source models.
We believe that that takes care and that is why we are so excited about cord and customer service to start with because thats, where we believe that people can.
Jim Kavanaugh: And it was our strong first fourth quarter in a Z-16 environment. We're going to match that even taken into account the effects headwinds overall that we called out going forward. One last thing that I'll put and then I'll get into the color is on a profit basis, although you didn't ask that. Historically profit, we generate somewhere, if I remember correctly, studying over a weekend about a billion three quarter to quarter. You look at our operating pretext margin, which we recommitted a half a point for the year.
Can benefit from this indemnification.
Talking about the governance of the lifecycle side people are also worried about some of the long term deployment, because an enterprise may well deploy our model for five or 10 years. So the governance tools that allow you to keep lineage of the data use a cleaner model and then for those adding private data, we give them a commitment that day.
<unk> stays with them and the refinements of that model go nowhere else helps to mitigate some of the fear and uncertainty around those issues I do believe that this is going to play out well over the next few years, but I also want to point out there are many cases, where people are not worried about some of these risks.
Jim Kavanaugh: That puts you in a profit range of, I don't know, a billion seven billion eight quarter to quarter. So you see the fundamental operating leverage of what's happening to our business. So you put all that together. We still believe we have a very confident year at that three to five percent. By the way, led by software delivered three points of that IBM growth consistent. I would say very good performance competitively and consulting driving about two points of IBM's growth.
If youre, giving a quick website response, you could well use a model that may have some of these risks because the danger in using any of those other areas is small.
So that is how it is playing out right now I expect to see a lot of deployment in 2024 going into full production across the world of whether you use the word large language models, our foundation models or generate of AI.
Jim Kavanaugh: Infrastructure around the product cycle downside. We said beginning of the year and we're consistent. It's about a point hurt IBM. And then you got the devastature impact of about a half a point. You put all that together. I think that's a pretty good year overall and pretty much on top of our model.
Operator: Okay, Sheila, let's go to the next question please.
Thank you Matt Let's go to the next question. Please.
Our next question comes from Ben Reitzes with Melius Research Your line is open.
Hey, Thanks, a lot I appreciate it.
Matt Swanson: Next we will hear from Matt Swanson with RBC capital markets. Your line is open. Yeah, thank you for taking my question. It was great to hear about some of the quantifiable success that you've seen in generative AI so far. But maybe split me now a little bit, whether it's too early consulting engagements or customer conversations. Where are you seeing some of the choke points that might hold up people from deploying as fast as they want? Whether it's through foundation models, or some of your other tools around the government side, kind of how that's developing your R&D to develop solutions for those problems. Yeah, thanks.
My question is on consulting I was very surprised to see 32% bookings growth after 24% the prior quarter seven in the prior quarter.
It's really diverging from your perceived.
Rivaling consulting Accenture and I was just wondering.
What the reasoning you would say is behind that and then Jim with regard to those bookings what does that do for your revenue visibility for consulting not only for the fourth quarter, but for early next year I would think.
The good book to Bill might make you feel pretty confident about that six to eight and continuing thanks a lot.
Thanks very much for the question.
Arvind Krishna: Let me try to address your question here. Look, I think the concerns that people have are coming around. Are these models accurate? How accurate are they? Do they result in things that may cause long term liability? People are worried about the conversation because they hear and they read that whether it's artists, whether it's authors, whether it's code, writers are suing some of the producers of large language models. You alluded to governance.
I said earlier.
Pleased with the team overall and consulting.
Arvind Krishna: That comes more around life cycle. And how do you carry it out over the long term? Coupled with this are some people's concerns. If you add their own private data into a model, now what happens to the model? Where is it protected? Where does it stay? Do others learn from it? So if you begin to unpack all of that, we begin to say, all right, for models that are IBM produced, we will give you indemnification.
Not only on the signings and booking but our revenue is well positioned for that 6% to 8%, which gave us confidence to reiterate that but also the fundamentals of that business right. We talked a lot about this over the last handful of years, we're getting good operating leverage in that business. Good cash contribution so all.
All in all pretty pleased overall when you look at the bookings overall I mean, let's just put some statistics. So let me talk about kind of headwind tailwind overall.
Because I think what youre trying to get at is the confidence level, Arvind and I and the team have about this book of business going forward into fourth quarter and into 'twenty four.
Still seeing very good demand overall in areas around digital transformation application modernization and where there is real technology value productivity cost efficiency quick payback is there pressure on discretionary based activity.
Arvind Krishna: Meaning we are confident in our ability to stand by the data we have used to train what is being used to be output and we will stand behind the same indemnification as you provide for all enterprise software. As you would expect, that's hard for us to do for open source models. But we believe that that takes care and that is why we are so excited about code and customer service to start with because that's where we believe that people can benefit from this indemnification.
<unk>.
And that like absolutely, but what we've seen that all year long, we havent seen really any substantive change in the macro and the client buying behaviors overall, but that has enabled us to grow 30 plus percent by the way its strongest bookings quarter, we had quite a period of time and now we've got a trailing 12 months.
The Bill of 116, I think the strongest in about two and a half years overall now underneath that what's what's going on.
One we've opened up IBM to strategic partnerships, we're seeing great ecosystem velocity and strategic partnership growth signings were about 50% year over year, hyperscale or is underneath that <unk> signings, our hybrid cloud and application modernization red hat.
Arvind Krishna: Talking about the governance on the life cycle side, people are also worried about some of the long term deployment because an enterprise may well deploy a model for 5 or 10 years. So the governance tools that allow you to keep a lineage of the data used to train a model. And then for those adding private data, we give them a commitment. That data stays with them. And the refinements of that model go over else, helps to mitigate some of the fears and uncertainty around those issues.
We signed north of $1 billion alone in the quarter now Thats $10 billion inception to date, we got acquisitions that are now accretive and scaling nicely. So far I think from that aspect you look at the top line growth, we feel pretty confident about the 6% to 8% for this year and we feel.
Arvind Krishna: I do believe that this is going to play out well over the next few years, but I also want to point out there are many cases where people are not worried about some of these risks. If you're giving a quick website response, you could well use a model that may have some of these risks because the danger and using any of those other areas is small. So that is how it's playing out right now.
Confident about the value and the growth.
Contribution of the growth factor of consulting and our book of business heading into 2024, and now with that said headwinds wise, yeah listen to every other services consulting company there are macroeconomic challenges without a doubt uncertainty.
Matt Swanson: I expect to see a lot of deployment in 2024 going into full production across the world of whether you use the word large language models or foundation models or generative AI. Great. Thank you, Matt. Let's go to the next question, please.
But we got to go out and compete every single day here and duration I would say not only we had great signings growth, we're monitoring our backlog realization our duration by the way. This year has went up by a couple of months.
But that revenue will play out over time and.
Ben Reitzes: Our next question comes from Ben Reitzes with Melius Research. Your line is open. Hey, thank you a lot. I appreciate it. My question is on consulting. I was very surprised to see 32% bookings growth after 24% the prior quarter, seven the prior quarter. It's really diverging from your perceived rival and consulting expenditure and I was just wondering what the reasoning you would say is behind that. And then Jim, with regard to those bookings, what does that do for your revenue visibility for consulting, not only for the fourth quarter, but for early next year, I would think the good book to Bill, you know, might make you feel pretty confident about that six to eight and continuing. Thanks a lot. Ben, thanks very much for the question.
All in all if I sum it up I think we're taking share I'm pleased with the team.
Thank you Ben Taylor, let's go to the next question.
Our next question will come from Erik Woodring with Morgan Stanley. Your line is open.
Hey, guys. Thanks for taking my question I'll stick to the one as well and then maybe Jim This is for you.
You didn't change your software consulting guidance ranges for the year I think you had a minor benefit from <unk> closing earlier in early in <unk>, but you now expect a full year constant currency revenue growth to be at the low end of the 3% to 5% range and so I'm. Just wondering should we now think about software consulting to grow at the lower end.
Of those ranges that you provided earlier, especially now kind of given some of your red hat comments I'm just trying to understand what has changed underlying the different segments to get to the kind of that new view on total revenue in constant currency. Thank you.
Jim Kavanaugh: As I said earlier, please with the team, overall in consulting, you know, not only on the signings and booking, but our revenue is well positioned for that six to eight percent, which give us confidence to reiterate that. But also the fundamentals of that business, right. We talked a lot about this over the last handful of years. We're getting good operating leverage in that business, good cash contribution. So all in all, pretty pleased overall when you look at the bookings overall, I mean, let's just put some statistics and let me talk about kind of headwind tailwind overall.
Yes, Thanks, Eric I appreciate the question so similar to I think Toni asked something similar to this overall when you look at IBM, 3% to 5% just practically speaking one quarter to go we said all.
It's better to say, we're prudently at the low end of that range now, let's talk about it by segment.
Software you dial back 90 days ago.
We said that we were very excited about the announced acquisition of <unk>. We said that we expected that to close in early fourth quarter team did an outstanding job, we got through that regulatory approval. We closed it mid August but when we announced that acquisition in July we actually given our first half performance.
Jim Kavanaugh: Because I think what you're trying to get at is the confidence level, Arvin and I and the team have about this book of business going forward into fourth quarter and into 24. You know, we're still seeing very good demand overall in areas around digital transformation, application modernization and where there's real technology, value, productivity, cost efficiency, quick payback. Is there pressure on discretionary based activity and that like absolutely. But you know what, we've seen that all year long.
Both in our recurring revenue streams and the strength of that but also in our transactional book of business. We actually took our full year guidance up to the high end of the range now we're close to and by the way we set up there'll be about a half a point on the full year now we close at what a month month and a half earlier.
Okay. So that half a point of contribution in <unk> might be 70 basis points of contribution on a full year, we still feel very confident by the way through three quarters. We're up six 5% that's above our mid term model. Yes, we have the peak wrap on Elas last year, but very interesting underneath.
Jim Kavanaugh: We haven't seen really any substantive change in the macro and the client buying behaviors overall. But that is enabled us to grow 30 plus percent. By the way, it's strongest bookings quarter. We had quite a period of time and now we've got a trailing 12 month, put the bill of 1.16. I think the strongest in about two and a half years overall. Now underneath that, what's going on? One, you know, we've opened up IBM to strategic partnerships.
Our third quarter year to year to year performance, we're growing transactional revenue.
Every different profile than what we started out in January which I think prudently. We said we expected transactional revenue is going to be a headwind to us.
Jim Kavanaugh: We're seeing great ecosystem velocity and strategic partnership growth. Signings were about 50 percent year over year, hyper scalers underneath that two ex signings are hybrid cloud and application modernization red hat. We sign north of a billion dollars alone in the quarter. Now that's $10 billion inception to date. We got acquisitions that are now a creative and scaling nicely. So I think from that aspect, you look at the top and growth. We feel pretty confident about the 68 percent for this year.
What's happening.
The new innovation, we're bringing to market is actually creating much more volume of newer la content and by the way is contributed about a point and a half of growth above our expectation and we're also getting great clothing, and NR up seven points versus history. So we think.
Like we just finished above our model and third quarter constant currency on software. We said in our prepared remarks, we expect a pretty similar fourth quarter at the high end overall, so we're maintaining software. If you look at consulting we said, 6% to 8% overall by the way year to date were up 6%.
Jim Kavanaugh: And we feel confident about the value and the growth contribution of the growth factor of consulting in our book of business heading into 2024. Now with that said, Edwin's wise, yeah, listen to every other services consulting company. There are macroeconomic challenges without a doubt on certainty, but we got to go on compete every single day here and duration. I would say not only we had great signings growth, we're monitoring our backlog realization, our duration by the way this year has went up by a couple months, but that revenue will play out over time. And all in all, if I sum it up, I think we're taking share. Please, with the team. Thank you, Ben.
Operator: Jaila, let's go to the next question.
$6 four to be exact.
And we look at fourth quarter overall, we just talked about in Ben's question are strong bookings our book to Bill at one dot one six the tail winds on hybrid cloud around strategic partnerships I think we feel pretty good about our overall guidance.
Alright, very good let's go to the next question. Please.
Our next question comes from David Grossman with Stifel. Your line is open.
Thank you.
Yes.
Erik Woodring: Our next question will come from Erik Woodring with Morgan Stanley. Your line is open. Hey guys, thanks for taking my question. I'll stick to the one as well. And maybe Jim, this is for you. You know, you didn't you didn't change your software, consulting guidance ranges for the year. I think you had a minor benefit from AppDio closing earlier in early in 3Q, but you now expect a full year cause and currency revenue growth to be at the low end of the 3 to 5% range.
You provided some good detail on free cash flow year to date and the question really is are there any early indications on what non operating items could.
<unk> free cash flow next year, working capital cash taxes et cetera, as well as.
How restructuring actions this year may flow into earnings and cash flow as well over the next several months.
Yes, David Thanks for the question overall, we will spend a lot of time in January.
Erik Woodring: And so I'm just wondering, should we now think about software consulting to grow at the lower ends of those ranges that you provided earlier, especially now, kind of given some of your red hat comments. I'm just trying to understand what has changed underlying the the different segments to get to the kind of that new view on total revenue and cost and currency. Thank you. Yes. Thanks, Eric. I appreciate the question. So, you know, similar to I think Tony asked something similar to this overall, you know, when you look at IBM 3 to 5% just practically speaking, one quarter to go, we said, oh, you know, it's better to say we're prudently at the low end of that range.
Thinking about 2020 for free cash flow, but I'm glad you actually asked the question because we've been talking about free cash flow all year long and it's one of Arvin and Ibm's two important metrics revenue growth free cash flow generation, we called out $10 $5 billion by the way up $1 $2 billion. This year.
<unk> off of last year, where we grew $2 8 billion year to year, and we said that's above our annualized model. Our annualized model is about 750 per year coming on off the <unk> and the business fundamentals.
Jim Kavanaugh: Now, let's talk about it by segment. You know, software, you dial back 90 days ago. We said that we were very excited about the announced acquisition of AppDio. We said that we expected that to close in early fourth quarter team did an outstanding job. We got through that regulatory approval. We closed it mid August. But when we announced that acquisition in July, we actually given our first half performance, both in our recurring revenue streams and the strength of that.
You look through the third quarter.
We're up now $1 billion year to year, we're at $5 $1 billion.
Jim Kavanaugh: But also in our transactional book of business, we actually took our full year guidance up to the high end of the range. Now we closed it. And by the way, we said, AppDio will be about a half a point in the full year. Now we close it, what, a month, a month and a half earlier. Okay. So that half a point of contribution and AppDio might be 70 basis points of contribution on a full year.
Very high quality by the way.
Of that $1 billion $700 million of it is cash source from.
Operating profit overall, so that's the improving fundamentals of our sustainable revenue growth and our operating leverage and productivity. We're driving in this business and as I said all year long I was very transparent in January repeated it in April said it again in July and I'll say it again, when we look at that.
At $1 $2 billion free cash flow growth year to year, we're going to get most of it through cash source from profit readout about $8 million to $900 million and we said.
That we would get working capital efficiency. This year why because of our <unk> 22 opportunity gap that we missed.
Jim Kavanaugh: We still view very confident, by the way, through three quarters, we're up six and a half percent. That's above our midterm model. Yes, we have the peak wrap on ELAs last year, but very interesting underneath our third quarter year, year to year performance. We're growing transactional revenue. Very different profile than what we started out in January, which I think prudently, we said we expected transactional revenue was going to be a headwind to us.
And we called it out transparently in January we're seeing that play out.
Do the puts and takes yes, we're going to get a little bit of a modest tailwind on structural actions. This year that will offset cash tax headwinds, but you look at the underlying $1 $2 billion of free cash flow growth. It is a high quality fundamentally driven out of our revenue growth and operating leverage that you look to 'twenty four will <unk>.
Jim Kavanaugh: What's happening? The new innovation we're bringing to market is actually creating much more volume of new ELA content that by the way is contributed about a point and a half a growth above our expectation. And we're also getting great clothing and NRR of seven points versus history. So we think like we just finished above our model on third quarter, a currency on software, we said in a prepare remarks, we expect a pretty similar fourth quarter, you know, at the high end overall, so we're maintaining software.
And a lot more time on cash tax.
A lot of that is going to be predicated on where we actually finished fourth quarter overall, but we feel confident with the actions we've been putting in place and we got to earn our credibility and discipline here closing out.
A free cash flow quarter by the way that's five $4 billion.
Very good Sheila let's take one last question.
Our last question will come from Brian Essex with Jpmorgan. Your line is open.
Yeah.
Hi, good afternoon, and thank you for taking the question I guess, maybe are going if we could just circle back on this.
Jim Kavanaugh: If you look at consulting, we said six to eight percent overall. By the way, year to date, we're up six percent. That's actually six point four to be exact. And we look at fourth quarter overall, we just talked about in Ben's question, our strong bookings are booked to bill at 1.16, the tailwinds on hybrid cloud around strategic partnerships. I think we feel pretty good about our overall guidance.
Well.
Operator: Okay, very good.
Well work topic of AI.
Could you maybe just take a very high level approach and how you're seeing customers evaluated adoption and how that might impact the nature of contracts within the consulting business.
The Watson X platform, maybe maybe adoption with initial read on adoption rates.
And two how consulting could be the tip of the spear there. Thank you.
David Grossman: Let's go to the next question, please. Our next question comes from David Grossman with Steeple. Your line is open. Thank you. Jim, you provided some good detail on free cash flow year dates. And the question really is, are there any early indications on what non-operating items could impact free cash flow next year, you know, working capital cash taxes, et cetera, as well as, you know, how restructuring actions this year may flow in earnings and cash flow as well over the next several months. Yeah, David, thanks for the question overall.
Alright, Thanks, Brian for the question.
<unk> consulting is going to be the tip of the spear, but it's not going to be the only because some clients do have enough expertise inside to do things on our own.
As we approach clients.
Trying to use I'll call it a big public chatbot to perhaps improve some service is not where they look to us and we've been very clear that's not where we're going to go and we do not actually serve up any of those services.
However, I'll take some maybe some quick examples.
As I go through so with a large.
Jim Kavanaugh: You know, we'll spend a lot of time in January talking about 2024 free cash flow. But I'm glad you actually asked the question because we've been talking about free cash flow all year long. It's one of Arvind and IBM's two important metrics, revenue growth, free cash flow generation. We called out 10 and a half billion, by the way, up 1.2 billion dollars this year, off of last year where we grew 2.8 billion year to year.
I'll use the word financial services company.
They want to use gender.
Generative AI to dramatically improve the productivity of their developers.
They actually use their own proprietary languages not only the common languages that are available outside.
They have been asking the question who cannot cross to augment their model give it to me and I don't really want to get into all the details of how I might use it but I want them to provide the technology.
Jim Kavanaugh: And we said, you know, that's above our annualized model. Our annualized model is about 750 per year coming on off the INE and the business fundamentals. You know, you look through the third quarter. We're up now a billion dollars year to year. We're at 5.1 billion dollars, very high quality, by the way, of that billion dollars, 700 million of it is cash source from operating profit overall. So that's the improving fundamentals of our sustainable revenue growth and our operating leverage and productivity we're driving in this business.
In this case, Brian we would work with them to augment the model using their language that their data and their code snippet, we would do it in a way that they are completely comfortable hitting 100% that that leaks nowhere else. They will take back the model. It now becomes an as a service deployment in their private cloud infrastructure.
And we monetize it as is typical for as a service software.
I'll take another example that we are building out with Dun <unk> Bradstreet and I mentioned that briefly on the call in that case. It is consulting led they want to work with consulting to use what's the next in this case, but to help them create solutions that left their clients get grid.
Jim Kavanaugh: And as I said all year long, I was very transparent in January, repeated it in April, set it again in July, and now I'll say it again. When we look at that 1.2 billion dollar free cash flow growth year to year, we're going to get most of it through cash source from profit, read that about 8 to 900 million. And we said that we would get working capital efficiency this year. Why?
Inside AK.
Health D&B monetize that data better so in that case. It is absolutely consulting led I think without consulting we would not have landed that deal.
Jim Kavanaugh: Because of our 4Q-22 opportunity gap that we missed. And we called it out transparently in January. We're seeing that play out. You do the puts and takes. Yes, we're going to get a little bit of a modest tailwind on structural actions this year that will offset cash tax headwinds. But you look at the underlying 1.2 billion dollar free cash flow growth. It is a high quality, fundamentally driven out of our revenue growth and operating leverage.
Let me go to others because there are also examples where our consulting team is using both what's available but.
As you are open AI as an example to go win deals because they have built up the expertise. They have also built up expertise.
Amazon's bracket platform and they are going forward with winning deals on those in that cases theyre coming in with the methodology with knowledge with the thousands of trained.
Jim Kavanaugh: Now, you look to 24, we'll spend a lot more time on cash tax. A lot of that is going to be predicated on where we actually finished worth quarter overall. But we feel confident with the actions we've been putting in place, and we got to earn the credibility and discipline here closing out a free cash flow quarter by the way that's $5.4 billion.
Consultants, who know how to work on those platforms and they are working with the clients to go do that I think these are all examples of what's working.
Operator: Very good.
I think you are trying to also ask is it going to be consulting or is it going to be software look we didn't say much on the on the call on this topic, we just characterize it as low hundreds of millions of dollars of booking but in the absence of anything else think of that as maybe half and half between consulting.
Brian S6: Sheila, let's take one last question.
Arvind Krishna: Our last question will come from Brian S6 with JP Morgan. Your line is open. Hi, good afternoon. Thank you for taking the question. I guess maybe Arvin, if we could just circle back on this. Well, well worked topic of AI. Could you maybe just take a very high level approach at how you're seeing customers evaluated adoption. And how that might impact the nature of contracts within the consulting business and feed the lots of next platform.
Putting in software.
Just tell you that a couple of points of growth.
For both of those units came from the generative AI that will be putting out and I think that's the best way to think about it in terms of what's happening right now and we are certainly expecting and planning that that will only increase as the quarters go on.
Alright, So let me now wrap up the call.
Arvind Krishna: Maybe maybe adoption initial read on adoption rate and view into how consulting to be the tip of the spear there. Thank you. Alright, thanks Brian for the question. So consulting is going to be the tip of the sphere but it's not going to be the only because some clients do have enough expertise inside to do things on our own. And we do not actually serve up any of those services. However, I'll take some maybe some quick examples as I go through.
<unk> third quarter performance reinforced our confidence in the strategy and in our ability to deliver value to enterprise clients in today's environment.
Cited of the opportunities ahead of us and I look forward to taking you through our continued progress.
And our view of 2024 and January Thank you all.
Okay, 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.
Arvind Krishna: So with a large, I'll use about financial services company. They want to use a generative AI to dramatically improve the productivity of their developers. They actually use their own proprietary languages, not only the common languages that are available outside. They are then asking the question, who can I trust to augment their model, give it to me. And I don't really want to get into all the details of how I might use it, but I want them to provide the technology.
Arvind Krishna: In this case, Brian, we would work with them to augment the model using their language and their data and their code snippets. We would do it in a way that they are completely comfortable in 100% that that leaks over else. They would take back the model. It now becomes an as a service deployment in their private cloud infrastructure and we monetize it as a typical for as a service software. I'll take another example that we are building out with Darren Bradstreet, and I mentioned that briefly on the call.
Arvind Krishna: In that case, it is consulting led. They want to work with consulting to use what's the next in this case, but to help them create solutions that let their clients get greater insight aka helps D&B monetize their data better. So in that case, it is absolutely consulting led. I think without consulting, we would not have landed that deal. Let me go to others because there are also examples where our consulting team is using both what's available with Azure Open AI as an example to go win deals because they have built up the expertise.
Arvind Krishna: They have also built up expertise on Amazon's bracket platform and they are going forward with winning deals on those. In that case, they are coming in with a methodology, with knowledge, with the thousands of trained consultants who know how to work on those platforms and they are working with the clients to go do that. I think these are all examples of what's working. I think you are trying to also ask is it going to be consulting or is it going to be software?
Arvind Krishna: Look, we didn't say much on the call on this topic. We just characterized it as low hundreds of millions of dollars of booking. But in the absence of anything else, think of that as maybe half and half between consulting and software, which does tell you that a couple of points of growth for both those units came from the generative AI that we've been putting out. I think that's the best way to think about it in terms of what's happening right now and we are certainly expecting and planning that that will only increase as the quarters go on.
[music].
Operator: Alright, so let me now wrap up the call. This third quarter performance reinforced our confidence in the strategy and in our ability to deliver value to enterprise clients in today's environment. Very excited are the opportunities ahead of us and I look forward to taking you through our continued progress and our view of 2024 in January. Thank you all. Hey, Sheila, let me turn it back to you to close up the call.
Operator: Thank you. Thank you for participating on today's call. The conference has now ended. You may disconnect at this time. You You You You You . . 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.
Today's conference is being recorded if you have any objections you may disconnect. At this time now I will turn the meeting over to MS. Patricia Murphy Ibm's, Vice President Investor Relations Ma'am you may begin.
Thank you.
To welcome you to Ibm's third quarter 2023 earnings presentation as the operator, just mentioned I'm, Patricia Murphy and 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 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 and signings growth are at constant currency.
Provided reconciliation charts for these and other non-GAAP financial 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 under the private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially.
Additional information about these factors is included in the company's SEC filings.
So with that I'll turn the call over to Arvind.
Thank you for joining us.
Before we start let.
Address the outbreak award in Israel.
We condemn all acts of terrorism.
We had also saddened over the loss of innocent lives and joined the global community and the hope that the recent safety can be restored.
Let me now turn to our business performance.
In the third quarter, we had solid growth across revenue profit and free cash flow, while delivering innovations and positioning our business to capture future opportunities.
On the broader trends, we are seeing in the market.
Technology continues to serve as a fundamental source of competitive advantage businesses and governments around the world.
Looking for opportunities to address demographic shifts make the supply chain is more resilient and improve sustainability.
More recently geopolitical events and the reality of higher for longer add to the growing uncertainty.
Technology helps organizations better deal with the many challenges they face.
We see both tailwind and headwind to overall spending.
Nearly every business, we talk to wants to leverage technology to offer better services scale more quickly and fuel growth without increasing their footprint.
This has been driving demand for technologies that boost productivity and competitiveness like hybrid cloud and artificial intelligence.
Overall, we believe the tailwind outweigh the headwinds and technology spend will continue to outpace GDP.
In this past quarter, we saw good revenue growth in software and consulting.
Infrastructure.
More than a year into the product cycle, we continue to see good adoption of <unk> 16.
Our overall growth reflects our ability to help clients to leverage data and AI for competitive advantage automate it environments and seamlessly integrated hybrid cloud solutions.
We also continue to position our business for the future launching new products and offerings.
Forging and expanding key partnerships investing in talent and skills and focusing our portfolio.
We have been taking concrete actions to deliver productivity in our own business.
Patricia Murphy: No, I will turn the meeting over to Ms. Patricia Murphy, IBM's Vice President Investor Relations. Miami may begin. Thank you.
All of this results in an IBM that is aligned to our clients' most pressing needs and has a stronger financial profile.
Patricia Murphy: I'd like to welcome you to IBM's third quarter, 2023 earnings presentation.
Third quarter results are another proof point.
Patricia Murphy: As the operator just mentioned, I'm Patricia Murphy and 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 replay will be available by this time tomorrow.
Typically at this point I'd talk about hybrid cloud and the progress we have made.
Cloud remains vitally important to our clients and to our business.
Given the inflection in AI and more specifically generative AI I want to spend more time today on AI and how we are approaching this opportunity.
Patricia Murphy: To provide additional information to our investors, our presentation includes certain non-gotten measures. For example, all of our references to revenue and signings growth are constant currency. We've provided reconciliation charts for these and other non-gotten financial measures at the end of the presentation, which is posted to our investor website.
We believe that generative AI will be multimodal with clients using a combination of ibm's models.
Other companies models.
Then on proprietary models and open source models.
Patricia Murphy: Finally, some comments made in this presentation may be considered forward-looking under the Private Security's Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filing.
This hybrid approach to AI is similar to the hybrid approach to cloud.
Let me give you an overview of the capabilities we have been building.
Our generative AI software stack talked with Red hat open shift, which serves as a foundation that allows clients to operate in a hybrid environment.
Arvind Krishna: The lift-out, I'll turn the call over to Arvind.
Arvind Krishna: Thank you for joining us. Before we start, let me address the outbreak of war in Israel. We condemn all acts of terrorism.
Data services helped make the data ready for AI.
Watson X to the core platform that enables clients to train June validate and deploy AI models.
Arvind Krishna: We are also saddened over the loss of innocent lives and join the global community in the hope that peace and safety can be restored. Let me now turn to our business performance. In the third quarter, we had solid growth across revenue, profit and free cash flow, while delivering innovations and positioning our business to capture future opportunities. On the broader trends we are seeing in the market, technology continues to serve as a fundamental source of competitive advantage.
We are providing models that address specific domains, let's just cord language and cyber security among others.
AI assistance include the Watson Xcode assistant to augment developers.
What's the neck assistant to augment customer service agents.
And what's the next August rate to augment employees.
This quarter, we introduced new AI capabilities for our clients and partners.
We unveiled granite.
Arvind Krishna: Businesses and governments around the world are looking for opportunities to address demographic shifts, make the supply change more resilient and improve sustainability. Kennedy, more recently geo-political events and the reality of higher for longer add to the growing uncertainty technology health organizations better deal with the many challenges they face. We see both tailwinds and headwinds to overall spending. Nearly every business we talk to wants to leverage technology to offer better services, scale more quickly and fuel growth without increasing their footprint.
A multibillion pardon me the foundation model on what's the next Dot AI, which excels in both language in code.
We also introduced the Watson Xcode assistant.
This includes the what's the next quota system for Z to help clients accelerate the modernization of mainframe cord and apps.
It's fueled by a 20 billion part of it our model and Gan as.
As an example swiftly translate cobalt of Java.
There are hundreds of billions of lines of code written in COBOL.
The opportunity is significant.
Looking forward, we plan to launch what's the next Dart governance before the end of the year.
Arvind Krishna: This has been driving demand for technologies that boost productivity and competitiveness like hybrid cloud and artificial intelligence. Overall, we believe the tailwinds outweigh the headwinds and technology spend will continue to outpace GDP. In this past quarter, we saw good revenue growth in software and consulting. In infrastructure, more than a year into the product cycle, we continue to see good adoption of Z16. Our overall growth reflects our ability to help clients to leverage data and AI for competitive advantage, automate IT environments and seamlessly integrate hybrid cloud solutions.
That provides governance tools businesses need to mitigate risks and ensure compliance through the lifecycle.
This is a key consideration for clients as the golf beyond early proof of concepts into real deployments.
To bring our AI capabilities to life, we have more than 20000 data and AI consultants, including a center of excellence for generative AI.
Our team's help clients navigate the AI landscape from crafting our strategy understanding how AI can be used and deploying AI responsibly.
These consultants also provide valuable real time feedback to our product teams.
As in hybrid cloud our ecosystem across GSI Isps in Hyperscale is plays a critical role in bringing generative AI to our clients.
Arvind Krishna: We also continue to position our business for the future, launching new products and offerings, forging and expanding key partnerships, investing in talent and skills and focusing our portfolio. We have been taking concrete actions to deliver productivity in our own business. All of this results in an IBM that is aligned to our clients most pressing needs and has a stronger financial profile. Our third core results are another proof point.
The work we are doing clear patterns are emerging in terms of the AI enterprise use cases.
Based on extensive feedback and trials to date three have risen to the top.
God modernization customer service and digital labor, all have broad relevance and deliver tangible business benefits.
We've also seen this internally as we apply our AI capabilities to areas such as client support HR. It.
Arvind Krishna: Typically, at this point, I talk about hybrid cloud and the progress we have made. Hybrid cloud remains vitally important to our clients and to our business.
Optimization and source to pay to automate a significant portion of tasks and improve the productivity of our people.
Arvind Krishna: Given the inflection in AI and more specifically generative AI, I want to spend more time today on AI and how we are approaching this opportunity. We believe that generative AI will be multi-models with clients using a combination of IBM's models, other companies' models, their own proprietary models and open source models. This hybrid approach to AI is similar to the hybrid approach to cloud. Let me give you an overview of the capabilities we have in building.
Our book of business in the third quarter, specifically related to generative AI was in the low hundreds of millions of dollars.
Interest is larger.
With thousands of hands on interactions with our clients.
These are across our largest clients and smaller clients.
It lays the groundwork for future what the next opportunities.
Let me close the discussion on AI by talking about a couple of client examples.
Don on broad Street is leveraging our consulting and software capabilities fueled by what's the next to help their clients create proprietary generative AI solutions.
Arvind Krishna: Our generative AI software stack starts with Red Hat OpenShift, which serves as a foundation that allows clients to operate in a hybrid environment. Data services help make the data ready for AI. What's an X is a core platform that enables clients to train, tune, validate and deploy AI models. We are providing models that address specific domains such as code, language and cyber security among others. Our AI assistants include the what the next code assistant to augment developers, what the next assistant to augment customer service agents, and what the next orchestrate to augment employees.
IBM and <unk> also just announced a new solution powered by Watson next August rates to enhance <unk> people advisory services.
We continue to bring innovations to the market in areas other than AI.
This includes new innovations to our industrial leading hybrid cloud platform Red hat open shift, which was recognized recently by both Gartner and Forrester as the leader in container management.
We completed the acquisition of <unk>, which complements our automation capabilities.
In quantum we are making good progress in building practical quantum computers that can solve hard problems in areas, such as risk finance and materials.
Arvind Krishna: James. This quarter, we introduced new AI capabilities for our clients and partners. We unveiled Granite, a multi-billion parameter foundation model on whatthenex.ai, which excels in both language and code. We also introduced the whatthenex code assistant. This includes the whatthenex code assistant for Z to help clients accelerate the modernization of mainframe code and apps. It's fueled by a 20 billion parameter model and can, as an example, swiftly translate cobalt to Java. There are hundreds of billions of lines of code written in cobalt, so the opportunity is significant.
Clothing.
We accomplished a lot this quarter.
We launched our generative AI platform and have good momentum in helping our clients use this important technology.
We've continued to take portfolio actions to increase our focus on hybrid cloud and AI.
And we are applying AI within our own business, improving execution speed and unlocking real value.
All of this reinforces my confidence in our future.
We're executing a strategy that closely resonate with our clients needs and this is propelling our business forward.
Arvind Krishna: Looking forward, we plan to launch whatthenex.governance before the end of the year that provides governance tools, businesses need to mitigate risks and ensure compliance through the AI life cycle. This is a key consideration for clients as the go beyond early proof of concepts into real deployments. To bring our AI capabilities to life, we have more than 20,000 data and AI consultants, including a center of excellence for generative AI. Our teams help clients navigate the AI landscape for crafting a strategy, understanding how AI can be used, and deploying AI responsibly.
Three quarters into the year, we are well positioned to deliver on 2023 expectations for both revenue growth and free cash flow.
Now to offer you a more detailed view of our results and the rest of 2023.
Hand, it over to Jim.
Thanks, Arvind I'll get right into the financial highlights of the quarter.
We delivered $14 $8 billion of revenue $2 3 billion of operating pre tax income and $2 20 of operating earnings per share.
Through the first three quarters of the year, we generated $5 $1 billion of free cash flow.
Arvind Krishna: These consultants also provide valuable real-time feedback to our product teams. As in hybrid cloud, our ecosystem across GSI, ISVs and hyperscalers plays a critical role in bringing generative AI to our clients. In the work we are doing, clear patterns are emerging in terms of the AI enterprise use cases. Based on extensive feedback and trials to date, three have risen to the top. Code modernization, customer service, and digital labor all have broad relevance and deliver tangible business benefits.
Reported revenue growth was four 6%. This includes just over a point of growth from currency translation, which is significantly less than the currency rates suggested in July.
In fact currency movements over the last 90 days impacted our third quarter revenue by about $250 million.
At constant currency, our revenue was up three 5%.
As is typical I'll focus the discussion on constant currency.
Arvind talked about clients' priorities in today's environment.
Which are driving solid growth in our software and consulting offerings I'll remind you software and consulting our two growth factors and together make up about three quarters of our revenue base.
Arvind Krishna: We have also seen this internally, as we apply our AI capabilities to areas such as client support, HR, IT optimization, and source-to-pay to automate a significant portion of tasks and improve the productivity of our people. Our book of business in the third quarter specifically related to generative AI was in the low hundreds of millions of dollars. The interest is larger with thousands of hands-on interactions with our clients. These are across our largest clients and smaller clients which lays the groundwork for future what the next opportunities.
Software revenue was up 6% as clients leverage their data for insights and automate their it in a hybrid.
<unk> environment.
We had good growth in both hybrid platform and solutions and transaction processing revenue.
Our consulting business had another solid quarter with 5% revenue growth strong signings performance and.
And a book to bill ratio greater than 1.15 over the last year.
We are capitalizing on our continued momentum in the market as.
Arvind Krishna: Let me close the discussion on AI by talking about a couple of client examples. John and Brad Street is leveraging our consulting and software capabilities fueled by what the next to help their clients create proprietary generative AI solutions. IBM and EY also just announced a new solution powered by what the next orchestrate to enhance EY's people advisory services. We continue to bring innovations to the market in areas other than AI. This includes new innovations to our industrial-leading hybrid cloud platform, Red Hat OpenShift, which was recognized recently by both Godter and Forester as the leader in container management.
As we help clients get value from hybrid cloud and AI and leverage our strategic partnerships.
Our infrastructure revenue was down 3% with growth in Z systems.
More and more we are seeing clients embrace ibm's and their hybrid cloud environments, especially in regulated industries.
This growth was offset by declines in distributed infrastructure and infrastructure support.
Ibm's revenue growth together with the good portfolio mix and yield from our productivity initiatives generated strong margin profit and free cash flow performance.
Operating gross margin expanded 160 basis points and operating pre tax margin expanded 170 basis points.
Arvind Krishna: We completed the acquisition of AppTO, which complements our IT automation capabilities. In Quantum, we are making good progress in building practical quantum computers that can solve hard problems in areas such as risk, finance, and materials. In closing, we accomplish a lot of this quarter. We launched our generative AI platform and have good momentum in helping our clients use this important technology. We continue to take portfolio actions to increase our focus on hybrid cloud and AI, and we are applying AI within our own business, improving execution speed and unlocking real value.
Within that PCI margin, we absorbed a year to year currency impact of over 150 basis points disc.
Despite that headwind our margin expansion was broad based with improvements in every business segment.
Driving efficiency and productivity has always been part of our operating and financial models. These.
These ongoing productivity initiatives enable reinvestment in the business increased financial flexibility and contribute to margin expansion.
Arvind Krishna: All of this reinforces my confidence in our future. We are executing a strategy that closely resonates with our clients' needs and this is propelling our business forward. Three quarters into the year, we are well positioned to deliver on 2023 expectations for both revenue growth and free cash flow.
Our activities range from simplifying our application environment to digitally transforming our business processes by applying AI at scale.
We're ahead of pace to achieve our target of $2 billion in annual run rate savings by the end of 2024.
While there is still more to do I am pleased with our progress the.
Jim Kavanaugh: Now, to offer you a more detailed view of our results and the rest of 2023, I'll hand it over to Jim. Thanks, Arvin. I'll get right into the financial highlights of the quarter. We delivered $14.8 billion of revenue, $2.3 billion of operating pre-tax income, and $2.20 of operating earnings per share. Through the first three quarters of the year, we generated $5.1 billion of free cash flow. Reported revenue growth was 4.6%. This includes just over a point of growth from currency translation, which is significantly less than the currency rates suggested in July.
The combination of our revenue and margin performance yielded strong profit growth operating.
Operating pre tax profit was up 17% to $2 $3 billion.
We generated $1 $7 billion of free cash flow in the quarter and over $5 billion year to date, which is up $1 billion versus last year.
Free cash flow growth through the first three quarters was primarily driven by cash sourced from our operating profit performance.
We also had working capital efficiencies driven by solid collections.
These growth drivers were partially offset by higher performance based compensation payments earlier in the year.
Jim Kavanaugh: In fact, currency movements over the last 90 days impacted our third quarter revenue by about $250 million. At constant currency, our revenue was up 3.5%. As is typical, I'll focus the discussion on constant currency. Arvin talked about clients' priorities in today's environment, which are driving solid growth in our software and consulting offerings. I'll remind you, software and consulting are our two growth factors, and together make up about three quarters of our revenue base.
In terms of cash usage year to date, we spent about $5 billion in acquisitions and returned $4 5 billion to shareholders through dividends.
Our resulting cash balance at the end of September was $11 billion, that's up over $2 billion from year end, but with the acquisition of <unk> in the third quarter cash is down over $5 billion from June.
Our debt balance is now $55 billion also down from June.
Putting this all together.
Jim Kavanaugh: Software revenue was up 6% as clients leveraged their data for insights and automate their IT in a hybrid environment. We had good growth in both hybrid platform and solutions and transaction processing revenue. Our consulting business had another solid quarter with 5% revenue growth, strong signings performance, and a book to bill ratio greater than 1.15 over the last year. We are capitalizing on our continued momentum in the market as we help clients get value from hybrid cloud and AI and leverage our strategic partnerships.
Our business fundamentals are solid.
Sustainable revenue growth margin expansion solid cash generation and a strong balance sheet with financial flexibility to support our business into the future.
Turning to the segments software revenue grew 6% with contribution from our hybrid platform of solutions and transaction processing.
This performance reflects growth in both our transactional revenue and our recurring revenue base, which is about 80% of our annual software revenue.
In hybrid platform and solutions revenue was up 7% with growth across Red hat automation and data in AI as we execute our platform based approach the hybrid cloud and AI.
Jim Kavanaugh: Our infrastructure revenue was down 3% with growth in Z6, and IBC. More and more, we are seeing clients embrace IBM's E in their hybrid cloud environments, especially in regulated industries. This growth was offset by the clients and distributed infrastructure and infrastructure support. IBM's revenue growth, together with the good portfolio mix, and yield from our productivity initiatives, generated strong margin, profit, and free cash flow performance. Operating Gross Margin expanded 160 basis points, and operating pre-tax margin expanded 170 basis points.
Red hat revenue was up 8%, we continue to deliver good growth and open shift and ansible, both gaining share again this quarter.
Clients are committing to a hybrid cloud approach with annual bookings up 14% in the quarter.
This includes double digit growth across well open shift and ansible, partially offset by headwinds in consumption based services.
ITM business automation, our top client priorities and we've been investing to capture the opportunity.
Jim Kavanaugh: Within that PTI margin, we absorbed a year-to-year currency impact of over 150 basis points. Despite that headwind, our margin expansion was broad base, would improvements in every business segment. Driving efficiency and productivity has always been part of our operating and financial models. These ongoing productivity initiatives enable reinvestment in the business, increase financial flexibility, and contribute to margin expansion. Our activities range from simplifying our application environment to digitally transforming our business processes by applying AI at scale.
This quarter, our automation revenue grew 13% with pervasive growth across all business areas.
We had strength in AI ops and management driven by good performance and in scanner turbine AMIC and now App.
As clients look to optimize business outcomes and boost productivity.
Data and AI revenue was up 6%.
Growth areas include data fabric and customer care as enterprise clients are both preparing for and adopting generative AI solutions leveraging Watson X.
We also grew in Essent and supply chain management as we help enterprises run sustainable operations.
Jim Kavanaugh: We are ahead of pace to achieve our target of $2 billion in annual run rate savings by the end of 2024. While there is still more to do, I am pleased with our progress. The combination of our revenue and margin performance yielded strong profit growth. Operating pre-tax profit was up 17 percent to $2.3 billion. We generated $1.7 billion of free cash flow in the quarter, and over $5 billion a year-to-date, which is up $1 billion versus last year.
Security revenue declined 3%, we delivered growth in security software driven by data security and identity and access management.
This was more than offset by declines in managed security services.
Looking across these businesses our hybrid platform of solutions <unk> has grown to $14 billion up 7% since last year.
And transaction processing revenue was up 5% throughout this year, we've been talking about how the success over the last couple of Z systems cycles is driving demand for this mission critical software.
Jim Kavanaugh: Free cash flow of growth through the first three quarters was primarily driven by cash source from our operating profit performance. We also had working capital efficiencies driven by solid collections. These growth drivers were partially offset by higher performance-based compensation payments earlier in the year. In terms of cash uses, year-to-date, we spent about $5 billion in acquisitions and returned $4.5 billion to shareholders through dividends. Our resulting cash balance at the end of September was $11 billion. That's up over $2 billion from year-end, but with the acquisition of Aptio in the third quarter, cash is down over $5 billion from June. Our debt balance is now $55 billion also down from June.
This together with price increases contributed to year to date growth in both recurring and transactional software revenue and transaction processing.
Moving to profit for the software segment, we expanded gross and pre tax margins. Our pre tax margin was up 120 basis points, even while absorbing over two points of impact from currency.
We continue to deliver operating leverage driven by our revenue scale and mix this quarter.
Our.
<unk> revenue was up 5% with growth across all three lines of business and geographies.
Jim Kavanaugh: Putting this all together, our business fundamentals are solid, which is sustainable revenue growth, margin expansion, solid cash generation, and a strong balance sheet with financial flexibility to support our business into the future. Turning to the segments, software revenue grew 6%, with contribution from hybrid platform and solutions, and transaction process. Sussan, this performance reflects growth in both our transactional revenue and our recurring revenue base, which is about 80% of our annual software revenue.
With another quarter of strong signings as I said, our trailing 12 month book to Bill ratio is now over 115.
<unk> continue to prioritize transformation projects that enable cost savings and productivity.
These results are a proof point that we are well positioned to meet these needs in today's complex environment.
Ibm's focused hybrid cloud and AI strategy has become even more of a differentiator as clients interest in generative AI continues to ramp.
We are helping clients understand how AI can be used to automate tasks make better decisions with speed and improve customer experiences.
Jim Kavanaugh: In hybrid platform and solutions, revenue was up 7% with growth across Red Hat, Automation, and Data NAI, as we execute our platform based approach, the Hybrid Cloud NAI. Red Hat revenue was up 8%. We continue to deliver good growth in OpenShift and Ansible, both gaining share, again, this quarter. Clients are committing to our hybrid cloud approach with annual bookings up 14% in the quarter. This includes double-digit growth across Red Hat, OpenShift, and Ansible, partially offset by headwinds in consumption-based services.
We made a series of AI announcements over the last few months demonstrated continued advancement of our strategic partnerships.
Refining clients with the opportunity to accelerate their transformation and deploy generally AI responsibly, whether that be leveraging AI capabilities of IBM, our partners or a combination.
Today, our strategic partnerships account for about 40% of consulting revenue and have continued to grow double digits across revenue and signings.
Jim Kavanaugh: IT and Business Automation are top client priorities, and we've been investing to capture their opportunity. This quarter, our automation revenue grew 13%, with pervasive growth across all business areas. We had strength in AI ops and management, driven by good performance in Instana, Terminomic, and now Apo as clients looked to optimize business outcomes and boost productivity. Data in AI revenue was up 6%. Growth areas include data fabric and customer care, as enterprise clients are both preparing for and adopting generative AI solutions, leveraging Watson X.
In aggregate, our Hyperscale or partnership revenue was up over 40% and signings essentially doubled year to year.
Additionally, a red hat practice, which helps clients optimize how they build deploy and manage applications for a hybrid cloud environment has continued to grow at a double digit rate.
With over $1 billion of signings in the quarter.
All of what I, just mentioned for market demand to how we're positioned and partnering to our investments to drive growth is reflected in our overall consulting revenue performance.
You can see that play out across our three lines of business and.
Jim Kavanaugh: We also grew an asset and supply chain management, as we help enterprises run sustainable operations. Security revenue declined 3%. We delivered growth and security software, driven by data security, and identity and access management. This was more than offset by declines in managed security services. Looking across these businesses, our hybrid platform and solutions ARR has grown to $14 billion, up 7% since last year. In transaction processing, revenue was up 5%. Throughout this year, we've been talking about how the success of the last couple of z-system cycles is driving demand for this mission critical software.
In business transformation revenue grew 5% again led by data and technology transformations, including AI and analytics focused projects.
Finance and supply chain transformations also contributed to growth.
And technology consulting revenue was up 1%.
Growth in cloud based application development and modernization work was partially offset by declines in on Prem application focused projects.
And application operations revenue grew 7% driven by both cloud application management and platform Engineering services.
And platform engineering, we help clients design and application environment that run securely and smoothly at scale.
Jim Kavanaugh: This, together with price increases, contributed to year-to-date growth in both recurring and transactional software revenue in transaction processing. Moving to profit for the software segment, we expanded growth and pre-text margins. Our pre-text margin was up 120 basis points, even while absorbing over two points of impact from currency. We continued to deliver operating leverage driven by our revenue scale and mixed this quarter. Our consulting revenue was up 5% with growth across all three lines of business and geographies.
Moving to consulting profit, we expanded gross margin of 150 basis points pre.
Pre tax margin expanded 40 basis points to just over 10%.
Our year to year margin performance reflects productivity actions, we've taken mitigated by increased labor costs and about a point of pre tax margin impact from currency.
Moving to the infrastructure segment revenue was down 3% high.
Hybrid infrastructure revenue was flat while infrastructure support declined 7%.
Within hybrid infrastructure Z systems grew 9% and a seasonally smaller revenue quarter.
Jim Kavanaugh: With another quarter of strong signings, as I said, our trailing 12-month book to bill ratio is now over 1.15, and Dave. Clients continue to prioritize transformation projects that enable cost savings and productivity. These results are a proof point that we are well positioned to meet these needs in today's complex environment. IBM's focus hybrid cloud and AI strategy has become even more of a differentiator as clients' interest in generative AI continues to ramp.
<unk> revenue remains well ahead of prior cycles after six quarters of availability.
The program strength reflects both growing enterprise workload requirements and the economic value at scale of the platform.
In traditional processing analytics consolidation.
In fact installed Mips capacity for Linux on Z has grown more than fourfold over the last decade.
<unk> continue to value the security resiliency and hybrid cloud capabilities of the Z systems platform.
Jim Kavanaugh: We are helping clients understand how AI can be used to automate tasks, make better decisions with speed, and improve customer experiences. We made a series of AI announcements over the last few months, demonstrating continued advancement of our strategic partnerships, where providing clients with the opportunity to accelerate their transformation and deploy generative AI responsibly, whether that be leveraging AI capabilities of IBM, our partners or a combination. Today, our strategic partnerships account for about 40% of consulting revenue, and have continued to grow double digits across revenue and signings.
Distributed infrastructure revenue was down 6% as compared to a strong growth and last year of 21% as we introduced innovation across storage and power 10.
This quarter, we had growth in power offset by declines in storage.
In the infrastructure segment, we had strong gross and pre tax margin performance.
Pre tax margin expanded 350 basis points, reflecting benefits from our portfolio mix with our Z systems performance and productivity.
While absorbing over a point of impact from currency.
Jim Kavanaugh: In aggregate, our hyper-scale partnership revenue was up over 40% and signings essentially doubled year to year. Additionally, our Red Hat practice, which helps clients optimize how they build, deploy and manage applications for a hybrid cloud environment has continued to grow at a double digit rate, with over $1 billion of signings in the quarter. All of what I just mentioned from market demand, the how we are positioned and partnering to our investments to drive growth, is reflected in our overall consulting revenue performance.
Now, let me bring it back up to the IBM level to talk about our expectations before we go to Q&A.
Just about two years ago, we introduce today's IBM ey.
A more focused business with a platform based approach to hybrid cloud and AI.
Since then we've continued to invest organically and inorganically.
Bring new products and innovation to market.
Expand our ecosystem and our talent base and drive productivity across our business.
The result is a business that addresses today's client needs what.
With a stronger financial profile.
Jim Kavanaugh: You can see that play out across our three lines of business. In business transformation, revenue grew 5%, again led by data and technology transformations, including AI and analytics focused projects. Finance and supply chain transformations also contributed to growth. In technology consulting, revenue was up 1%, growth in cloud-based application development and modernization work was partially offset by declines in on-prem application focused projects. In application operations, revenue grew 7%, driven by both cloud application management and platform engineering services.
Our third quarter performance reinforces this progress with three 5% revenue growth gross and pre tax margin expansion and strong free cash flow generation.
Now with three quarters of the year behind US we are holding our full year view of our two primary financial metrics revenue growth and free cash flow.
We continue to expect constant currency revenue growth of 3% to 5% and free cash flow of about $10 $5 billion, that's up $1 2 billion.
Over last year.
We've had solid revenue performance, all year, and our growth factors of software and consulting.
We still expect software revenue growth at the high end of its mid single digit model.
Jim Kavanaugh: In platform engineering, we helped clients design an application environment that runs securely and smoothly at scale. Moving to consulting profit, we expanded gross margin 150 basis points, pre-text margin expanded 40 basis points to just over 10%. Our year to year margin performance reflects productivity actions we've taken mitigated by increased labor costs and about a point of pre-text margin impact from currency. Moving to the infrastructure segment, revenue was down 3%, hybrid infrastructure revenue was flat, while infrastructure support declined 7%.
And consulting revenue in the 6% to 8% range.
Infrastructure revenue of course reflects product cycle dynamics.
Total with one quarter to go it's prudent to assume the low end of Ibm's, 3% to 5% range.
We are making great progress in our productivity initiatives.
The work we are doing to digitally transform our business not only makes us more nimble by simplifying and streamlining our processes and operations, but it also frees up spend for reinvestment provides financial flexibility and delivers operating leverage.
This contributes to solid margin and free cash flow performance.
Jim Kavanaugh: Within hybrid infrastructure, ZSystems grew 9% in a seasonally smaller revenue quarter. Z16 revenue remains well ahead of prior cycles after six quarters of availability. The program strength reflects both growing enterprise work load requirements and the economic value at scale of the platform in traditional processing and Linux consolidation. In fact, install MIPS capacity for Linux on Z has grown more than fourfold over the last decade. Clients continue to value the security, resiliency, and hybrid cloud capabilities of the ZSystems platform.
We continue to expect about a half a point of operating pre tax margin improvement and we see a mid teens tax rate for the year.
Our free cash flow performance has been driven primarily from our profit performance through.
Through the first three quarters were up a $1 billion year to year, and we delivered nearly 50% of our full year expectation, which is ahead of our historical attainment.
As always we are reliant on the seasonally strong fourth quarter, we're on track to achieve about $10 5 billion for the year.
As I look specifically at the fourth quarter with the recent currency movements, we now see currency to be neutral to a one point headwind to revenue growth.
Jim Kavanaugh: Distributed infrastructure revenue was down 6% as compared to a strong growth in last year of 21% as we introduced innovation across storage and power 10. This quarter we had growth and power offset by declines and storage. In the infrastructure segment we had strong growth and pre-tax margin performance. Pre-tax margin expanded 350 basis points reflecting benefits from portfolio mix with our ZSystems performance and productivity while absorbing over a point of impact from currency.
That's nearly $600 million worse than 90 days ago.
I would expect constant currency revenue growth in the fourth quarter to be similar to the third.
That's despite a tough compare from last year's strong <unk> contribution and software and the large these 16 transactional performance in infrastructure.
This demonstrates continued momentum in our underlying business.
Bringing it all together, we've clearly got a higher growth higher value business with strong cash generation, a business well positioned for the future.
Jim Kavanaugh: Now let me bring it back up to the IBM level to talk about our expectations before we go to Q&A. Just about two years ago we introduced today's IBM, a more focused business with a platform-based approach to hybrid cloud and AI. Since then we've continued to invest organically and organically, bring new products and innovation to market, expand our ecosystem and our talent base, and drive productivity across our business. The result is a business that addresses today's client needs with a stronger financial profile.
Arvind and I are now happy to take your questions.
Tricia, let's get started.
Thank you Jim before we begin the Q&A I'd like to mention a couple of items.
First supplemental information is provided at the end of this presentation and then second I'll try. This one last time, but I ask you to refrain from multi part questions to allow time for more people to participate.
Operator, let's please open it up for questions.
Thank you at this time, we'll begin the question and answer session of the conference to ask a question. Please press star one and record your name clearly if you need to withdraw your question Press Star two.
Jim Kavanaugh: Our third quarter performance reinforces this progress with 3.5% revenue growth, growth, and pre-tax margin expansion, and strong free cash flow generation. Now, with three quarters of the year behind us we are holding our full-year view of our two primary financial metrics, revenue growth, and free cash flow. We continue to expect constant currency revenue growth of 3-5%, and free cash flow of about $10.5 billion that's up $1.2 billion over last year. We've had solid revenue performance all year in our growth vectors of software and consulting.
Again to ask a question please press star one.
Our first question comes from Amit <unk> with Evercore. Your line is open.
Jim Kavanaugh: We still expect software revenue growth at the high end of its mid-single digit model, and consulting revenue in the 6-8% range. Infrastructure revenue, of course, reflects product cycle dynamics. In total, with one quarter to go, it's prudent to assume the low end of IBM's 3-5% range. We are making great progress in our productivity initiative. The work we are doing to digitally transform our business not only makes us more nimble by simplifying and streamlining our processes and operations but it also frees up spend for reinvestment, provides financial flexibility and delivers operating leverage.
Yeah. Thanks, a lot good afternoon, everyone and I will stick to Patricia Patricia has one last time I'll ask one question only rule.
Yes, I guess, there's a lot of macro concerns out there to say the least.
Hoping you could spend a little bit of time, just talking about when you talk to your customers and you know I'm sure you can.
With a lot of the fortune 500 companies given this macro environment how are they shifting are prioritizing their it budget dollars.
And I fully understand you're talking about generative AI and how our.
Ill beneficial theres going to be but given the macro environment given the constrained budgets I guess where are they taking money away from to fund. These investments I'd love to just understand the customer feedback you're getting and how does the priority changing as they go forward.
Hi, Amit so thanks for the question.
And it's actually a wonderful to talk about this.
So generative AI just for me to very quickly reiterate the use cases, we found that our clients were really.
Moving onto.
<unk> God.
On customer service.
And on I'll call. It general digital workers, which is productivity in every enterprise function.
So if you look at cord.
To a person every one of our clients said, we don't intend to get rid of any developers, but this allows us to take care of the debt that we've accumulated and makes every develop a more productive.
Jim Kavanaugh: This contributes to solid margin and free cash flow performance. We continue to expect about a half a point of operating pre-tax margin improvement and we see a mid-teens tax rate for the year. Our free cash flow performance has been driven primarily from our profit performance. Through the first three quarters we're up a billion dollars year to year and we deliver nearly 50% of our full year expectation which is ahead of our historical attainment.
I'll kind of point out most enterprises are very quick to realize if you are more productive that means you have a competitive advantage to your peers and if they are a competitive advantage to the Aps they will take share without spending more on labor, that's an incredible long term competitive advantage when.
When you go to customer service that is a cost takeout aspect, but it's not 100%, but there is probably a 20% to 30% if you're going to have more calls more chats answer by AI that means you can have much more volume with a smaller number of people. So there is both also I'll point out to our audience AI does not get.
Jim Kavanaugh: While as always we are relying on a seasonally strong fourth quarter we're on track to achieve about ten and a half billion dollars for the year. As I look specifically at the fourth quarter with the recent currency movements we now see currency to be neutral to a one point headwind to revenue growth. That's nearly six hundred million dollars worse than ninety days ago. I'd expect constant currency revenue growth in a fourth quarter to be similar to the third. That's despite a tough compare from last year's strong ELA contribution in software and the large Z16 transactional performance in infrastructure. This demonstrates continued momentum in our underlying business.
Tired it doesn't get angry at doesn't get upset so there is a NPS improvement you get along with it and then on the third one on digital workers. There likely is a small productivity improvement, but I would call it more in the four 5%, 10% not 30% 40%.
So in the macro headwinds you're mentioning higher interest rates are tougher to get skilled people.
All of the issues around the Geo political uncertainty that causes some of the concern.
Might've caused a pause in some other environment.
AI side and to be candid the hybrid cloud side offers them a way through that without having to decrease their ambitions for next year and I think we are seeing every one of them play to that and I think that these are more fundamental these are more processes than some of the other areas the people.
Jim Kavanaugh: Bring it all together we've clearly got a higher growth higher value business with strong cash generation a business well positioned for the future.
Patricia Murphy: Arvin and I are now happy to take your questions for Trisha let's get started. Thank you Jim.
Worrying about two or three years ago, when two or three years ago people were worried a lot what what do I do to keep all our employees happy and can I add up all the tools for that I think there is much less of a focus on that area.
Amit Daryanani: Before we begin the Q&A I'd like to mention a couple of items. First supplemental information is provided at the end of this presentation and then second I'll try this one last time but I ask you to refrain from multi part questions to allow time for more people to participate. Operator let's please open it up for questions. Thank you. At this time we'll begin the question and answer session of the conference to ask a question please press star one and record your name clearly.
Thanks, Amit let's go to the next question. Please.
Next we will hear from <unk> Mohan with Bank of America You May proceed.
Yes. Thank you so much.
I was wondering if you could comment a little further on the right had deceleration in <unk>, Jim it sounded like.
Amit Daryanani: If you need to withdraw your question press star two again to ask a question please press star one. Our first question comes from Amit Daria Nani whatever core your line is open. Yep thanks a lot good afternoon everyone and I will stick to Patricia Patricia's one last time last one question only room. I guess Arvin there's a lot of macro concerns out there to say the least. I'm hoping you could spend a little bit of time just talking about you know when you talk to your customers and you know I'm sure you engage with a lot of the Fortune 500 company.
It was driven partly by consumption based services stuff, where Doug was somewhat weaker.
Are you still expecting <unk> growth in that 11% to 13% range for the year end can you unpack some of the software elements and in the fourth quarter between Red hat transaction processing and perhaps up to you. Thank you so much.
Yes. Thanks, So obviously I appreciate the question obviously, we're very pleased overall with our software segment performance growing 8% actual 6% at constant currency really led pretty pervasive Lee with growth across the board automation led.
Amit Daryanani: Given this macro environment how are they shifting a prioritizing their IT budget dollars and I fully understand every you're talking about generative AI and how. How beneficial is going to be but given the macro environment given the constraint IT budgets I guess where are they taking money away from to fund these investment. I love just understand you know the customer feedback you're getting and how's the priority changing as they go forward.
Red hat at 8% as you said and I'll come to that in a second but data and AI overall.
Underpinning all of that is like we said starting the year one a very strong solid recurring revenue base high value, 80% of that portfolio by the way growing mid single digit growth do you see that play out in our transaction processing that we call the growth factor and then also.
Amit Daryanani: Hi Amit, so thanks for the question and it's actually wonderful to talk about this. So, Generative AI, just for me to very quickly reiterate the use cases we found that our clients were really climbing onto on code, on customer service, and on, I'll call it general digital workers which is productivity in every enterprise function. So, if you look at code, two a person, every one of the clients said we don't intend to get rid of any developers, but this allows us to take care of the tech debt that we've accumulated and makes every developer more productive.
Our hybrid platform and solution business $14 billion <unk> that's growing.
High single digit overall now within that you see red hat Red hat, we talked about in the prepared remarks first of all Arvind and I would acknowledge we came in a couple of points below our expectation.
And I think that's an execution discussion overall embedded in that where did that come from it came from because I think this is very important it came from the consumption based services and offerings side of the equation, which by the way is about 20% of our portfolio of shorter duration.
Amit Daryanani: Amit, I'll kind of point out, most enterprises are very quick to realize, if you are more productive that means you have a competitive advantage to your peers and if they have a competitive advantage to their peers, they'll take share without spending more on labor. That's an incredible long-term competitive advantage. When you go to customer service, there is a cost-take or aspect, but it's not 100%, but there is probably a 20-30%, if you can have more calls, more chats, answered by AI, that means you can have much more volume with a smaller number of people, so there is both.
Overall and it went from last quarter high single digit which is about what the model is so low single digit overall.
If you look at that and compare that now let's look at the other part of the portfolio the remaining 80%.
That is our subscription based business, that's our rail franchise industry market leader, that's Red had open shift and that sensible, we had a very strong annualized bookings in the quarter, which against subscription based business model, we talked about all year long, we're going to be backend loaded on renewal.
Amit Daryanani: Also, I'll point out to our audience, AI does not get tired, it doesn't get angry, it doesn't get upset, so there is an NPS improvement you get along with it. And then on the third one on digital workers, there likely is a small productivity improvement, but I would call it more in the 4, 5, 10%, not 20, 30, 40%. So, in the macro-headwinds you're mentioning, higher interest rates are tougher to get skilled people, all of the issues around the geopolitical uncertainty that causes some of the concern, or might have caused a pause in some other environments.
We grew that mid teens overall, including services by the way if I extract out there 20% portfolio of services and just look at the core subscription based businesses of Red hat open shift in Ansible, we grew 19% overall 110 plus percent.
And there are on that renewal.
<unk> of that business and within that 19% open shift and ansible, we're north of 40% with well growing double digits.
Amit Daryanani: The AI side, and to be candid, the hybrid cloud side, offers them a way through that without having to decrease their ambitions for next year. And I think we're seeing every one of them play to that, and I think that these are more fundamental, these are more core processes, than some of the other areas that people were worrying about two or three years ago, when two or three years ago, people were worrying a lot about what do I do to keep all our employees happy, and can I add up all the tools for that. I think there's much less of a focus on that area. Thanks, Ahmed.
So putting all that together I think it's prudent right now when we look at fourth quarter, we're only building into our model again.
Software at the high end of our segment model, we're only building in high single digit we have to continue to monitor what happened to us in the third quarter get the team focused on execution, but I would tell you just given the signings growth that we posted in the third quarter and by the way another good pipeline.
Wamsi Mohan: Let's go to the next question, please. Next, you will hear from one's email, hand with Think of America, you may proceed. Yes, thank you so much. I was wondering if you could comment a little further on the red hat deceleration in 3Q Jim sounded like, was driven partly by consumption-based services that were somewhat weaker. Are you still expecting red hat growth in that 11 to 13% range for the year, and can you unpack some of the software elements in the fourth quarter between red hat and action processing?
In the fourth quarter, we feel very confident in the long term posture.
Red hat growing double digits, we just got to get through and monitor what's happening to us on the services side. So thanks very much for the question. Thanks.
Wamsi Mohan: And perhaps that too. Thank you so much. Yeah, thanks, Ramsay. I appreciate the question. Obviously, we're very pleased overall with our software segment performance, growing 8%, actual 6% of constant currency, really led pretty pervasively with growth across the board. Automation led, red hat at 8%, as you said, and I'll come to that in a second. But data and AI overall, really underpinning all that, is like we said, starting the year, won a very strong, solid, recurring revenue base, high value, 80% of that portfolio.
Thanks, Tom Let's go to the next question. Please.
Our next question comes from Toni <unk> with Bernstein you May proceed.
Yes, Thank you for taking the question.
Jim It sounds like your guidance for Q4, Kevin you expect revenues at constant currency to be at the low end is somewhere around $17 3 billion.
Which is quite a bit below normal seasonality. Despite the fact that you have <unk> and you had strong services signings.
So I'm wondering if you could confirm if thats sort of the number that you're suggesting and was there some transactional pull forward in mainframe from Q4 to Q3.
This quarter.
Or are you expecting some deceleration in transaction processing.
Maybe you could kind of confirm the number for Q4, and then unpack it a little bit as to why.
Wamsi Mohan: By the way, growing mid-single-digit growth, you see that play out in our transaction processing that we call the growth factor. And then also our hybrid platform and solution business, $14,000,000,000 ARR that's growing high-single-digit overall. Now, within that, you see red hat. Red hat we talked about in the prepared remarks. First of all, Arvin and I would acknowledge we came in a couple points below our expectation. And I think that's an execution discussion overall.
Why it's below normal seasonality. Thank you.
Great Tony Thanks, very much for the question I appreciate it and I know Patricia really appreciate sticking to one question given it's her last call leading in piloting and.
We thank her for all of our efforts, but we'll have more time to celebrate and in January but as you stated we remain confident in what our guidance is overall with regards to topline revenue growth, 3% to 5%, albeit as we've said low end and that just practically speaking given we have one more quarter to go we said we.
Wamsi Mohan: Embedded in that, where did it come from? It came from, because I think this is very important. It came from the consumption-based services and offering side of the equation, which by the way is about 20% of our portfolio's shorter duration overall, and it went from last quarter high-single-digit, which is about what the model is for low-single-digit overall. If you look at that and compare that now, let's look at the other part of the portfolio, the remaining 80%.
Similar performance fourth quarter.
As we just executed in third quarter constant currency revenue growth rate, let me unpack that to your 0.1st of all at the macro level.
Historically, we would generate quarter to quarter about 2.9 billion ish of revenue.
Last year by the way, we did $2 6 billion up quarter to quarter in revenue.
At 17, three number in that ballpark youre not too far off is about equivalent to last year. It's about $2 6 billion, but I would tell you one thing underneath that Tony is we've seen a very different dramatic change in the currency FX U S dollar strengthening.
Wamsi Mohan: That is our subscription-based business. That's our rail, franchise, industry market leader. That's Red Hat OpenShift, and that's Ansible. We had a very strong annualized bookings in the quarter, which against subscription-based business model, we talked about all year long, we were going to be back and loaded on renewals. We grew that mid-teens overall, including services, by the way. If I extract out that 20% portfolio services, and just look at the course subscription-based businesses of Red Hat OpenShift and Ansible, we grew 19% overall.
Tune about $300 million. If you go look at the math back in 2019, 2000, 22021, so underneath it pretty consistent quarter to quarter performance as last year, which by the way I would highlight was the peak of our Elas cycle last year.
And it was a strong first fourth quarter and a <unk> environment, we're going to match that even taking into account the FX headwinds overall that we called out going forward. One last thing that I'll put and then I'll get into the color is on a profit basis, although you didn't ask.
Wamsi Mohan: 110% plus percent NRR on that renewal rate of that business. Within that 19%, OpenShift and Ansible were north of 40% with rail growing double digits. Putting all that together, I think it's prudent right now when we look at fourth quarter. We're only building into our model. Again, software at the high end of our segment model, we're only building in high single digit. We have to continue to monitor what happened to us in the third quarter, get the team focused on execution, but I would tell you just given the signings growth that we posted in the third quarter, and by the way, another good pipeline in the fourth quarter, we feel very confident in the long-term posture of Red Hat growing double digits. We just got to get through and monitor what's happening to us on the services side. So, thanks very much for the question. Thanks, Ramsey.
<unk> historically profit, we generate somewhere if I remember correctly studying over the weekend about one 1 billion three quarter to quarter.
You look at our operating pre tax margin, which we recommitted the half a point for the year that puts you in a profit range of I don't know billion 7 billion a quarter to quarter. So you see the fundamental operating leverage or what.
What's happening to our business. So you put all that together, we still believe we have a very confident you are at that 3% to 5% by the way led by software delivering three points of that IBM growth.
Consistent I would say very good performance competitively and consulting driving about two points of Ibm's growth infrastructure on the product cycle downside, we said beginning of the year and we're consistent it's about a point hurt IBM and then you got the divestiture impact of about a half a point you put all that together I think thats a pretty good.
Tony Sakonegi: Let's go to the next question, please. Our next question comes from Tony Sakonegi with Bernstein. You may proceed. Yes, thank you for taking the question. Jim, it sounds like your guidance for Q4, given you expect revenue is a constant currency to be at the low end is somewhere around 17.3 billion. Which is quite a bit below normal seasonality despite the fact that you have FDO and you had strong services signings. So, I'm wondering if you could a confirm if that's sort of the number that you're suggesting, and was there some transactional pull forward in mainframe from Q4 to Q3, this quarter, or are you expecting some deceleration and transaction processing?
Year overall and pretty much on top of our model.
Thanks, Sheila and let's go to the next question. Please.
Next we will hear from Matt Swanson with RBC capital markets. Your line is open.
Yeah. Thank you for taking my question, it's great to hear about some of the quantifiable success that you've seen in generative AI, so far, but maybe slipping a little bit whether it's too early consulting engagements and customer conversations where are you seeing some of the choke points that might hold up people from deploying as fast as they want and whether it's.
<unk> Foundation models or some of your other tools.
Around the governance side kind of how thats developing your R&D to develop solutions.
Tony Sakonegi: Maybe you could kind of confirm the number for Q4 and then unpack it a little bit as to why it's below normal seasonality. Thank you. Great. Tony, thanks very much for the question I appreciated. I know Patricia really appreciates sticking to one question given it's her last call leading and piloting. And we thank her for all her efforts, but we'll have more time to celebrate in January. But as you stated we remain confident in what our guidance is overall with regards to top line revenue growth 3 to 5%.
<unk> for those problems.
Yes. Thanks.
Try to address your question here.
I think the concerns that people have.
Coming around.
All of these models accurate how accurate are they do they result in things that may cause long term liability people are worried about the conversation because the here and the read that whether it's <unk>, whether it's office, whether it's cord right.
Tony Sakonegi: I'll be it as we said, low end, and that's just practically speaking given we have one more quarter to go. We said we expect similar performance, fourth quarter, as we just executed in third quarter, constant currency revenue growth. Let me unpack that to your point. First of all, at the macro level, historically we would generate quarter to quarter about 2.9 billionish of revenue. Last year, by the way, we did 2.6 billion up quarter to quarter to revenue.
<unk> are suing some of the producers of large language models.
Alluded to governance that comes more around lifecycle and how do you carry it out over the long term.
Coupled with this are some people's concerns.
You add their own private data into our model now what happens to the model, whereas the protected where does it stay two others learn from it.
So if you begin to unpack all of that.
Tony Sakonegi: That's 17.3 number in that ballpark, you're not too far off, is about equivalent to last year, it's about 2.6 billion. But I would tell you one thing underneath that Tony is we've seen a very different dramatic change in the currency effects US dollar strengthening. To tune about $300 million, if you go look at the math back into 19, 2020, 2021. So underneath it, pretty consistent quarter to quarter performance is last year, which by the way, I would highlight was the peak of our ELA cycle last year.
We begin to say alright for models that are IBM produced we will give you indemnification, meaning we are confident in our ability to stand by the data. We have used to train what is being used to be output and we'll stand behind the same indemnification as you provide for all.
All enterprise software.
As you would expect that's hard for us to do for open source models.
But we believe that that takes care and that is why we are so excited about cord and customer service to start with because thats, where we believe that people can.
Can benefit from this indemnification.
Tony Sakonegi: And it was our strong first fourth quarter in a Z16 environment. We're going to match that even taken into account the effects headwinds overall that we called out going forward. One last thing that I'll put and then I'll get into the color is on a profit basis, although you didn't ask that. Historically, profit, we generate somewhere, if I remember correctly, studying over the weekend, about 1.3 billion quarter to quarter. You look at our operating pre-text margin, which we recommitted a half a point for the year.
Talking about the governance of the lifecycle side people are also worried about some of the long term deployment, because an enterprise may well deploy a model for five or 10 years. So the governance tools that allow you to keep lineage of the data use a cleaner model and then for those adding private data.
Give them a commitment that data stays with them and the refinements of that model go nowhere else helps to mitigate some of the fear and uncertainty around those issues I do believe that this is going to play out well over the next few years, but I also want to point out there are many cases, where people are not worried about.
Tony Sakonegi: That puts you in a profit range of, I don't know, billion seven, billion eight quarter to quarter. So you see the fundamental operating leverage of what's happening to our business. So you put all that together. We still believe we have a very confident year at that three to five percent. By the way, led by software delivery and three points of that IBM growth consistent. I would say very good performance competitively and consulting driving about two points of IBM's growth.
Some of these risks.
If youre, giving a quick website response, you could well use a model that may have some of these risks because the danger in using any of those other areas is small.
So that is how it is playing out right now I expect to see a lot of deployment in 2024 going into full production across the world of whether you use the word large language models, our foundation models or generate of AI.
Tony Sakonegi: Infrastructure around the product cycle downside. We said beginning of the year and we're consistent. It's about a point hurt IBM. And then you got the divestiture impact of about a half a point. You put all that together. I think that's a pretty good year overall and pretty much on top of our model.
Great. Thank you, Matt Let's go to the next question. Please.
Our next question comes from Ben Reitzes with Melius Research Your line is open.
Jim Kavanaugh: Okay, Sheila, let's go to the next question, please. Next, we will hear from Matt Swanson with RBC Capital Markets. Your line is open. Yeah, thank you for taking my question. It was great to hear about some of the quantifiable success that you've seen in generative AI so far, but maybe split me now a little bit, whether it's due early consulting engagements or customer conversations, where you've seen some of the choke points that might hold up people from deploying as fast as they want, whether it's due foundation models, or some of your other tools around the government side, how that's developing your R&D to develop solutions for those problems.
Hey, Thanks, a lot I appreciate it.
My question is on consulting I was very surprised to see 32% bookings growth after 24% the prior quarter seven in the prior quarter.
It's really diverging from your perceived.
Rifle and consulting Accenture and I was just wondering.
What the reasoning you would say is behind that and then Jim.
With regard to those bookings what does that do for your revenue visibility for consulting not only for the fourth quarter, but for early next year I would think.
The good book to Bill.
Makes you feel pretty confident about that six to eight and continuing thanks a lot.
Thanks very much for the question.
Jim Kavanaugh: Yeah, thanks. Let me try to address your question here. Look, I think the concerns that people have are coming around all these models accurate, how accurate are they? Do they result in things that may cause long term liability? People are worried about the conversation because they hear and they read that whether it's artists, whether it's authors, whether it's code writers are suing some of the producers of large language models. You alluded to governance, that comes more around life cycle and how do you carry it out over the long term.
I said earlier.
Pleased with the team overall and consulting.
Not only on the signings and booking but our revenue is well positioned for that 6% to 8%, which gave us confidence to reiterate that but also the fundamentals of that business right. We talked a lot about this over the last handful of years, we're getting good operating leverage in that business. Good cash contribution so all.
All in all pretty pleased overall when you look at the bookings overall I mean, let's just put some statistics. So let me talk about kind of headwind tailwind overall.
Because I think what youre trying to get at is the confidence level, Arvind and I and the team have about this book of business going forward into fourth quarter and into 'twenty four.
Jim Kavanaugh: Coupled with this, some people's concerns, if you add their own private data into a model, now what happens to the model? Where is it protected? Where does it stay? Do others learn from it? So if you begin to unpack all of that, we begin to say, all right, for models that our IBM produced, we will give you indemnification, meaning we are confident in our ability to stand by the data we have used to train what is being used to be output and we'll stand behind the same indemnification as you provide for all enterprise software.
Still seeing very good demand overall in areas around digital transformation application modernization and where there is real technology value productivity cost sufficiency quick payback is there pressure on discretionary based activity.
And that like absolutely, but what we've seen that all year long, we havent seen really any subset of change in the macro and the client buying behaviors overall, but that has enabled us to grow 30 plus percent by the way its strongest bookings quarter, we had quite a period of time and now we've got a.
Jim Kavanaugh: As you would expect, that's hard for us to do for open source models. But we believe that that takes care and that is why we are so excited about code and customer service to start with because that's where we believe that people can benefit from this indemnification. Talking about the governance in the life cycle side, people are also worried about some of the long term deployment because an enterprise may well deploy a model for 5 or 10 years.
Trailing 12 month book to Bill of 116, I think the strongest sent about two and a half years overall now underneath that what's what's going on.
One we've opened up IBM to strategic partnerships, we're seeing great ecosystem velocity and strategic partnership growth signings were about 50% year over year Hyperscale is underneath that two X signings, our hybrid cloud and application modernization red hat.
Jim Kavanaugh: So the governance tools that allow you to keep a lineage of the data used to train a model and then for those adding private data, we give them a commitment that data stays with them and the refinements of that model go over health, helps to mitigate some of the fears and uncertainty around those issues. I do believe that this is going to play out well over the next few years, but I also want to point out there are many cases where people are not worried about some of these risks.
We signed north of $1 billion alone in the quarter now Thats $10 billion inception to date, we got acquisitions that are now accretive and scaling nicely. So far I think from that aspect you look at the top line growth, we feel pretty confident about the 6% to 8% for this year and we feel.
Confident about the value and the growth.
Jim Kavanaugh: If you're giving a quick website response, you could well use a model that may have some of these risks because the danger and using any of those other areas is small. So that is how it's playing out right now. I expect to see a lot of deployment in 2024 going into full production across the world whether you use the word large language models or foundation models or generate a AI. Great. Thank you, Matt.
<unk> of the growth factor of consulting and our book of business heading into 2024, and now with that said headwinds wise, yeah listen to every other services consulting companies there are macroeconomic challenges without a doubt uncertainty.
But we got to go out and compete every single day here and duration I would say not only we had great signings growth, we're monitoring our backlog realization our duration by the way. This year has went up by a couple of months.
But that revenue will play out over time and all in all if I sum it up I think we're taking share I am pleased with the team.
Matt Swanson: Let's go to the next question, please. Our next question comes from Ben Reitzes with Melius Research. Your line is open. Hey, thank a lot. I appreciate it. My question is on consulting. I was very surprised to see 32% bookings growth after 24% the prior quarter, seven the prior quarter. It's really diverging from your perceived rival and consulting expenditure. And I was just wondering what the reasoning you would say is behind that.
Ben Taylor, let's go to the next question.
Our next question will come from Erik Woodring with Morgan Stanley. Your line is open.
Hey, guys. Thanks for taking my question I'll stick to the one as well and then maybe Jim. This is for you you didn't you didn't change your software consulting guidance ranges for the year I forget a minor benefit from after closing earlier in early in <unk>, but you now expect a full year constant currency revenue growth to be at the low end of the 3%.
Matt Swanson: And then Jim, with regard to those bookings, what does that do for your revenue visibility for consulting, not only for the fourth quarter, but for early next year, I would think the good book to Bill, you know, might make you feel pretty confident about that six to eight and continuing. Thanks a lot. Ben, thanks very much for the question. As I said earlier, please with the team overall in consulting, you know, not only on the signings and booking, but our revenue is well positioned for that six to eight percent, which give us confidence to reiterate that, but also the fundamentals of that business, right?
<unk>, 5% range and so I'm just wondering should we now think about software consulting to grow at the lower ends of those ranges that you provided earlier.
Especially now kind of given some of your Red hat comments I'm, just trying to understand what has changed underlying the different segments to get to the kind of that new view on total revenue in constant currency. Thank you.
Yes, Thanks, Eric I appreciate the question so similar to I think Toni asked something similar to this overall.
When you look at IBM, 3% to 5% just practically speaking.
Matt Swanson: We talked a lot about this over the last handful of years. We're getting good operating leverage in that business, good cash contribution. So all and all pretty pleased overall, when you look at the bookings overall, I mean, let's just put some statistics and let me talk about kind of headwind tailwind overall, because I think what you're trying to get at is the confidence level. You know, Arvin and I and the team have about this book of business going forward into fourth quarter and into 24.
One quarter to go we said all.
It's better to say we are prudently at the low end of that range now, let's talk about it by segment.
Software you dial back 90 days ago.
We said that we were very excited about the announced acquisition of App deal.
We said that we expected that to close in early fourth quarter team did an outstanding job, we got through that regulatory approval. We closed it mid August but when we announced that acquisition in July we actually given our first half performance both in our recurring revenue streams and the strength of that but also in our transaction.
Matt Swanson: You know, we're still seeing very good demand overall and areas around digital transformation, application modernization, and where there's real technology, value, productivity, cost efficiency, quick payback. Is there pressure on discretionary based activity and and and that like absolutely. But you know, what we've seen that all year long, we haven't seen really any substantive change in the macro and the client buying behaviors overall, but that is enabled us to grow, you know, 30 plus percent, by the way, it's strongest bookings quarter, we had quite a period of time.
Our book of business, we actually took our full year guidance up to the high end of the range now we're close to and by the way we set up there'll be about a half a point on the full year now we close at what a month month and a half earlier, okay. So that half a point of contribution in <unk> might be 70 basis points.
Contribution on a full year, we still feel very confident by the way through three quarters, we're up six 5% that's above our mid term model. Yes, we have the peak wrap on Elas last year, but very interesting underneath our third quarter year to year to year performance, we're growing transactional.
Matt Swanson: And now we've got a trailing 12 month, but the bill of 1.16. I think the strongest in about two and a half years overall. Now underneath that, what's what's going on? One, you know, we've opened up IBM to strategic partnerships. We're seeing great ecosystem velocity and strategic partnership growth. Signings were about 50 percent year over year, hyper scalers underneath that 2x signings are hybrid cloud and application modernization red hat. We signed north of a billion dollars alone in the quarter.
Revenue.
Very different profile than what we started out in January which I think prudently. We said we expected transactional revenue is going to be a headwind to us what's happening.
The new innovation, we're bringing to market is actually creating much more volume of newer la content and by the way.
Ray has contributed about a point and a half of growth above our expectation and we're also getting great clothing, and NR up seven points versus history. So we think like we just finished above our model and third quarter constant currency on software. We said in our prepared remarks, we expect a pretty similar fourth quarter.
Matt Swanson: Now that's $10 billion inception to date. We got acquisitions that are now a creative and scaling nicely. So I think from that aspect, you look at the top and growth. We feel pretty confident about the 68 percent for this year. And we feel confident about the value and the growth contribution of the growth factor of consulting in our book of business heading into 2024. Now, what that said. Edwin's wise, yeah, listen to every other services consulting company.
<unk> at the high end overall, so we're maintaining software if you look at consulting we said, 6% to 8% overall by the way year to date were up 6% and I actually $6 four to be exact.
And we look at fourth quarter overall, we just talked about in Ben's question are strong bookings our book to Bill at 116, the tail winds on hybrid cloud around strategic partnerships I think we feel pretty good about our overall guidance.
Matt Swanson: There are macroeconomic challenges without a doubt on certainty. But we got to go on compete every single day here and duration. I would say not only we had great signings growth, we're monitoring our backlog realization. Our duration, by the way, this year has went up by a couple months, but that revenue will play out over time. And you know, all in all, if I sum it up, I think we're taking share. Police with the team. Thank you, Ben.
Okay very good let's go to the next question. Please.
Our next question comes from David Grossman with Stifel. Your line is open.
Ben Reitzes: Sheila, let's go to the next question. Our next question will come from Erik Woodring with Morgan Stanley. Your line is open. Hey guys, thanks for taking my question. I'll stick to the one as well. And then maybe Jim, this is for you. You know, you didn't you didn't change your software, consulting, guidance, ranges for the year. I forget a minor benefit from AppDio closing earlier in early in 3Q, but you now expect to fully your constant currency revenue growth to be at the low end of the 3 to 5% range.
Thank you.
Yes.
Ben Reitzes: And so I'm just wondering should we now think about software consulting to grow at the lower ends of those ranges that you provided earlier, especially now, kind of given some of your red hat comments. I'm just trying to understand what has changed underlying the the different segments to get to the kind of that new view on total revenue and constant currency. Thank you. Yes, thanks, Eric. I appreciate the question. So, you know, similar to I think Tony asked something similar to this overall, you know, when you look at IBM 3 to 5% just practically speaking one quarter to go.
Jim you provided some good detail on free cash flow year to date and the question really is are there any early indications on what non operating items could <unk>.
The impact free cash flow next year, working capital cash taxes et cetera, as well as how.
How restructuring actions this year may flow into earnings and cash flow as well over the next several months.
Yes, David Thanks for the question overall, we will spend a lot of time in January talking about 2020 for free cash flow, but I'm glad you actually asked the question because we've been talking about free cash flow all year long, it's one of Arvin and Ibms two important metrics revenue growth free cash flow gens.
<unk>, we called out $10 5 billion by the way up $1 $2 billion. This year off of last year, where we grew $2 8 billion year to year, and we said that's above our annualized model. Our annualized model is about 750 per year coming on off the <unk> and the business fundamentals.
Ben Reitzes: We said, oh, you know, it's better to say we're prudently at the low end of that range. Now, let's talk about it by segment. You know, software, you dial back 90 days ago. We said that we were very excited about the announced acquisition of AppDio. We said that we expected that to close in early fourth quarter team did an outstanding job. We got through that regulatory approval. We closed it mid August, but when we announced that acquisition in July, we actually given our first half performance, both in our recurring revenue streams and the strength of that, but also in our transactional book of business.
Look through the third quarter.
We're up now a $1 billion year to year, we're at $5 $1 billion.
<unk> high quality by the way.
Of.
That $1 billion $700 million of it is cash source from.
Operating profit overall, so that's the improving fundamentals of our sustainable revenue growth and our operating leverage and productivity. We're driving in this business and as I said all year long I was very transparent in January repeated it in April set to begin in July and I'll say it again, when we look at that.
Ben Reitzes: We actually took our full year guidance up to the high end of the range. Now, we closed it, and by the way, we said, AppDio will be about a half a point on the full year. Now, we close it, what, a month, a month and a half earlier. Okay, so that half a point of contribution and AppDio might be 70 basis points of contribution on a full year. We still view very confident, by the way, through three quarters, we're up six and a half percent.
$1 2 billion free cash flow growth year to year, we're going to get most of it through cash source from profit readout about $8 million to $900 million and we said.
That we would get working capital efficiency this year why.
Because of our <unk> 22 opportunity gap that we missed.
And we called it out transparently in January we're seeing that play out.
Ben Reitzes: That's above our midterm model. Yes, we have the peak wrap on ELA's last year, but very interesting underneath our third quarter year, year to year performance. We're growing transactional revenue. Very different profile than what we started out in January, which I think prudently we said we expected transactional revenue was going to be a headwind to us. What's happening? The new innovation we're bringing to market is actually creating much more volume of new ELA content.
Do the puts and takes yes, we're going to get a little bit of a modest tailwind on structural actions. This year that will offset cash tax headwinds, but you look at the underlying $1 2 billion free cash flow growth. It is a high quality fundamentally driven out of our revenue growth and operating leverage now you look to 'twenty four will <unk>.
And a lot more time on cash tax.
A lot of that is going to be predicated on where we actually finished fourth quarter overall, but we feel confident with the actions we have been.
Ben Reitzes: That by the way, is contributed about a point and a half a growth above our expectation. And we're also getting great clothing and NRR of seven points versus history. So we think, like we just finished above our model on third quarter, our currency on software, we said in a prepare remarks, we expect a pretty similar fourth quarter at the high end overall. So we're maintaining software. If you look at consulting, we said six to eight percent overall.
Putting it in place and we got to earn our credibility and discipline here closing out.
A free cash flow quarter by the way that's five $4 billion.
Very good Sheila let's take one last question.
Our last question will come from Brian Essex with J P. Morgan Your line is open.
Yes.
Hi, good afternoon, and thank you for taking the question I guess, maybe are going if we could just circle back on this.
Well.
Ben Reitzes: By the way, year to date, we're up six percent. It's actually 6.4 to be exact. And we look at fourth quarter overall. We just talked about in Ben's question, our strong bookings are booked to bill at 1.16. The tailwinds on hybrid cloud around strategic partnerships. I think we feel pretty good about our overall guidance. All right, very good.
Well work topic of AI.
Could you maybe just take a very high level approach and how youre seeing customers evaluated adoption and how that might impact the nature of contracts within the consulting business.
The Watson X platform, maybe maybe adoption initially.
Read on adoption rates.
View into how consulting could be the tip of the spear there. Thank you.
Erik Woodring: Let's go to the next question, please. Our next question comes from David Grossman with Steeple. Your line is open. Thank you. You know, Jimmy, you provided some good detail on free cash flow of your dates. And the question really is, are there any early indications on what non-operating items could impact free cash flow next year? You know, working capital cash tax as well as, you know, how restructuring actions this year may slow in earnings and cash flow as well over the next several months.
Alright, Thanks, Brian for the question.
<unk> consulting is going to be the tip of the spear, but it's not going to be the only because some clients do have enough expertise inside to do things on our own.
As we approach clients.
Trying to use I'll call it a big public chatbot to perhaps improve some service is not where they look to us and we've been very clear that's not where we're going to go and we do not actually serve up any of those services.
However, I'll take some maybe some quick examples.
Erik Woodring: Yeah, David, thanks for the question. Overall, you know, we'll spend a lot of time in January, talking about 2024 free cash flow. But I'm glad you actually asked the question because we've been talking about free cash flow all year long. It's one of Arvind and IBM's two important metrics revenue growth, free cash flow generation we called out 10 and a half billion, by the way, up 1.2 billion dollars this year off of last year where we grew 2.8 billion year to year.
As I go through so with a large.
I'll use the word financial services company.
They want to use generative AI to dramatically improve the productivity of their developers.
They actually use their own proprietary languages not only the common languages that are available outside.
They have been asking the question who cannot cross to augment their model give it to me.
Don't really want to get into all the details of how I might use it but I want them to provide the technology.
Erik Woodring: And we said, you know, that's above our annualized model. Our annualized model is about 750 per year coming on off the I&E and the business fundamentals. You look through the third quarter, we're up now a billion dollars year to year, we're at 5.1 billion dollars, very high quality, by the way, of that billion dollars, 700 million of it is cash source from operating profit overall. So that's the improving fundamentals of our sustainable revenue growth and our operating leverage and productivity we're driving in this business.
In this case, Brian we would work with them to augment the model using their language and their data and their code snippet, we would do it in a way that they are completely comfortable hitting 100% that that leaks nowhere else. They will take back the model. It now becomes an as a service deployment and their private cloud infrastructure.
And we monetize it as is typical for as a service software.
I'll take another example that we are building out with Dun <unk> Bradstreet and I mentioned that briefly on the call in that case. It is consulting led they want to work with consulting to use what's the next in this case, but to help them create solutions that their clients get grid.
Erik Woodring: And as I said all year long, I was very transparent in January, repeated it in April, set it again in July, and now I'll say it again. When we look at that 1.2 billion dollar free cash flow growth year to year, we're going to get most of it through cash source from profit, read that about 8 to 900 million. And we said that we would get working capital efficiency this year. Why?
Inside AK.
Health D&B monetize that data better so in that case. It is absolutely consulting led I think without consulting we would not have landed that deal.
Erik Woodring: Because of our 4Q-22 opportunity gap that we missed. And we called it out transparently in January. We're seeing that play out. You do the puts and takes. Yes, we're going to get a little bit of a modest tailwind on structural actions this year that will offset cash tax headwinds. But you look at the underlying 1.2 billion dollar free cash flow growth. It is a high quality, fundamentally driven out of our revenue growth and operating leverage.
Let me go to others because there are also examples where our consulting team is using both what's available but.
As you are open AI as an example to go win deals because they have built up the expertise. They have also built up expertise.
Amazon's bracket platform and they are going forward with winning deals on those in that cases theyre coming in with the methodology with knowledge with the thousands of trained.
Erik Woodring: Now, you look to 24, we'll spend a lot more time on cash tax. A lot of that is going to be predicated on where we actually finished 4th quarter overall. But we feel confident with the actions we've been putting in place. And we got to earn the credibility and discipline here closing out, you know, a free cash flow quarter, by the way, that's $5.4 billion.
Consulting who know how to work on those platforms and they are working with the clients to go do that I think these are all examples of what's working.
I think you are trying to also ask is it going to be consulting or is it going to be software look we didn't say much on the on the call on this topic, we just characterize it as low hundreds of millions of dollars of booking but in the absence of anything else think of that as maybe half and half between consulting.
Arvind Krishna: Very good. Sheila, let's take one last question. Our last question will come from Brian S6 with JP Morgan. Your line is open. Hi, good afternoon. Thank you for taking the question. I guess maybe Arvin, if we could just circle back on this. Well, well worked topic of AI. Could you maybe just take a very high level approach at how you're seeing customers evaluated adoption and how that might impact the nature of contracts within the consulting business and feed the Watson X platform.
Letting in software.
Just tell you that a couple of points of growth.
So both of those units came from the generative AI that we've been putting out and I think that's the best way to think about it in terms of what's happening right now and we are certainly expecting and planning that that will only increase as the quarters go on.
Alright, So let me now wrap up the call.
Arvind Krishna: Or maybe maybe adoption initial read out adoption rate and view into how consulting would be the tip of the sphere there. Thanks. All right, thanks, Brian, for the question. So consulting is going to be the tip of the sphere but it's not going to be the only because some clients do have enough expertise inside to do things on our own. As we approach clients, trying to use, I'll call it a big public chatbot to perhaps improve some service is not where they look to us and we've been very clear that's not where we are going to go and we do not actually serve up any of those services.
This third quarter performance reinforced our confidence in the strategy and in our ability to deliver value to enterprise clients in today's environment.
Cited of the opportunities ahead of us and I look forward to taking you through our continued progress.
And our view of 2024 and January Thank you all.
Okay, 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.
Arvind Krishna: However, I'll take some maybe some quick examples as I go through. So with a large, I'll use the word financial services company. They want to use a generative AI to dramatically improve the productivity of their developers. They actually use their own proprietary languages, not only the common languages that are available outside. They are then asking the question, who can I trust to augment their model, give it to me, and I don't really want to get into all the details of how I might use it but I want them to provide the technology.
Arvind Krishna: In this case, Brian, we would work with them to augment the model using their language and their data and their code snippets. We would do it in a way that they are completely comfortable, meaning 100% that that leaks over else. They would take back the model. It now becomes an as a service deployment in their private cloud infrastructure and we monetize it as a typical for as a service software. I'll take another example that we are building out with Darren Bradstreet and I mentioned that briefly on the call.
Arvind Krishna: In that case, it is consulting led. They want to work with consulting to use what's the next in this case, but to help them create solutions that let their clients get greater insight aka helps D&B monetize their data better. So in that case, it is absolutely consulting led. I think without consulting, we would not have landed that deal. Let me go to others because there are also examples where our consulting team is using both what's available with Azure Open AI as an example to go win deals because they have built up the expertise.
Arvind Krishna: They have also built up expertise on Amazon's bracket platform and they are going forward with winning deals on those. In that case, they are coming in with a methodology, with knowledge, with the thousands of trained consultants who know how to work on those platforms and they are working with the clients to go do that. I think these are all examples of what's working. I think you're trying to also ask, is it going to be consulting or is it going to be software?
Arvind Krishna: Look, we didn't say much on the call on this topic. We just characterized it as low hundreds of millions of dollars of booking. But in the absence of anything else, think of that as maybe half and half between consulting and software, which does tell you that a couple of points of growth for both those units came from the generative AI that we've been putting out. And I think that's the best way to think about it in terms of what's happening right now and we are certainly expecting and planning that that will only increase as the quarters go on.
Arvind Krishna: Alright, so let me now wrap up the call. This third quarter performance reinforced our confidence in the strategy and an our ability to deliver value to enterprise clients in today's environment. Very excited are the opportunities ahead of us and I look forward to taking you through our continued progress and our view of 2024 in January.
Patricia Murphy: Thank you all. Okay, Sheila, let me turn it back to you to close up the call. Thank you. Thank you for participating on today's call. The conference has...