Q1 2024 International Business Machines Corp Earnings Call
Operator: Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode.
Welcome and.
And thank you for standing by.
At this time all participants are in a listen only mode.
Operator: 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 Olympia McNerney, IBM's Global Head of Investor Relations. Olympia, you may begin. Thank you.
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 Olympia Mcnerney Ibm's Global head of Investor Relations Olympia you may begin.
Olympia Mcnerney: Thank you I'd like to welcome you to Ibm's first quarter 'twenty 'twenty four our earnings presentation.
Olympia Mcnerney: I'd like to welcome you to IBM's first quarter 2024 earnings presentation. I'm Olympia McNerney, 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 will 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.
Olympia Mcnerney: I'm Olympian Mcnerney and I'm here today with Arvin question on IBM, 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.
Olympia Mcnerney: 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. 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 <unk> <unk>.
Olympia Mcnerney: For example, all of our references to revenue and signings growth are at Compton Curtin. We provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation, which is posted on our investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995 because 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.
Olympia Mcnerney: 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.
Arvind Krishna: Thank you for joining us. In the first quarter, we had solid performance across revenue and cash flow. These results are further proof of the quality of our portfolio and our hybrid cloud and AI strategy. We had good performance in software at the high end of our model, continued strength in infrastructure above our model, while consulting was below our model. On a relative basis, consulting outperformed the market. Our cash flow generation is the strongest first quarter level we have reported in many years.
Arvind: Thank you for joining us.
Arvind: In the first quarter, we had solid performance across revenue and cash flow.
Arvind: These results are further proof of the quality of our portfolio and our hybrid cloud and AI strategy we.
Arvind: We had good performance in software at the high end of our model.
Arvind: Continued strength in infrastructure above our model, while consulting was below model.
Arvind: On a relative basis consulting outperformed the market.
Arvind: Our cash flow generation is the strongest first quarter level, we have reported in many years. This performance speaks to the strength of our diversified business model.
Arvind Krishna: This performance speaks to the strength of our diversified business model. Before we get into more detail on the quarter, let me address the announcement of our agreement to acquire HashiCorp, a company we have partnered with for a long time and believe is a tremendous strategic fit with IBM. Enterprise clients are wrestling with an unprecedented expansion in infrastructure applications across public and private clouds, as well as on-premises environments, making this the ideal time to pursue this acquisition.
Speaker Change: Before we get into more detail on the quarter, Let me address the announcement of our agreement to acquire Hershey Cop a company. We have partnered with for a long time and believe is a tremendous strategic fit with IBM.
Speaker Change: Enterprise clients are wrestling with an unprecedented expansion and infrastructure apt.
Speaker Change: The applications across public and private cloud as well as on Prem environments, making this the ideal time to pursue this acquisition.
Arvind Krishna: As generative AI deployment accelerates alongside traditional workloads, developers are working with increasingly heterogeneous, dynamic, and complex infrastructure strategies. HashiCorp has a proven track record of helping clients manage the complexity of today's infrastructure by automating, orchestrating, and securing hybrid and multi-cloud environments. HashiCorp is a great strategic addition to our portfolio, extending Red Hat's hybrid cloud capabilities to provide end-to-end automated infrastructure and security lifecycle management. HashiCorp's technology is foundational to enabling the transition to hybrid and multi-cloud, and Terraform is the industry standard for infrastructure automation for these environments. With security top of mind for every enterprise, Vault is a powerful secret management offering to automate identity security across applications.
Speaker Change: As generative AI deployment accelerates alongside traditional workloads developers are working with increasingly heterogeneous dynamic and complex infrastructure strategies hockey.
Speaker Change: <unk> has a proven track record of helping clients manage the complexity of today's infrastructure by automating orchestrating and securing hybrid and multi cloud environments.
Speaker Change: Archie Cup is a great strategic addition to our portfolio.
Speaker Change: Extending red Hat's hybrid cloud capabilities to provide end to end automated infrastructure and security lifecycle management Harsha.
Speaker Change: Hershey cough technology is foundational to enabling the transition to hybrid and multi cloud and terraform as the industry standard for infrastructure automation for these environments.
Speaker Change: With security top of mind for every enterprise.
Speaker Change: What is a powerful secrets management offering to automate identity security across applications.
Arvind Krishna: The combination will also bolster our leading IT automation platform to address the sprawling complexity of AI-driven application and infrastructure growth. HashiCorp's products have wide-scale adoption in the developer community, highlighting the pervasive nature of their technology used by over 85% of the Fortune 500 and downloaded over half a billion times. The acquisition of HashiCorp builds on IBM's commitment to industry collaboration, the developer community, and open source hybrid cloud and AI innovation
Speaker Change: The combination will also bolster our leading automation platform to address the sprawling complexity of AI driven application and infrastructure growth.
Speaker Change: Hershey Cups products have wide scale adoption in the developer community.
Speaker Change: Highlighting the pervasive nature of their technology used by over 85% of the fortune 500, and downloaded over half a billion times.
Speaker Change: The acquisition of Hershey car builds on Ibm's commitment to industrial collaboration.
Speaker Change: The developer community and open source hybrid cloud and AI innovation.
Arvind Krishna: Today's acquisition is consistent with our M&A strategy. We have taken a disciplined approach to M&A, and HashiCorp aligns well across all our key criteria to continue to focus and strengthen our portfolio on hybrid cloud and AI, deliver synergies with the rest of IBM, and be near-term accretive to free cash flow. I will now turn it to Jim to discuss the financial implications. Thank you, Arvind.
Today's acquisition is consistent with our M&A strategy, we have taken a disciplined approach to M&A and how she cup aligns well across all our key criteria to continue to focus and strengthen our portfolio.
Speaker Change: On hybrid cloud and AI deliver synergies with the rest of IBM and be near term accretive to free cash flow.
Speaker Change: I will now turn it to Jim to discuss the financial implications.
James J. Kavanaugh: Thank you Arvind, let me start with the details of the transaction. We have agreed to acquire Hashi Corp for $6 $4 billion in enterprise value to be funded by cash on hand to.
James J. Kavanaugh: Let me start with the details of the transaction. We have agreed to acquire HashiCorp for $6.4 billion in enterprise value to be funded by cash on hand. The transaction was approved by HashiCorp's Board of Directors.
James J. Kavanaugh: The transaction was approved by Hashi Corp, 's board of directors.
James J. Kavanaugh: Closing is anticipated by the end of 2024, subject to approval by HashiCorp's shareholders, regulatory approvals, and other customary closing conditions. We have been executing a disciplined capital allocation strategy, and the acquisition of HashiCorp meets all of our criteria, including strategic fit, as Arvind just walked through, synergies across IBM, and financial accretion. Let me start by addressing synergies. We see multiple drivers of product synergies within IBM and accelerating growth for HashiCorp. Product synergies span across multiple strategic growth areas for IBM, including Red Hat, Watson X, data security, IT automation, and consulting. For example, the powerful combination of Red Hat's Ansible Automation Platform's Configuration Management and Terraform's Automation will simplify provisioning and configuration of applications across hybrid cloud environments.
James J. Kavanaugh: Closing is anticipated by the end of 'twenty 'twenty four subject to approval by Hershey Corp, shareholders regulatory approvals and other customary closing conditions.
James J. Kavanaugh: We have been executing a disciplined capital allocation strategy and the acquisition of Hashi Corp meets all of our criteria, including strategic fit as Arvind just walked through synergies across IBM and financial accretion.
Arvind: Let me start by addressing synergies, we see multiple drivers of product synergies within IBM and accelerating growth for Hashi Corp.
Arvind: Product synergy span across multiple strategic growth areas for IBM, including Red hat, what's the next data security.
Automation and consulting.
Arvind: For example, the powerful combination of Red Hat's, Ansible automation platforms configuration management, and Terra forms of automation will simplified provisioning and configuration of applications across hybrid cloud environments.
James J. Kavanaugh: We are well positioned to drive growth for HashiCorp by leveraging IBM's enterprise incumbency and global reach. With 70% of their revenue today coming from the U.S., the opportunity to scale HashiCorp across IBM's operations in 175 countries is significant. We also believe we can accelerate HashiCorp's adoption with IBM clients. To put this in perspective, only about 20% of the Forbes Global 2000 are HashiCorp customers, and just a quarter of HashiCorp customers generate more than $100,000 annual recurring revenue, underscoring the opportunity to better monetize and upsell their products.
Arvind: We are well positioned to drive growth for Hashi Corp by leveraging Ibm's enterprise incumbency and global reach with 70% of the revenue today coming from the U S. The opportunity to scale Hashi Corp across Ibm's operations and 175 countries is significant.
Arvind: We also believe we can accelerate hashi corp's adoption with IBM clients.
Arvind: To put this in perspective, only about 20% of the Forbes Global 2000 are Hashi Corp customers and just a quarter of Hershey Corp. Customers result in more than 100000 annual recurring revenue.
Arvind: Underscoring the opportunity to better monetize and up sell their products.
James J. Kavanaugh: Bringing it all together, the acquisition allows us to deliver a more comprehensive hybrid cloud offering to enterprise clients, Enhancing IBM's Ability to Capture Global Cloud Opportunities This will drive higher growth profiles over time. Finally, we expect to realize operating efficiencies and expect the transaction to be accretive to adjusted EBITDA within the first full year post-close and to free cash flow in year two. Significant near-term cost synergies underpin the financial profile of the transaction, while product synergies represent further upsides. We are very comfortable with our strong balance sheet, liquidity profile, and solid investment grade rating and remain committed to our dividend policy. I'll now turn it back to Arvind.
Arvind: Bringing it all together the acquisition allows us to deliver a more comprehensive hybrid cloud offering to enterprise clients enhancing ibm's ability to capture global cloud opportunity.
Arvind: This will drive a higher growth profile over time.
Arvind: Finally, we expect to realize operating efficiencies and expect the transaction to be accretive to adjusted EBITDA within the first full year post close.
Arvind: And to free cash flow in year two.
Arvind: Significant near term cost synergies underpin the financial profile of the transaction.
Arvind: While product synergies represent further upside.
Arvind: We are very comfortable with our strong balance sheet liquidity profile and solid investment grade rating and remain committed to our dividend policy.
I'll now turn it back to Arvind.
Arvind Krishna: Now turning back to the quarter, let me start with a few comments on the macroeconomic environment. We expect the global economy to behave similarly to last year, albeit with some uncertainty due to persistently high interest rates. There are reasons to believe technology will be even more important in 2024 as clients focus on productivity improvements and customer experience. AI-driven productivity, in particular, continues to be a top priority for businesses for both cost reductions and new revenue opportunities. I will now provide some details on the execution of our strategy around hybrid cloud and AI. Enterprise AI continues to gain traction.
Arvind: Now turning back to the quarter, let me start with a few comments on the macroeconomic environment.
Arvind: We expect the global economy to behave similarly to last year, albeit with some uncertainty due to persistently high interest rates.
Arvind: There are reasons to believe technology will be even more important in 'twenty 'twenty four as clients focus on productivity improvement and customer experience.
Air driven productivity in particular continues to be a top priority for businesses for both cost reductions and new revenue opportunities.
Arvind: I will now provide some details on the execution of our strategy around hybrid cloud and AI.
Arvind: Enterprise AI continues to gain traction.
Arvind Krishna: This year, we anticipate more clients moving from experimenting to deploying AI at scale to unlock productivity. We are pleased with the solid progress of our AI offerings. Each quarter, we are winning more clients, expanding partnerships, and introducing new innovations. Since inception to date, our book of business related to Watson X and generative AI is greater than $1 billion, with sequential quarter over quarter growth. However, similar to last quarter, this remains weighted towards consulting.
Arvind: This year, we anticipate more clients moving from experimenting to deploying AI at scale to unlock productivity.
Arvind: We are pleased with the solid progress of our AI offerings.
Each quarter, we are winning more clients expanding partnerships.
Arvind: And introducing new innovations.
Inception to date, our book of business related to Watson next in generative AI is greater than $1 billion with sequential quarter over quarter growth.
Similar to last quarter this remains weighted towards consulting.
Arvind Krishna: We believe our comprehensive AI strategy is well positioned to help clients scale AI. We developed a Watson X platform for clients to build their AI solutions, expanding from Foundation Model Training to Data Preparation and Governance, including both IBM Granite models and third-party models.
We believe our comprehensive AI strategy is well positioned to help clients scale AI.
Arvind: We developed a Watson X platform for clients to build their AI solutions spanning from foundation model, creating to data preparation and governance.
Arvind: This includes both IBM granite models and third party models, giving our clients a variety as well as the efficiency and focus on enterprise domains at IBM breaks.
Arvind Krishna: Bringing variety as well as the efficiency and focus on enterprise domains that IBM brings. We have leveraged Watson X to build AI assistance through our software portfolio. Our consultants are helping clients navigate the AI landscape.
Arvind: We have leveraged Watson X to build AI assistance through our software portfolio.
Arvind: Our consultants are helping clients navigate the AI landscape.
Arvind Krishna: And finally, we are seeing our infrastructure segment play a larger role as clients leverage their hardware investments in their AI strategies. Let me touch on these infrastructure dynamics briefly. As AI becomes widely adopted, IBM Z is uniquely advantaged. We believe a lot of AI inferencing will happen where the data is, for security, efficiency, and latency reasons. Our full stack focus, from on-chip AI processing to AI accelerator cards to Watson X platform support, allows models to be built and trained on any platform and easily deployed on IBM Z. The Telem chip is a unique differentiator, enabling real-time AI inferences.
Arvind: And finally, we are seeing our infrastructure segment play a larger role as clients leverage their hardware investments in their AI strategies.
Arvind: Let me touch on these infrastructure dynamics briefly.
Arvind: As AI becomes widely adopted IBM Z is uniquely advantaged.
Arvind: We believe a lot of AI and printing will happen, where the data is for security efficiency and latency reasons.
Arvind: Our full stack focus from on chip AI processing to AI accelerator cards to Watson X platform support allows models to be built and created any platform and easily deployed on IBM Z to.
Tell him chip is a unique differentiator, enabling real time AI inferencing.
Arvind Krishna: Generative AI is also driving lift for our storage offerings, where industry-leading performance and scalability are utilized for data curation, model building, and fine tuning. For enterprises to deploy AI at scale, AI is not a one-size-fits-all proposition. Although it requires tuned domain-specific models trained with quality data to maximize its impact, clients value the flexibility of our approach. They appreciate having the ability to leverage a combination of AI models, whether they are IBM's, their own models, open source models, such as Lama from Meta and Mistral from Mistral, and they can deploy these AI models across multiple environments.
Arvind: Generative AI is also driving lift for our storage offerings with industrial leading performance and scalability is utilized for data curation model building and fine tuning.
Arvind: For enterprises to deploy AI at scale AI is not a one size fits all proposition.
Arvind: It requires tuned domain specific models crane with quality data to maximize its impact.
Arvind: Clients value the flexibility of our approach.
<unk>, having the ability to leverage a combination of AI models, whether they're ibms their own models open source models, such as Lamar from meta and mixed trial for Mistral and they can deploy these AI models across multiple environments. The.
Arvind Krishna: The flexibility we offer is responding as there are use cases for both large and more efficient models. We are committed to an open innovation ecosystem around AI to help our clients maximize flexibility and leverage skills. Let me spend a minute on our progress in this area. We see early parallels to Linux in making open source AI models performant for enterprise use. We believe that IBM, with Red Hat, can be a key driver of open source AI. As you know, we have done a lot of work with AI models and recently released a family of state-of-the-art open source code models from our Granite series.
Arvind: The flexibility we offer is resonating as there are use cases for both large and more efficient models.
Arvind: We are committed to an open innovation ecosystem around AI to help our clients maximize flexibility and leverage skills.
Arvind: Let me spend a minute on our progress in this area.
Arvind: We see early parallels to Linux and making open source AI models performance for enterprise use.
Arvind: We believe that IBM with Red hat can be a key driver of open source AI.
Arvind: As you know we've done a lot of work with AI models, and recently released a family of state of the Art Open source code models from our granite series read.
Arvind Krishna: Red Hat and IBM also recently launched InstructLab to evolve and improve AI models through incremental community contributions, much like open source software. This open strategy is resonating around the world. We recently announced a collaboration with the Spanish government to leverage IBM's investments across the entire AI stack and open source to build the world's leading suite of foundation models proficient in the Spanish language. Enterprise use cases addressing code modernization, customer service, and digital labor remain top of mind for our clients.
Arvind: And IBM also recently lodged instruct lab to evolve and improve AI models through incremental community contributions much like open source software.
Arvind: This open strategy is resonating around the world.
We recently announced a collaboration with the Spanish government to leverage Ibm's investments across the entire AI stock in open source to build the world's leading suite of foundation modeled proficient in the Spanish language.
Arvind: Enterprise use cases addressing good modernization customer service and digital labor remain top of mind for our clients.
Arvind Krishna: This quarter, we signed a multi-year contract with Providence Health to reimagine talent and HR workflows with AI from IBM and partners. We're also providing data-driven insights and enabling Spanish language narration for this year's Masters Golf Tournament.
Arvind: This quarter, we signed a multiyear contract with Providence health to re imagine talent and HR workflows with AI from IBM and partners.
Also providing data driven insights and enabling Spanish language narration for this year's Masters Golf tournament.
Arvind Krishna: Our partner ecosystem remains essential to both AI and hybrid cloud growth. This quarter, we progressed strategic partnerships with a number of industrial leaders, consulting joint forces with Nvidia to accelerate clients' AI journey. ServiceNow will embed Watson X AI capabilities into the ServiceNow platform to accelerate enterprise digital transformation.
Arvind: Our partner ecosystem remains essential to both AI and hybrid cloud growth.
Arvind: This quarter, we progress strategic partnerships with a number of industrial leaders.
Consulting joined forces with Nvidia to accelerate clients AI journeys.
Arvind: Service now will embed Watson X AI capabilities into the service now platform to accelerate enterprise digital transformation.
Arvind Krishna: We also expanded our relationship with Adobe around OpenShift and What's Next as it relates to the Adobe Experience Platform. We continue to invest in emerging technologies as well, bringing new innovations to the market. Since we put the world's first quantum system on the cloud in 2016, we have deployed over 80 quantum systems, and our users have run over 3 trillion programs to date. We just installed a Quantum System I at Rensselaer Polytechnic Institute. This is the first IVM quantum system on a college campus anywhere in the world.
We've also expanded our relationship with Adobe crowd open shifted what's the next as it relates to the Adobe experience platform.
Arvind: We continue to invest in emerging technology, as well, bringing new innovations to the market.
Arvind: Since we put the world's first quantum system on the cloud in 2016, we have deployed over 80 quantum systems and our users have run over three trillion programs to date.
Arvind: We just installed a quantum system one at Rensselaer Polytechnic Institute.
Arvind: This is the first IBM quantum system on a college campus anywhere in the world.
Arvind Krishna: This installation will advance research in critical areas such as energy storage, material science, and financial modeling. As always, focusing our portfolio remains a key priority. We closed the sale of the weather company in the first quarter and expect to close the announced acquisition of stream sets and web methods from software AG by mid-year. Overall, we had a positive start to the year, which gives us confidence in our next quarter and full year expectations. Jim will now take you through the details of the quarter. Jim, it's over to you.
Arvind: This installation will advance research in critical areas, such as energy storage material science and financial modeling.
Arvind: As always focusing our portfolio remains a key priority.
Arvind: We closed the sale of the weather company in the first quarter and expect to close the announced acquisition of stream sets and web methods from software AG by mid year.
Arvind: Overall, we had a positive start to the year, which gives us confidence in our next quarter and full year expectations.
Arvind: Jim will now take you through the details of the quarter Jim over to you.
James J. Kavanaugh: Thanks, Arvind. In the first quarter, we delivered $14.5 billion in revenue. $3 billion of adjusted EBITDA, $1.7 billion of operating pre-tax income, and $1.68 operating earnings per share. And we generated free cash flow of $1.9 billion, up approximately $600 million year over year. Our revenue for the quarter was up 3% at constant currency. We saw an impact on our top-line performance from the closure of the weather company earlier than expected in the quarter.
James J. Kavanaugh: Thanks, Arvind and the first quarter, we delivered $14 $5 billion in revenue.
James J. Kavanaugh: $3 billion of adjusted EBITDA $1 $7 billion of operating pre tax income.
James J. Kavanaugh: And $1.68 operating earnings per share.
James J. Kavanaugh: And we generated free cash flow of $1 $9 billion up approximately $600 million year over year.
Speaker Change: Our revenue for the quarter was up 3% at constant currency.
Speaker Change: We saw an impact to our top line performance from the closing of the weather company earlier than expected in the quarter.
James J. Kavanaugh: Software grew by 6% with growth across hybrid platform and solutions and transaction processes, and continued strength in our Recurring Revenue Base. Consulting was up 2%, reflecting organic growth. We continue to have solid signings performance and a trailing 12-month book-to-bill of over 1.15. Infrastructure had strong performance, delivering growth across all of our hardware offerings. Looking at our profit metrics, we expanded operating gross margin by 100 basis points and operating pre-tax margin by 130 basis points over last year, inclusive of about a 100 basin point currency headwind to pre-tax margin. At the end of January, we closed on the divestiture of the weather company, generating a pre-tax gain of $241 million in the quarter.
Speaker Change: Software grew by 6% with growth across hybrid platform and solutions and transaction processing.
Speaker Change: And continued strength in our recurring revenue base and.
Speaker Change: Consulting was up 2%, reflecting organic growth.
Speaker Change: We continue to have solid signings performance in a trailing 12 month book to bill of over $1, one five <unk>.
Speaker Change: Infrastructure had strong performance delivering growth across all of our hardware offerings.
Speaker Change: Looking at our profit metrics, we expanded operating gross margin by 100 basis points.
Speaker Change: And operating pre tax margin by 130 basis points over last year.
Speaker Change: Inclusive of about 100 basis point currency headwind to pre tax margin.
Speaker Change: At the end of January we closed on the divestiture of the weather company.
Speaker Change: <unk> generating a pretax gain of $241 million in the quarter.
James J. Kavanaugh: Mitigating that benefit, we took charges of $374 million to address workforce rebalancing. Operating pre-tax margin was up 50 basis points, excluding the year-over-year impacts of workforce rebalancing and divestiture dynamics. We are pleased with this performance in line with our guidance of roughly 50 basis points of operating pre-tax margin improvement in 2024. Margin expansion was driven by our operating leverage, product mix, and ongoing productivity initiatives. This allows for continued investments to drive innovation, which you can see in our higher R&D expense. The timing of discrete tax items this quarter resulted in an operating tax rate of about 6%.
Speaker Change: Mitigating that benefit we took charges of $374 million to address workforce rebalancing.
Operating pre tax margin was up 50 basis points, excluding the year over year impacts of workforce rebalancing and divestiture dynamics. We are pleased with this performance in line with our guidance of roughly 50 basis points of operating pre tax margin improvement in <unk>.
Speaker Change: 2024.
Speaker Change: Margin expansion was driven by our operating leverage product mix and ongoing productivity initiatives. This allow for continued investments to drive innovation, which you can see in our higher R&D expense.
Speaker Change: The timing of discrete tax items this quarter, resulting in an operating tax rate of about 6%.
James J. Kavanaugh: We are still expecting a full year operating tax rate consistent with last year. Overall, the combination of our revenue and operating margin performance resulted in 7% growth in our adjusted EBITDA. This contributed to our free cash flow performance. For the quarter, we generated $1.9 billion of free cash flow, up $600 million year over year.
Speaker Change: We are still expecting a full year operating tax rate consistent with last year.
Speaker Change: Overall, the combination of our revenue and operating margin performance resulted in 7% growth in our adjusted EBITDA.
Speaker Change: This contributed to our free cash flow performance for the quarter, we generated $1 $9 billion of free cash flow up $600 million year over year.
James J. Kavanaugh: This growth reflects the performance of our underlying business, with adjusted EBITDA up $200 million year-over-year and about $400 million from timing of balance sheet dynamics and CapEx. In the last 12 months, we generated free cash flow of $11.8 billion. This puts us on track to deliver about $12 billion of free cash flow for the year, with growth largely driven by adjusted EBITDA. Since our acquisition of Red Hat, excluding 2021 when we spun off Kindrel, our operating net income to free cash flow realization averaged 120%. Two factors drive this.
This growth reflects the performance of our underlying business with adjusted EBITDA up $200 million year over year.
And about $400 million from timing of balance sheet dynamics and Capex.
Speaker Change: Over the last 12 months, we generated free cash flow of $11 $8 billion. This puts us on track to deliver about $12 billion of free cash flow for the year with the growth largely driven by adjusted EBITDA.
Speaker Change: Since our acquisition of Red hat, excluding 2021 when we spun off Ken drove our operating net income to free cash flow realization averaged 120%.
Speaker Change: Two factors drive this one is stock based compensation, which today represents 15 points of realization.
James J. Kavanaugh: One is stock-based compensation, which today represents 15 points of realization. And two, given the shift in our portfolio to a growing software business, deferred income also contributes to our realization. In terms of cash uses, we return $1.5 billion to shareholders in the form of dividends. From a balance sheet perspective, we have a very strong liquidity position with cash of $19.3 billion, up from $13.5 billion at year-end 2023. Our debt balance at the end of the first quarter was $59.5 billion, including $9.9 billion from our financing business.
Speaker Change: And two given the shift in our portfolio to a growing software business deferred income also contributes to our realization.
Speaker Change: In terms of cash uses we returned $1 $5 billion to shareholders in the form of dividends from.
Speaker Change: From a balance sheet perspective, we have a very strong liquidity position with cash of $19 $3 billion up from $13 $5 billion at year end 2023.
Our debt balance at the end of the first quarter was $59 $5 billion, including $9 $9 billion from our financing business.
James J. Kavanaugh: Turning to the segments, software revenue grew 6% with good performance across both hybrid platform and solutions and transaction process. As mentioned in January, the software revenue growth drivers for the year include Red Hat Growth, Acquisitions, Strong Recurring Revenue, and Transaction Process. And this is just how the first quarter played out. Hybrid Platform and Solutions revenue was up 7%. Let me spend a minute on the various elements. Red Hat revenue grew 9%, reflecting solid performance across the three key solutions. REL, OpenShift, and Ansible.
Speaker Change: Turning to the segments software revenue grew 6% with good performance across both hybrid platform and solutions and transaction processing.
Speaker Change: As mentioned in January the software revenue growth drivers for the year include Red hat growth acquisitions strong recurring revenue and transaction processing and this is just how the first quarter played out.
Hybrid platform and solutions revenue was up 7% let.
Speaker Change: Let me spend a minute on the various elements.
Speaker Change: Red hat revenue grew 9%, reflecting solid performance across the three key solutions.
Well open shift in ansible.
James J. Kavanaugh: Annual bookings growth was again in the mid-teens, with OpenShift up over 40% this quarter and Rell and Ansible each up double digits. Beyond Red Hat, recent acquisitions contributed to the growth profile of hybrid platform and solutions, as did new innovation areas including Watson X. The combination of Appdio, acquired mid last year, and our IT automation portfolio has delivered strong results. In fact, just this quarter, we partnered with Microsoft to bring Appdio to Azure, and we'll co-sell to our joint customers, and Microsoft has agreed to adopt AppDeal's capabilities in parts of their organization.
Annual bookings growth was again in the mid teens with open shift up over 40% this quarter and relevant ansible each up double digits.
Speaker Change: Beyond Red hat recent acquisitions contributed to the growth profile of hybrid platform and solutions.
Speaker Change: As did new innovation areas, including Watson X.
Speaker Change: The combination of App Dio acquired mid last year, and our automation portfolio has delivered strong results.
Speaker Change: Unlocking the full benefits of a fin apps solution for technology investments across hybrid cloud environments.
In fact, just this quarter, we partner with Microsoft to bring App D O to Azure and will cross sell to our joint customers and Microsoft has agreed to adopt <unk> capabilities in parts of their organization.
James J. Kavanaugh: Our revenue performance continues to reflect growth in our high-value, recurring revenue base. Our ARR, after removing the weather company and security services, is now $13.9 billion, up over 8% since last year. Transaction processing, with its strong base of recurring revenue, delivered revenue growth of 4%. Clients continue to value this portfolio of mission-critical software, supporting growing workloads on our hardware platform. And there's an increasing interest in generative AI application modernization capabilities, like Watson X Code Assistant for Z. Software segment profit was up 80 basis points while absorbing both key investments in innovation and about a point of currency impact in the quarter.
Our revenue performance continues to reflect growth in our high value recurring revenue base are.
Speaker Change: Our after removing the weather company and security services is now $13 $9 billion up over 8% since last year.
Speaker Change: Transaction processing with its strong base of recurring revenue deliver revenue growth of 4%.
Speaker Change: Clients continue to value this portfolio of mission critical software supporting growing workloads on our hardware platforms and there is an increasing interest in generative AI application modernization capabilities like Watson next code assistant for Z.
Speaker Change: Software segment profit was up 80 basis points, while absorbing both key investments in innovation and about a point of currency impact in the quarter.
James J. Kavanaugh: We continue to deliver operating leverage driven by our revenue performance this quarter. Our consulting revenue was up 2%. We continue to see clients prioritizing large data and technology transformation projects focused on driving productivity with AI and analytics. These results reflect the organic performance of our business. Solid demand for our offerings led to signings growth of 4%, our highest absolute first quarter signings in recent history, and our trailing 12-month book-to-bill ratio remains over 1.15.
Speaker Change: We continue to deliver operating leverage driven by our revenue performance this quarter.
Speaker Change: Our consulting revenue was up 2%.
Speaker Change: We continue to see clients prioritizing large data and technology transformation projects focused on driving productivity with AI and analytics.
Speaker Change: These results reflect the organic performance of our business.
Speaker Change: Solid demand for our offerings led to signings growth of 4% our highest absolute first quarter signings in recent history and our trailing 12 month book to Bill ratio remains over one that one five.
James J. Kavanaugh: Our overall backlog remains healthy at 7% year over year, and backlog erosion levels remain stable. However, at the same time, we saw both a lengthening of backlog duration driven by large-scale digital transformations and a reduced level of revenue realization in the quarter as clients tighten discretionary spending.
Speaker Change: Our overall backlog remains healthy up 7% year over year and backlog erosion levels remained stable.
Speaker Change: At the same time, we saw both a lengthening of backlog duration driven by large scale digital transformations.
Speaker Change: And a reduced level of revenue realization in the quarter as clients Titan discretionary spending.
James J. Kavanaugh: Contributing to growth across the business this quarter, our strategic partnerships continue to make up over 40% of our consulting revenue, with both AWS and Azure practices growing double digits. Additionally, our Red Hat practice grew revenue double digits. Expanding upon our partnerships, we are leveraging Microsoft CoPilot to drive productivity for our clients.
Speaker Change: Contributing to growth across the business this quarter, our strategic partnerships continue to make up over 40% of our consulting revenue with both AWS and azure practices growing double digits.
Speaker Change: Additionally, a red hat practice grew revenue double digits expanding.
Speaker Change: Expanding upon our partnerships, we are leveraging Microsoft co pilot to drive productivity for our clients.
James J. Kavanaugh: Just as we quickly ramped up a meaningful book of business around Red Hat to address the hybrid cloud opportunity, we are ahead of pace at this stage with our generative AI book of business. Turning to our lines of business, Business Transformation revenue grew 3%.
Speaker Change: Just as we quickly ramp a meaningful book of business around Red hat to address the hybrid cloud opportunity. We are ahead of pace at this stage with our generative AI book of business.
Speaker Change: Turning to our lines of business business transformation revenue grew 3%.
James J. Kavanaugh: Led by Supply Chain and Finance Transformation. Customer experience transformations also contributed to growth. Technology consulting revenue was also up 3%, with double-digit growth in cloud modernization projects, and both strategic partnerships and Red Hat engagements delivered double-digit growth. Application operations revenue declined, reflecting weakness in on-prem custom application management projects, partially offset by strength in its cloud-based application management offering.
Speaker Change: Led by supply chain and finance transformations.
Speaker Change: Customer experience transformation also contributed to growth.
Speaker Change: Technology consulting revenue was also up 3% with double digit growth in cloud modernization projects and bolt strategic partnerships and red hat engagements delivered double digit growth.
Speaker Change: Application operations revenue declined reflecting weakness in on Prem custom application management projects, partially offset by strength in cloud based application management offerings.
James J. Kavanaugh: Moving to consulting profit, we delivered over 8% of segment profit margin, which is flat year to year. However, our segment profit margin was impacted by about a point of currency. Offsetting the improvements in pricing and productivity actions we have taken. Moving to infrastructure, revenue grew, reflecting growth in hybrid infrastructure of 6% and declines in infrastructure support of 7%. Within hybrid infrastructure, growth was broad-based, with strong demand from our hardware offerings across IBM Z, power, and storage.
Speaker Change: Moving to consulting profit, we delivered over 8% of segment profit margin, which is flat year to year. Our segment profit margin was impacted by about a point of currency.
Speaker Change: Outstanding improvements in pricing and productivity actions, we have taken.
Moving to infrastructure revenue grew reflecting growth in hybrid infrastructure of 6% and declines in infrastructure support of 7%.
Speaker Change: Within hybrid infrastructure growth was broad based with strong demand from our hardware offerings across IBM Z.
Speaker Change: <unk> and storage.
James J. Kavanaugh: In IBM Z, revenue was up 5% in the eighth quarter of Z16 product availability. Now two years in, this product cycle continues to resonate with clients and surpass Z15 revenue performance. IBM Z is uniquely positioned for AI, with the first processor design with on-chip acceleration for real-time AI inferences. In fact, we're working with over 100 clients on the application of AI on Z16. Use cases range from fraud detection to anti-money laundering to anomaly detection.
Speaker Change: And IBM Z revenue was up 5% in the eighth quarter of Z 16 product availability.
Speaker Change: Now two years in this product cycle continues to resonate with clients and surpassed Z 15 revenue performance.
Speaker Change: IBM Z is uniquely positioned for AI.
Speaker Change: With the first processor design with and chip acceleration for real time AI inferencing.
Speaker Change: In fact, we're working with over 100 clients and the application of AI and <unk> use cases range from fraud detection to anti money laundering to anomaly detection.
James J. Kavanaugh: This remains an enduring platform, driving not just hardware adoption but also related software, storage, and services. Distributed infrastructure delivered 7% revenue growth with strength in both power and storage. Power performance was fueled by demand for data-intensive workloads.
Speaker Change: This remains an enduring platform driving not just hardware adoption, but also related software storage and services.
Speaker Change: Distributed infrastructure delivered 7% revenue growth with strength in both power and storage.
Speaker Change: Our performance was fueled by demand for data intensive workloads.
James J. Kavanaugh: Storage delivered strong double-digit revenue growth, including demand for high-end storage tied to the Z16 cycle. And clients are also looking to our storage offerings for data curation, model building, and fine-tuning in support of generative AI. Looking at infrastructure profit, we deliver both gross profit and segment profit margin expansion. Segment profit margin expanded 20 basis points in the quarter, reflecting benefits from productivity while absorbing about a point of impact from current. Now, let me bring it back to the IBM level to wrap up.
Speaker Change: Storage delivered strong double digit revenue growth and cooling demand for high end storage tied to disease 16 cycle.
Speaker Change: And clients are also looking to our storage offerings for data curation model building and fine tuning and supportive generative AI.
Speaker Change: Looking at infrastructure profit, we deliver both gross profit and segment profit margin expansion.
Speaker Change: Segment profit margin expanded 20 basis points in the quarter, reflecting benefits from productivity, while absorbing about a point of impact from currency.
Speaker Change: Now, let me bring it back to the IBM level to wrap up.
James J. Kavanaugh: More than two years into our midterm model, we are a more focused business that has delivered sustained revenue and free cash flow growth. Over this time, we've continued to invest organically and inorganically, bring new products and innovation to market, expand our ecosystem, and drive productivity across our business. Our first quarter performance is another proof point of this progress, with constant currency revenue growth, operating gross margin, and operating pre-tax margin expansion and the strongest first quarter free cash flow in many years.
Speaker Change: More than two years into our midterm model. We are a more focused business that has delivered sustained revenue and free cash flow growth.
Speaker Change: Over this time, we've continued to invest organically and inorganically bring new products and innovation to market expand our ecosystem and drive productivity across our business.
Speaker Change: Our first quarter performance is another proof point of this progress with constant currency revenue growth operating gross margin and operating pre tax margin expansion.
Speaker Change: And the strongest first quarter free cash flow in many years.
James J. Kavanaugh: Looking to the full year 2024, we are holding our view on our two primary metrics. Revenue and Free Cash. We see full-year constant currency revenue growth in line with our mid-single-digit model, still prudently at the low end. And for free cash flow, we expect to generate about $12 billion, driven primarily by growth in adjusted EBITDA.
Speaker Change: Looking to the full year of 2024, we are holding our view on our two primary metrics.
Speaker Change: Revenue and free cash flow.
Speaker Change: We see full year constant currency revenue growth in line with our mid single digit model still prudently at the low end.
Speaker Change: And for free cash flow, we expect to generate about $12 billion driven primarily by growth in adjusted EBITDA.
James J. Kavanaugh: On the segments of software, we had a solid start to the year and continue to expect growth slightly above the high end of our mid-single-digit model. In consulting, we continue to see strong demand for digital transformation. Though, as I said, we are seeing some pressure on smaller, more discretionary projects, we now see mid-single-digit revenue growth in consulting, with acceleration throughout the year. Given our ongoing productivity initiatives and investment in innovation, we expect to see about a point-a-segment profit margin expansion in both of these segments, and an infrastructure given product cycle dynamics. We expect revenue to decline, driving about a half a point impact on our overall growth.
Speaker Change: And the segments and software we had a solid start to the year and continue to expect growth slightly above the high end of our mid single digit model.
Speaker Change: In consulting we continue to see strong demand for digital transformations, though as I said, we are seeing some pressure on smaller more discretionary projects.
Speaker Change: We now see mid single digit revenue growth in consulting with the acceleration throughout the year.
Speaker Change: Given our ongoing productivity initiatives and investment and innovation, we expect to see about a point of segment profit margin expansion in both of these segments and an infrastructure given product cycle dynamics, we expect revenue to decline.
Speaker Change: Driving about a half a point impact to our overall growth given IBM Z cycle dynamics, we expect segment profit margin to be lower year over year.
James J. Kavanaugh: Given IBM's Z-cycle dynamics, we expect segment profit margin to be lower year over year. With these segment dynamics, we continue to expect IBM's operating pre-tax margin to expand by about a half a point year to year, consistent with our view 90 days ago. And we are maintaining our view of operating tax for the year to be consistent with last year in the mid-teens range. We took a workforce rebalancing charge this quarter.
Speaker Change: With these segment dynamics, we continue to expect Ibm's operating pre tax margin to expand by about a half a point year to year.
Speaker Change: Consistent with our view 90 days ago.
Speaker Change: And we are maintaining our view of operating tax for the year to be consistent with last year in the mid teens range.
Speaker Change: We took a workforce rebalancing charge this quarter and as I mentioned 90 days ago, we continue to see the overall amount this year consistent with last year.
James J. Kavanaugh: And as I mentioned 90 days ago, we continue to see the overall amount this year consistent with last. We expect this to pay back by the end of the year. On currency, given the strengthening of the dollar, we now expect a 150 to 200 basis point impact on revenue growth for the year, which is about one point worse than 90 days ago. For the second quarter, I expect our constant currency revenue growth rate to be consistent with the full year. Our tax rate is expected to be in the high teens.
Speaker Change: We expect this to pay back by the end of the year.
Speaker Change: And currency given the strengthening of the dollar we now expect a 150 to 200 basis point impact to revenue growth for the year, which is about one point worse than 90 days ago.
Speaker Change: For the second quarter, I expect our constant currency revenue growth rate to be consistent with the full year. Our tax rate is expected to be in the high teens and for profit. We expect the first half skew of net income will remain a couple of points ahead of the prior year.
James J. Kavanaugh: And for profit, we expect the first half skew of net income will remain a couple points ahead of the prior year. In closing, we are pleased with our performance to start the quarter. We are positioned to grow revenue, increase operating profit margin, and grow free cash flow for the year. Arvind and I are now happy to take your questions. Olympia, let's get started. Thank you, Jim.
Speaker Change: In closing we are pleased with our performance to start the quarter. We are positioned to grow revenue expand operating profit margin and grow free cash flow for the year.
Speaker Change: Arvind and I are now happy to take your questions Olympia, let's get started.
Arvind: 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 the presentation and then second as always I'd ask you to refrain from multipart question operator, let's please open it up for questions.
Olympia Mcnerney: Before we begin the Q&A, I'd like to mention a couple of things. First, supplemental information is provided at the end of the presentation. And then second, as always, I'd ask you to refrain from multi-part questions. Operator, let's please open it up for questions. At this time, we'll begin the question and answer session of the conference. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker Change: Thank you.
At this time, we will begin the question and answer session of the conference.
Speaker Change: If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue you.
Speaker Change: You May press Star two if you would like to remove your question from the queue.
Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key. Our first question comes from Amit Daryanani with Evercore. Please state your question. Thanks for taking my question. Good afternoon, everyone.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Our first question comes from Amit <unk> with Evercore. Please state your question.
Amit: Thanks for taking for taking my question good afternoon, everyone.
Amit Jawaharlaz Daryanani: You know, I guess I was hoping you could talk a bit more on the consulting side of the business because revenues did decelerate rather notably in the March quarter, but I think on the other side, your AI-centric backlog, at over a billion dollars, is doing extremely well. So I'm hoping you could touch on the near-term side. You know, what are you hearing from your customers? What are they telling you about the duration of this pause?
I guess, just hoping you could talk a bit more on the consulting side of the business because revenues did decelerate, rather notably in March quarter, but I think on the other side.
Amit: AI centric backlog at over $1 billion is doing extremely well so I'm, hoping you could touch on the near term side. What are you hearing from your customers what are they telling you on the duration of this pause because I think your expectation of mid single digit growth would imply this business will recover rather quickly. So just love to get a sense on what our customers are you in consulting.
Amit Jawaharlaz Daryanani: Because I think the expectation of mid-single-digit growth would imply this business will recover rather quickly. So I'd just love to get a sense of what our customers are doing in consulting in terms of the duration of the pause. And then, longer term, what does the opportunity look like given the AI-centric backlog appears a lot more robust versus what I think folks would have expected beyond 24? Thank you.
Amit: The duration of the pause and then longer term what does the opportunity look like given the AI centric backlog appears a lot more robust worth letting folks that are expected beyond 24. Thank you.
James J. Kavanaugh: Thanks, Amit. I appreciate the question. Let's, let's take a step back.
Speaker Change: Thanks, Amit I appreciate the question, let's let's take a step back because I think youre seeing some interesting dynamics in the consulting industry overall and lets bifurcate it between.
James J. Kavanaugh: I think you're seeing some interesting dynamics in the consulting industry overall. And let's bifurcate it between... how do you ask the question? Let's look at real demand that is being measured in bookings, and then let's talk about what's happening with real revenue. On demand, we continue to see and capitalize on solid demand in key areas around digital transformation, application modernization, and Gen AI. Our signings in the quarter, up 4%, were the strongest absolute first quarter signings we've had as far back as I can remember. We have a strong book-to-bill, over 1.15 on a trailing 12 months.
Speaker Change: How you asked the question, let's look at real demand.
Speaker Change: Being measured in bookings and then let's talk about what's happening with the revenue realization.
Speaker Change: Demand, we continue to see and capitalize on solid demand.
Speaker Change: Areas around digital transformation application modernization and Jenny.
Speaker Change: Signings in the quarter up 4%.
Speaker Change: The strongest absolute first quarter signings, we've had as far back as I can go.
Speaker Change: We have a strong book to bill over 115 on a trailing 12 months.
James J. Kavanaugh: Our backlog dynamic is in a very strong position, 7% overall, with stable erosion, but our duration has been going up the last two quarters. It's been up a couple months, but let's talk about the underpinnings of what's driving demand, because I think that's what's most important around the key growth focus areas. Consulting in the first quarter, booking a business on Gen AI was 2x all of last year. So I think we're winning in the marketplace. We're taking a share.
Speaker Change: Backlog dynamic is in a very strong position, 7% overall.
Speaker Change: Stefan erosion.
Speaker Change: But our duration has been going up the last two quarters, it's been up a couple of months, but let's talk about the underpinnings of what's driving demand because I think that's what's most important around the key focus areas you've talked about Jimmy.
Speaker Change: <unk>.
Speaker Change: For IBM Arvin indicated inception to date over $1 billion book of business consulting in the first quarter.
Speaker Change: So on Gen. AI was two X all of last year.
Speaker Change: We are winning in the marketplace.
Speaker Change: Taken share and by the way, we're well above that ramp we saw.
James J. Kavanaugh: And by the way, we're well above that ramp we saw with regard to Red Hat; our strategic partnerships still have great velocity, booked a bill well north of 1.2. Our Red Hat book of business is now $2.8 billion ARR around hybrid cloud. And we're seeing very nice acceleration in Gen AI and digital transformation around core workflow use case areas of finance, supply chain, HR, and talent. So I think in the key focus areas, our demand profile still continues to be good. Now let's translate that to revenue. Revenue, first of all, and first quarter, as we indicated, was all organic.
Speaker Change: With regards to Red hat, our strategic partnerships still have great velocity book to Bill North of one dot to our Red Hat book business is now $2 8 billion hours they are around hybrid cloud.
Speaker Change: Seeing very nice acceleration in Gen AI and digital transformation.
Workflow use case areas of finance supply chain HR and talent. So I think the key focus areas. Our demand profile still continues to be good now, let's translate that to revenue revenue first of all in the first quarter. As we indicated was all organic we wrapped on our acquisitions we continue to.
James J. Kavanaugh: We wrapped up on our acquisitions. We continue to operate a very disciplined M&A process, and we continue to be opportunistic. But that 2% revenue growth was all organic, quarter to quarter. Second, in this marketplace, you look at competition, and we're still taking share. So when you look at it, 90 days ago, we talked about the year. We talked about how the year was going to play out more rapidly throughout the year. Why? Because one, we knew we had a strong backlog, and that backlog realization showed us that it was going to play out throughout the year with sequential improvement. But second, Easter.
Operator, very disciplined M&A process, and we continue to be opportunistic with that 10% revenue growth was all organic quarter to quarter second enlist marketplace. You look at competition, we're taking share.
Speaker Change: So when you look at it 90 days ago, we talked about the year, we talked about the year was going to play out accelerating throughout the year why because one we knew we had a strong backlog and that backlog realization showed us that it was going to play out throughout the year with sequential improvement, but second.
Speaker Change: Yes, there is.
James J. Kavanaugh: Easter, we knew. The calendar was there. Was at the end of March. That does impact a human capital-based business on the number of billings. So when you look at the first quarter, that backlog duration extending out a couple months, we also saw less revenue backlog yield, and that really played out if you look at our subsegments and application operations, which are centered around custom AMS applications, which, by the way, many of those, as you know quite well, are volume-based businesses. And that volume, like I said, backlog is stable overall. We're not losing business. That is moving out to the right.
Speaker Change: We knew calendar was there was at the end of March that does impact human capital based business on the number of billing days.
Speaker Change: When you looked at first quarter that backlog duration.
Speaker Change: Extending out a couple of months.
Speaker Change: Also saw though less revenue backlog.
Speaker Change: And that really played out if you look at our sub segments and application operations.
Speaker Change: Centered around custom.
Speaker Change: MFS applications, which by the way many of that as you know quite well is volume based business and that volume like I said backlog is stable overall, we're not losing the business that is moving out to the right. So with all that said what are we focused on we're focused on capturing new clients.
James J. Kavanaugh: So with all that said, what are we focusing on? We're focused on capturing new client demand in areas around our Keith Growth Area. Two, we'll continue to focus, and we are gaining share in the market. We are driving that economic multiplier of consulting and technology across our hybrid cloud and AI platform. In light of all that, that's why you see the mid-single-digit growth. I think that's prudent, just given what every other consulting competitor has come out with.
Speaker Change: Man in areas around our key growth areas too, we're continuing to focus and we are gaining share in the marketplace. Three we're driving that economic multiplier of consulting and technology across our hybrid cloud and AI platform. So.
Speaker Change: Light of all that that's why you see the mid single digit growth I think that's prudent just given with every other consulting competitors come out with by the way that's still drives one five points of growth to IBM for the full year.
James J. Kavanaugh: By the way, that still drives one and a half points of growth for IBM for the full year. As I stated earlier, we see an accelerated growth profile as we move forward. Operator, next question.
Speaker Change: As I stated earlier, we see an accelerated growth profile as we move through the year.
Speaker Change: Operator next question.
Operator: The next question comes from Wamsi Mohan with Bank of America. Please state your question. Yes, thank you.
Speaker Change: The next question comes from <unk> Mohan with Bank of America. Please state your question.
Mohan: Hi, yes. Thank you.
Wamsi Mohan: Arvind would love to get a little bit more of sort of a macro demand backdrop. I mean, I know Jim mentioned the tightened discretionary spending in some areas. How do you think about the risk of that sort of filtering more broadly as you go through the course of the year, especially given your guidance calls for an accelerating trend here? And if I could quickly, Jim, the synergies relative to HashiCorp on the cost side, is there any way you can dimensionalize that given that, you know, when you're defining accretion on an EBITDA basis, I get that, but Thanks, Ramzi.
Mohan: <unk> would love to get a little bit more of sort of macro demand backdrop, I mean, I know, Jim mentioned that tightened discretionary spending.
Mohan: In some areas.
Mohan: How how do you think about the risk of thoughts sort of filtering more broadly as you go through the course of the year, especially given your guidance calls for an accelerating trend here and if I could quickly Jim.
Mohan: The synergies relative to Hershey Corp. On the cost side is there any way you can dimensionalize that given that you know when.
Mohan: When youre defining accretion on EBITDA basis.
Speaker Change: I get that but can you also help on the net income basis or from a free cash flow how much it might be dilutive in year, one and accretive one year or two thank you so much.
Speaker Change: Thanks, Amit.
Arvind Krishna: So let me address your concern about the demand profile globally. Look, if I look at where we are right now and where we project for the rest of the year, our demand is actually quite strong. I would put it as very similar to 2020. This is backed up by IMF GDP estimates, which are now north of 3% for global business. If I look at it by geography, Japan remains very strong. I think that they are taking this opportunity to refresh the technology across their enterprise and government base. If you look at South Asia, extremely strong. Even the Middle East, UAE, Saudi Arabia, very strong.
Speaker Change: Let me address.
Speaker Change: What about the demand profile globally.
Speaker Change: If I look at where we are right now and where we project for the rest of the year.
Speaker Change: Demand is actually quite strong I would put it is very similar to 2023.
Speaker Change: This is backed up by IMF, GDP estimates, which are now north of 3%.
Speaker Change: For the global business, if I look at it by geography.
Speaker Change: <unk> remains very strong I think that they are taking this opportunity to refresh the technology across their enterprise and government base.
Speaker Change: Look at South Asia extremely strong even the middle East our UAE, Saudi very strong Europe is it.
Arvind Krishna: Europe has remained consistent with last year, and North and South America. So on a geography basis, you're seeing very, very strong demand. Now, interest rates are higher than people were expecting. I think we should acknowledge that. That means you get two effects going on.
Speaker Change: Consistent with last year, North and South America.
Speaker Change: On a geography basis, you're seeing very very strong demand now interest rates are higher than people were expecting I think we should acknowledge that.
Speaker Change: That means you get two effects going on one that is even stronger demand for software and infrastructure because people believe technology helps you in those environment and health.
Arvind Krishna: One, there is even stronger demand for software and infrastructure because people believe technology helps them in those environments and helps in an environment of increased labor costs and increased supply chain costs. Then when you look at the discretionary side, Jim answered this in the previous question, we are seeing a little bit, not across the board, not in all of the offerings in consulting, but where there is a little bit of discretionary labor, that is where we sense that pressure.
Speaker Change: Volume and increased labor cost and increased.
Speaker Change: Increased supply chain costs.
Speaker Change: When you look at.
The discretionary side Jim answered. This in the previous question, we are seeing a little bit not across the board not in all of our offerings and consulting.
Speaker Change: There is a little bit of a discretionary labor that is babies that pressure.
Arvind Krishna: What we are going to do is pivot into areas around helping people become more productive, take more costs out, digital transformation, and work with our partners, where there is very strong demand in the market. And as you pivot there, we believe that our growth rate in consulting will continue to accelerate. So I hope, Wamsi, that gave you a flavor of the demand vectors we have, both in software and infrastructure, and in consulting and at a geographical level. Jim, over to you for part two.
Speaker Change: We're going to do is pivoting to the areas around helping people become more productive take more cost out digital transformation work with our partners whether it is very strong demand in the market and as you've heard there we believe that our growth rate in consulting we will continue to accelerate.
Speaker Change: Obviously that gave you a flavor.
Speaker Change: On the demand vectors, we have both in software and infrastructure and then consulting and on a geography basis, Jim over to you for far too. Okay. Thank you. Thanks for the question as Arvind indicated in our prepared remarks, we couldnt be more excited about the powerful combination of Hershey Corp.
James J. Kavanaugh: Okay. Thank you. Thanks, Wamsi, for the question. As Arvind indicated in the prepared remarks, we couldn't be more excited about the powerful combination: HashiCorp with IBM and Red Hat together.
James J. Kavanaugh: With IBM and Red hat together.
James J. Kavanaugh: We talked about the prepared remarks. We've been very clear about our set of criteria around M&A. And this fits strategically, it has tremendous synergistic value to our hybrid cloud AI portfolio, and it has an attractive financial return overall. And Hashi meets all three.
James J. Kavanaugh: We talked about in the prepared remarks, we've been very disciplined in our set of criteria around M&A and this fits strategically it has tremendous synergistic value to our hybrid cloud and AI portfolio and it has an attractive financial return overall and how she meets all three.
James J. Kavanaugh: One, it's a higher revenue growth profile company, so it accelerates IBM's revenue growth overall. To your question, adjusted EBITDA accretive in the first 12 months, and three, levered free cash flow accretive by the end of year two. We think there is the potential for meaningful synergies overall. And when we look at it, significant near-term operating efficiencies, cost synergies, and put that in perspective, we see this business profile moving from about a mid-single digit to about a 30 to 40 percent. Free Cash to a Margin Business in a Handful of Years. Free cash flow accreted by the end of year two.
James J. Kavanaugh: One is the higher revenue growth profile company sort of accelerates ibm's revenue growth overtime.
James J. Kavanaugh: To your question adjusted EBITDA.
James J. Kavanaugh: Creative in the first 12 months and three Levered free cash flow accretive by the end of the year or two.
James J. Kavanaugh: Thanks.
James J. Kavanaugh: Or a potential for meaningful synergies overall and when we look at it significant near term operating efficiencies cost synergies.
James J. Kavanaugh: Put that in perspective, we see this business profile moving from about a mid single digit free cash flow margin business.
James J. Kavanaugh: About 30% to 40% free.
James J. Kavanaugh: Free cash flow margin business and a handful of years free cash flow accretive by the end of this year to now the multiple we paid on that fully supported by one the standalone revenue growth and the cost synergies that come out all of the IBM revenue synergies around red hat.
James J. Kavanaugh: Now, the multiple we paid on that, fully supported by one, the standalone revenue growth and the cost synergies that come out. All of the IBM revenue synergies around Red Hat, around data security, around Watson X, around consulting, and IT automation are all upside. So let's talk and conclude on the cost synergies. Cost synergies are what you would fully expect because IBM runs a global operation in 175 countries.
James J. Kavanaugh: Round data security around Watson ex around consulting and automation are all upside potential so let's talk.
James J. Kavanaugh: On the cost synergy cost synergies.
James J. Kavanaugh: Fully expect IBM runs a global operations and 175 countries, we run a very disciplined G&A efficient structure.
James J. Kavanaugh: We run a very disciplined, G&A efficient structure. We see significant G&A operating efficiencies that we're going to go cap. Second, running a playbook on how we expanded globally our go-to-market model that we did with Red Hat. And that has both global incumbency, global scale, global breadth, and ecosystem leverage overall. And when you look at that, those significant synergies allow us to invest in product, R&D, innovation, and capability that's built into our case and also deliver our future. I feel pretty good about it.
James J. Kavanaugh: Seeing significant G&A operating efficiencies that we're going to go capitalize on second.
James J. Kavanaugh: Running the playbook on how we expand that globally. Our go to market model that we did with Red hat and that has both global incumbency global scale breadth and ecosystem leverage overall and when you look at that those significant synergies allow us to invest in product.
James J. Kavanaugh: R&D innovation and capability, that's built into our case and also deliver a financial return so we feel pretty good about it.
Operator: Operator, let's go to the next question. Our next question comes from Tony Sakonagi with Bernstein Police. Yes, thank you. And good afternoon.
Speaker Change: Operator, let's go to the next question.
Speaker Change: Our next question comes from Toni <unk> with Bernstein. Please state your question.
Toni: Yes, Thank you and good afternoon.
Tony Sakonagi: Jim, just to clarify, you've taken down your consulting outlook for the year from six to eight to five. I think that's about 60 basis points to company growth. Is there anything offsetting that? Or is that just kind of a rounding error in the low single-digit guidance? And then my question is, maybe you could just elaborate a little bit more on the AI book of business. Maybe just help clarify exactly how you define that. I think it's both revenue-recognized and your bookings, and maybe partner bookings. Maybe you could just help define that?
Tim just to clarify.
Toni: Taken down your consulting outlook for the year from 6% to 8% to five I think that's about 60 basis points to company growth is there is there anything offsetting that or is that just kind of a rounding error in the low single digit guidance and then my question is maybe you could just elaborate a little bit more on the AI book of business.
Toni: Maybe just help clarify exactly how you define that I think it's both revenue recognized and your bookings in.
Toni: And maybe partner bookings, maybe you could just help define that and last quarter. You said it doubled sequentially. This quarter. You just commented that it grew sequentially, maybe you could add a little color with that double digits, or 20 or 30% or 40%.
James J. Kavanaugh: And last quarter, you said it doubled sequentially. This quarter, you just commented that it grew sequentially. Maybe you could add a little color.
James J. Kavanaugh: Was that double digits or, you know, 20 or 30 or 40 percent? And at least when I do the math, it sounds like it's less than 5 percent of your consulting backlog, AI, you know, AI backlog. Could you help to mention that as well? Thank you. Okay, Tony. There are many questions here. Let me see if I can get through them quick.
Toni: And at least when I do the math it sounds like it's less than 5% of your consulting backlog AI.
Toni:
AI backlog could you help dimension that as well thank you.
Speaker Change: Okay, Tony many questions here, let me see if I can get through them.
James J. Kavanaugh: You look at the full year. For the full year, as Arvind indicated, we're maintaining our guidance on our model, mid single digit. I think prudently, just coming out of our first quarter, we have a lot of work to do in the next three quarters, but I think prudently at the low end of that model. By the way, that was very consistent with what we said in our. Now, let's unpack that. When you take a look at the four-year, first of all, we are dealing with a stronger U.S. dollar. So we've given you a supplemental chart. Now we've lost basically about a point more of a headwind on currency.
Nick when you look at full year full year is Arvind indicated we are maintaining our guidance on our model mid single digit I think prudently just coming out of our first quarter. We got a lot of work to do in the next three quarters, but I think prudently at the low end of that model by the way that was very consistent what we said 90 day.
Speaker Change: So now, let's unpack that when you take a look at full year first of all we are dealing with a stronger U S. Dollar. So we've given you a supplemental chart now we've lost basically about a point more of headwind on currency, but let's talk about the underlying fundamentals of our business across our segments.
James J. Kavanaugh: But let's talk about the underlying fundamentals of our business across our segments, because I think that's at the heart of your question. You know, when you take a look at our growth at mid-single-digit, one, we said software would grow slightly above the high end of our mid-single-digit model. We are very pleased with our software performance in the first quarter.
Speaker Change: I think that's at the heart of your question.
Speaker Change: When you take a look at our growth at mid single digit one we said software will grow slightly above.
Speaker Change: The high end of our mid single digit model.
Speaker Change: We're very pleased with our software performance in the first quarter, we've accelerated growth from fourth quarter two 6% overall, we have a very strong recurring revenue base, we accelerated red hat.
James J. Kavanaugh: We've accelerated growth from the fourth quarter to 6% overall. We have a very strong recurring revenue base. We accelerated Red Hat to a very strong 9% with our third consecutive quarter of mid-team booking growth, which positions our business extremely well for double-digit growth for the full year. And we're getting nice scale leverage on acquisitions. Software for the Year will deliver over three points of that IBM mid-single, by itself.
Speaker Change: Two a very strong 9% with our third consecutive quarter of mid teens bookings growth, which positions our business extremely well for double digit growth for the full year and we're getting nice scale leverage on acquisitions software for the year.
Speaker Change: <unk> will deliver over three points of that IBM mid single digit by itself based on that Red hat momentum acquisitions solid recurring revenue tpa by the way nice start off.
James J. Kavanaugh: Based on that Red Hat momentum, acquisitions, solid recurring revenue, T.P., by the way, a nice start off up 4%, and new innovation like Watson X, consulting, we said, for the full year, appropriately, in light of the market, and still gaining share, would be mid-single digits. That would deliver about a point-and-a-half of growth to IBM. Why did we feel good about
Speaker Change: <unk>, 4% and new innovation like what's the next consulting.
Speaker Change: For the full year appropriately in light of the market and still gaining share with that mid single digits that will deliver about a point and a half of growth to IBM.
Speaker Change: Why do we feel good about that one solid book to Bill winning in key focus areas strategic partnerships Jenny scale overall, but like first quarter, we're going to continue to monitor that backlog realization to see how that plays out.
James J. Kavanaugh: One solid book to build, winning in key focus areas, strategic partnerships, and Gen-AI scale overall. But, like the first quarter, we're going to continue to monitor that backlog realization to see how that plays out. But between software and consulting, over three points in software, about a point-and-a-half. Now you get to infrastructure. We started out well above what we expected here in the first quarter.
<unk> software and consulting over three points in software or about a point and a half now you get the infrastructure, we started out well above what we expected here in the first quarter mainframe quarter in group.
James J. Kavanaugh: The mainframe, eighth quarter in, grew 5%. Our distributed infrastructure, power, and storage both grew double digits, as we're capitalizing on distributed infrastructure and demand requirements for Gen-AI. Full year, that's a little bit better than what we thought 90 days ago off our first start. So we expect about a little bit less than a half a point impact IP. You throw on top of that we executed the closure of the weather company, and that'd be about half a point.
Speaker Change: 5% are distributed infrastructure power and storage both grew double digits as we're capitalizing on distributed infrastructure on demand requirements for Jenny.
Speaker Change: Yeah, that's a little bit better than what we thought 90 days ago off our first start so we expect about a little bit less than a half a point impact IBM you throw on top of that we executed the closure of the weather company that'd be about a half a point so thats kind of how we built up our full year overall book of business.
James J. Kavanaugh: So that's kind of how we build up our full year overall. So AI Book of Business, I think you nailed it in your question. It's one, on a consulting perspective, it's our signings book of business overall.
Speaker Change: I think you nailed it in your question.
Speaker Change: One on a consulting perspective, it's our signings book of business overall.
James J. Kavanaugh: And on our software, it's our subscription, our SAS, and perpetual licenses. Again, as you know, we offer clients flexibility on how they want to purchase that overall. And consulting backlog, yes, 5% overall. But I would tell you, let's put it in perspective. It's probably mid to high single digits.
Speaker Change: Our software subscription or SaaS and perpetual licenses again as you know.
Speaker Change: For clients flexibility on how they want to purchase that overall.
Speaker Change: And consulting.
Speaker Change: Backlog, yes, 5% overall I would tell you, let's put it in perspective.
<unk>.
Speaker Change: Probably mid to high single digits, but we've got give or take about a $30 billion book of business backlog with consulting so coming from where we started less than nine months ago. I think that's a very good ramp let's put it in perspective.
James J. Kavanaugh: But we've got, you know, give or take about a $30 billion book of business on backlog with consulting, driving the hybrid cloud platform-centric play with consulting, which has done extremely well. Over the first four quarters, we did a billion-dollar book of business. Right now, through less than three quarters.
Speaker Change: When we drove the hybrid cloud platform centric play with consulting which has done extremely well.
Speaker Change: Over the first four quarters, we did $1 billion book of business right.
Speaker Change: Right now less than three quarters.
Operator: We're very damn close to that billion dollar book of business. Operator, let's take the next question. Our next question comes from Ben Reitzes with Mellius Research. Please state your... Yeah, hey, guys, thanks.
Speaker Change: Very damn close to that $1 billion book of business.
Speaker Change: So.
Speaker Change: Operator, let's take that question.
Speaker Change: Our next question comes from Ben Reitzes with Melius Research. Please state your question.
Benjamin Alexander Reitzes: Yeah, Hey, guys. Thanks.
Benjamin Alexander Reitzes: I wanted to ask about Red Hat. You accelerated it to 9% in the quarter from seven. What is your confidence level?
Benjamin Alexander Reitzes: I wanted to ask about Red hat.
Benjamin Alexander Reitzes: You accelerated to 9% in the quarter from seven.
Benjamin Alexander Reitzes: What is your confidence level, you get to the mid teens, which kind of equals your bookings growth.
Arvind Krishna: You get to the mid-teens, which kind of equals your bookings growth. So and then on Red Hat, the follow-up would be, how much can HashiCorp augment that growth rate? And what do you, can you clarify the synergies a little bit more between Red Hat and Hashi? And, you know, was Hashi needed to help grow Red Hat, or is it just a bonus?
Benjamin Alexander Reitzes: So and then on Red hat the follow up would be how much can hashi corp, augment that growth rate.
Benjamin Alexander Reitzes: And what do you can you clarify the synergies a little bit more between red hat and Hershey and.
Benjamin Alexander Reitzes: Was hershey needed to help grow red hat oriented a bonus how do you see that thanks very much.
Arvind Krishna: How do you see that? Thank you very much. Ben, let me take the first part of those questions. We are very, very pleased with Red Hat. If I look at Red Hat now, we have had mid-teen or better bookings growth for the last three quarters, third quarter, fourth quarter, and first quarter. That, combined with the growth we are seeing in OpenShift as well as in both Ansible and REL, OpenShift growing almost 40%, gives us a lot of confidence.
Speaker Change: All right.
Speaker Change: Ben Let me take the first part of those questions.
Speaker Change: We are very very pleased with the REIT had if I look at Red hat now we've had mid teens are better bookings growth for the last three quarter third quarter fourth quarter and first quarter.
Speaker Change: That combined with the growth we are seeing in open shift as well as in both honorable and route oversee a growing almost 40% gives.
Speaker Change: It gives us a lot of confidence so bookings growth plus.
Arvind Krishna: 2. Bookings growth plus OpenShift plus what we are seeing in revenue now at 9% tells us that we should see that Red Hat growth continue or accelerate through the year. Let me just address the microphone.
Speaker Change: Open shift plus what we're seeing in the revenue now at 9% tells us that we should see.
Speaker Change: That red outgrowth continue or accelerate through the year.
Speaker Change: Let me just address the macro point.
Arvind Krishna: Hashi is a nice ad for the Red Hat portfolio, but it's not inside Red Hat. Let's just be clear. So when we talk about Red Hat growth numbers of 9 and accelerating, that is Red Hat as is. Hashi will be measured in software, but in IBM software, not in Red Hat.
Speaker Change: Hershey.
Speaker Change: Nice add for the Red hat portfolio, but it's not inside Red hat, let's just be clear when we talk about red outgrowth number the line and accelerating that as red hat.
Speaker Change: Obviously, it will be measured and software.
Speaker Change: IBM software not at Red hat.
Arvind Krishna: Where the synergy comes in is that we believe there will be added demand because if a combined portfolio is more interesting, we think even more clients will talk to us. That is how Hashi will help Red Hat. But it's not that the Hashi revenue counts at all for the numbers we just mentioned.
Speaker Change: Synergy comes as we believe there will be added demand because of the.
Speaker Change: <unk> portfolio is more interesting, we think even more clients.
Speaker Change: Talk to us that is how how she will help Brad had its not that the heartbeat revenue count at all for the numbers. We just mentioned so we kind of want to be clear on that issue to us as an accelerant for IBM strategy and for southwest strategy.
Arvind Krishna: So we kind of want to be clear on that. Hashi, to us, is an accelerant for IBM's strategy and for software strategy. And Hashi helps us be offensive in terms of giving us an overall better portfolio, so even more clients want to do business with us in the environments they're going to. That's kind of how I would pitch it. And people know Hashi really well for its infrastructure management, but the security pieces of Hashi are also very, very interesting and really important as people navigate these very complex environments with all the worries about people losing secrets and keys and that resulting in ransomware or hacking attacks. And that's kind of how I would paint the picture on that. I would just add one more.
Speaker Change: And how is the health and being offensive in terms of giving us an overall better portfolio.
Speaker Change: More clients want to do business with us and the environments, they're going to that's kind of our vision and people know Archie really well for the infrastructure management, but the security pieces of heartbeat.
Speaker Change: Very very interesting and really important.
Speaker Change: People navigate these very complex environment with oil.
Speaker Change: All of the <unk>.
Speaker Change: People, losing secrets engaged and that resulting in ransomware or hacking attacks.
Our paint the picture on that side.
Speaker Change: Yes, I would just add one other.
Other point, Ben as you and I and many of the investors have talked about since first quarter earnings.
James J. Kavanaugh: Ben is you and I and many of the investors have talked. You know, we kind of bifurcated this business when we saw the slowdown happen in the second half last year in our subscription-based business within Red Hat versus our consumption-based services, and off. The former being about 80% of our portfolio, and the latter being about 20%. If you look at the first quarter, as Arvind indicated, we're very... Coming off of a two-plus-point acceleration positions us extremely well, even more, in that double-digit for the year.
Speaker Change: We've kind of bifurcated this business when we saw the slowdown happened in second half last year between.
Speaker Change: Subscription based business within Red hat versus our consumption based services and offerings.
Speaker Change: Former being about 80% of our portfolio the latter being about 20%.
Speaker Change: You look at first quarter as Arvind indicated we're very pleased coming off of a two plus point acceleration.
Speaker Change: <unk> has us extremely well even more confident in that double digit for the year.
James J. Kavanaugh: But the reason why we're even more confident is that 80% of that portfolio, that subscription business, we accelerated three points quarter to quarter in revenue, and we were above double digits. On the consumption base, we finally saw stabilization. We didn't see acceleration.
Speaker Change: Reason why we're even more confident is that 80% of that portfolio that subscription business.
Speaker Change: Accelerated three points quarter to quarter in revenue.
Speaker Change: And we were all above double digits.
Speaker Change: Consumption base. We finally saw stabilization, we didn't see acceleration, we saw stabilization, but remember we start wrapping on that in the second half. So that provides us a tailwind in the second half, but our subscription business today, the 8% three points acceleration double digit in the first quarter all three.
James J. Kavanaugh: We saw stabilization. But remember, we start wrapping on that in the second half. So that provides us with a tailwind in the second half.
Operator: But our subscription business today, the 80%, three points of acceleration, double-digit growth in the first quarter, all three major lines, broad-based, double-digit bookings, Red Hat OpenShift, over 40% booking strength, $1.3 billion ARM book of business, grown 25 plus percent, Ansible take and share. We feel even more confident in, Operator, next question please. Our next question comes from Erik Woodring with Morgan Stanley. Please state your question. Great, thank you very much for taking my question. Arvind, maybe this one's for you.
Speaker Change: Three major lines broad based double digit bookings Red had opened ship over 40% bookings strength $113 billion a broker.
Speaker Change: Broker business growing 25, plus percent ansible taken share.
Speaker Change: Even more confident as I said.
Speaker Change: Operator next question please.
Speaker Change: Our next question comes from Erik Woodring with Morgan Stanley. Please state your question.
Erik William Richard Woodring: Great. Thank you very much for taking my question I'm often maybe this one's for you you know if we include the software AG assets and know Hershey Corp. I think you've spent about $16 billion on acquisitions since your 2021 analyst day.
Erik William Richard Woodring: You know, if we include the software AG assets and now HashiCorp, I think you've spent about $16 billion on acquisitions since your 2021 Analyst Day. Back then, you talked about kind of having 20 to 25 billion of M&A firepower you could leverage through 2024. Just curious, as we sit here today, your willingness or desire to go after more M&A for the rest of this year. Would you be willing to go kind of above and beyond that total that you had laid out almost three years ago? And just as we think about potential targets in the future, where do you believe you have gaps that you can still fill within your portfolio? Thank you.
Erik William Richard Woodring: Then you talked about kind of having 20 to 25 billion of M&A firepower, you could leverage through 2024, just curious as we sit here today.
Erik William Richard Woodring: Your your willingness or desire to go after more M&A for the rest of this year would you be willing to go kind of above and beyond that total that you had laid out almost three years ago and just as we think about the potential targets in the future you know where do you believe you have gaps that you can still fill within your.
Erik William Richard Woodring: Within your portfolio. Thank you.
Arvind Krishna: Eric, let me just maybe address the microphone tonight, and I'll let Jim talk about some of the numbers. We are going to remain incredibly disciplined on our M&A strategy. We kind of said it, but I just want to repeat, we got to find things that meet our strategy. You've got to have some synergy opportunities at IBM.
Erik William Richard Woodring: Okay.
Speaker Change: Let me just maybe address the macro points and Ed and I will let Jim talk to the numbers yet.
Speaker Change: We're going to remain incredibly disciplined.
Speaker Change: Our M&A strategy.
Speaker Change: We kind of said it but I just wanted to repeat we've got to find things that meet our strategy you've got to have some synergy opportunity that IBM.
Arvind Krishna: And it has to be financially accretive within the second. So if we find things that meet that, and we are committed, I'll say, to both our dividend and our investment-grade ratings, then that is the kind of picture we go in. Now, within that, we believe we have some level of flexibility, and that is what we will operate in. That gives you a sense of what is there. By the way, one year ago, these two were yet to come.
Speaker Change: And it has to be financially accretive within the second year.
Speaker Change: So if we find things that meet that.
Speaker Change: And we are committed.
Speaker Change: Both our dividend and our investment grade ratings.
Our ratings.
Speaker Change: It is kind of the picture.
Speaker Change: <unk> is now within that we believe we have some level of flexibility.
Speaker Change: That is what we will operate that gives you a sense there by the way one thing about these two yet to come in Big box software AG.
James J. Kavanaugh: We've got Software AG that we hope to close mid-year, and HashiCorp, which will come near the end of the year. We also have to look at what our overall internal dynamics are of making sure that we can succeed in these businesses as we proceed down the path. We need to build consulting practices. We need to have synergies plays in other parts of the portfolio. Jim.
Speaker Change: We hope to close midyear.
Speaker Change: And Archie cough, which we'll come near the end of the year. We also have to look at what is our overall.
Speaker Change: No dynamics.
Making sure that we can succeed on these businesses as we proceed down the path we need to build consulting practices, we need to have synergy plays in other parts of the portfolio. We have to enable our sales teams globally as we see a big part of our synergy is getting.
Operator: Yeah, Arvind, just building on your point, we are very confident in the capital structure of this company. We are committed to maintaining a very solid investment-grade balance sheet. We are focused on debt leverage, obviously, but our primary capital allocation is to invest in our business, both organically and inorganically, and to maintain the attractive return-to-shareholder program with our dividends. So with all that said, just to reaffirm what Arvind indicated, we will remain in the market.
Speaker Change: The amplification from our global footprint that is there.
Speaker Change: It's all around the World Hi, Jim Yeah, Irvin just building on your point, we are very confident in the capital structure of this company.
Irvin: We're committed to maintain a very solid investment grade balance sheet. We are focused on debt leverage obviously, but our primary capital allocation is to invest in our business both organically and inorganically.
Speaker Change: To maintain the attractive return to shareholder program with our dividend policy. So with all that said just to reaffirm what Arvind indicated we will remain in the market.
Operator: Also, evaluating complementary tuck-in opportunities that fit our M&A strategy, and we have the capability. Operator, next question please. Our next question comes from Brent Thill with Jefferies. Please state your question. Arvind, on the software business, I mean, even ranging somewhere between 3 to 8, 9% growth. Many of our customers, It seems like the overall market's growing faster. What's it going to take to unlock this incredible portfolio you've built? To effectively maybe monetize at the rate the industry's growing, is there something that's causing friction to unlock the true potential of the software business? Are we just being too focused on the short term?
Speaker Change: Prudently evaluating complimentary tuck in opportunities that fit our M&A strategy and we've got the capability of doing that.
Speaker Change: Operator next question please.
Speaker Change: Our next question comes from Brent Thill with Jefferies. Please state your question.
Arvind on the software business, I mean, even ranging somewhere between three to eight 9% growth.
Brent John Thill: Many have asked it seems like the overall market is growing faster.
What's it going to take to unlock this part this incredible portfolio you've built.
Brent John Thill: Effectively maybe monetize at the rate the industry is growing out is there is there something thats, causing friction to unlock that true potential the software business.
Brent John Thill: Or are we just are we just being too focused on the short term whats what do you think unlocks that value and getting you to your closer Tam.
Brent John Thill: What do you think unlocks that value in getting you to your closer TAM of growth? So, Brent, as you can imagine, we are very, very focused on that question. If I just want to lay out a four-year project for you, if you'll indulge me for just a minute.
Brent John Thill: Tam of the growth.
Speaker Change: So Brent I think.
As you can imagine we are very very focused on that question.
So I just wanted to lay out a four year project, if you'll indulge me for just a minute we began with the software portfolio that was let's call it flat.
Arvind Krishna: We began with a software portfolio that was, let's call it flat, would be the kind we would put it about five years ago. We've gone from flat to, as you said, some volatility. But we are now seeing that we could be north of 6% for this year, whether you want to call that six and a half or seven. And we are very confident in that. As we move to organic innovation and as we do M&A, we will find that that number will keep improving year over year.
Speaker Change: Would be a kind way of putting it about five years ago.
Speaker Change: Gone from flat as you said some volatility, but we are now seeing that we can be north of 6%. This year, whether you want to call that six five or seven and we are very confident in that.
Speaker Change: And at Boto organic innovation and as we do M&A, we will find that that number will keep improving year over year and I am pointing to are very consistent.
Arvind Krishna: And I'm pointing to a very consistent four-year trajectory of having achieved that. By the way, within that, we do find there are a couple of slow-growing pieces, but they're incredibly important to our overall profile, both for incumbency with clients and for the cash flow that they produce. We would never expect our mainframe software, the TPS piece, to be growing in the high single digits or in double digits
Speaker Change: For your trajectory of having achieved that.
Speaker Change: Within that we do fine there are a couple of slower growing pieces.
Speaker Change: Very important to our overall profile, both where incumbency with client.
Speaker Change: For the cash flow does it produce we would never expect our mainframe software the TPS beef ought to be growing in the high single digits are in double digits. So as that mix also changes over time, then we find that we're going to get.
Arvind Krishna: As that mix also changes over time, then we find that we're going to get closer and closer. And we do want to, over time, get software to grow above where we are right now. So right now, we're at the upper end of the mid-single-digit model. I think you can conclude what the next step we will go at, and then we'll go. Operator, next question. Thank you.
Speaker Change: Closer and closer and we do want to over time.
Speaker Change: Get software to grow above where we are right now so right now we're at the upper end of the mid single digit model.
Speaker Change: I think you can conclude what would be the next step we will go out and then we'll go from there.
Speaker Change: Great.
Speaker Change: Thanks.
Speaker Change: Operator next question. Thank you. Our next question comes from Brian Essex with J P. Morgan. Please state your question.
Operator: Our next question comes from Brian Essex with J.P. Morgan. Please state your question. Hi, good afternoon, and thank you for taking the question. Another red hat one.
Brian Lee Essex: Hi, good afternoon, and thank you for taking the question another Red hat, one maybe arvind if.
Brian Lee Essex: Maybe Arvind, could you maybe give us a little bit of a sense of what's going on in the pipeline there and whether or not you're seeing a substantial benefit in the Red Hat pipeline from the VMware acquisition, both on the consulting side as well as the software side? Are you seeing a lot of migration, and how much of an opportunity do you think might be there longer term to capture more share of that market? Brian, a great question.
Brian Lee Essex: If you could maybe give us a little bit of a sense of whats going on in the pipeline, there and whether or not youre seeing a substantial.
Brian Lee Essex: Benefit in the Red have pipeline from the Vmware acquisition, both on the consulting side as well as the software side are you seeing a lot of migration and how much of an opportunity you think might be there.
Brian Lee Essex: Longer term to capture more share of that market.
Speaker Change: Hi, Brian.
Arvind Krishna: So if we could talk about some of the Red Hat dynamics. It's not so much directly related to VMware per se, but clients are all beginning to say, they're asking the question, which is the platform they want to bet on for the next 10 to 20 years, on which they will write their applications, deploy them both in their own data centers and on public clouds. We found an incredible amount of interest in that question.
Brian Lee Essex: Great question. So if you could talk to some other dynamics.
Speaker Change: It's not so much.
Speaker Change: Directly related to <unk> per se, but clients are all big thing to say you're asking the question, which is the platform. They want to bet on for the next 10 to 20 years on which they will write their applications and deploy them both in their own data centers add on public cloud.
Find an incredible amount of interest in that question.
Arvind Krishna: And as we have built out the Red Hat portfolio, not just for containers, because many people know OpenShift as a great container platform, but also for virtualization, with both container native virtualization and the KVM hypervisor, you're finding a lot of interest around those topics. Then, as we layer in by the end of the year the HashiCorp advantages of managing the infrastructure across all these environments, we do believe that that will be an accelerant for the Red Hat portfolio. So first, RHEL has got a goddess place as the primary place where people want to deploy. OpenShift is a platform for both containers and virtualization. Ansible and HashiCorp for helping increase automation and reduce complexity.
Speaker Change: And as we have built out the red hat portfolio.
Speaker Change: Not just for containers, because many people know open ship as a grid kadena platform, but also for virtualization, both container native virtualization and with the KVM Hypervisor finding a lot of interest around those topics.
Speaker Change: And then as we layer in.
Speaker Change: By the end of the year the harsher.
Speaker Change: Advantages of managing the infrastructure across all these environments. We do believe that that will be an accelerant to the red hat portfolio.
Speaker Change: First rail has got a got its place as the primary place where people want to deploy.
Speaker Change: Often shift as a platform for both container and virtualization.
Speaker Change: Ansible and Archie Cup for helping increase automation and reduce the complexity. We think all of this plays in.
Arvind Krishna: We think all of this plays in. And Brian, I think the best number is the mid-teen bookings growth on the subscription side of the business. That speaks to the demand in terms of not only is there demand, but we are realizing that demand in the book of business that we are getting clients to commit to on Red Hat. Operator, let's take one last question. Our next question comes from Matt Swanson with RBC Capital Markets. Please state your question.
Speaker Change: Brian I think the best number is the mid teens bookings growth on the subscription side of the business that speaks to the demand in terms of not only is the demand.
But we are realizing that demand in the book of business that we are getting clients to commit to on red hat.
Speaker Change: Okay.
Speaker Change: Let's take one last question.
Speaker Change: Our next question comes from Matt Swanson with RBC capital markets. Please state your question.
Operator: Yeah, thank you so much for taking the question. I think I might try a qualitative version of an earlier question around Gen AI. And I think we see so much of the newsfeed being around kind of the hype cycle, and obviously, growing a billion-dollar book of business shows you're monetizing it.
Matthew John Swanson: Yes. Thank you so much for taking the question I think I might try a qualitative version of it.
Matthew John Swanson: Earlier question around Gen AI and I think just we see so much of the news feed.
Matthew John Swanson: Around kind of the hype cycle, and obviously growing $1 billion book of business shows you're monetizing. It can you just talk about maybe the pain points that enterprises are looking to address when they first come to you.
Matthew John Swanson: Can you just talk about maybe the pain points that enterprises are looking to address when they first come to you? Or when those consulting relationships start, like how much of a plan is in place versus how much they're looking for you to, you know, kind of hold their hand in terms of this Gen AI journey? I think, Matt, that's a great question.
Matthew John Swanson: When those consulting relationship start like how much of a plan that's in place versus how much theyre looking for Utah.
Matthew John Swanson: Tend to hold their hand in terms of this journey a journey.
Speaker Change: I think Matt that's a great question. So let me maybe take that and I'll address it for both the consulting side and the software side.
Arvind Krishna: So let me maybe take that, and I'll address it from both the consulting side and the software side. If we were 12 months ago, I would say that there was a lot of excitement, and there was a lot of experimentation that was starting, and people were not thinking through, "What does this mean for my overall ROI? What are the economics of running Gen AI?".
Speaker Change: If we were 12 months ago, I would say that there was a lot of excitement and there was a lot of experimentation that restarting and people would not we're not thinking through what does this mean for my overall ROI what are the economics of running Gen. II, how do I get the people changes done so that the ROI can.
Arvind Krishna: How do I get the people changes done so that the ROI can actually be realized? What I have noticed in all of my conversations this year, in the first quarter of 2024, is that a lot of people have woken up to the fact that those issues need to be addressed as well. So when they talk to our consulting team, they are spending energy on, but can you help my people also do the transformation it takes? What is the change process through which you can recognize those? is then going to immediately ask... In these models, how expensive is it to run them?
Speaker Change: Actually be realized.
Speaker Change: What is happening in all of my conversations this year in the fourth quarter of 'twenty 'twenty. Four is a lot of people have woken up that those issues need to be addressed as well.
Speaker Change: So when they talk to our consulting team they are spending energy on but can you help my people also do the transformation at <unk> what is the change process through which you can recognize those things.
Speaker Change: And then go to immediately asking.
Speaker Change: In these models how expensive is it to run them and they begin to do the math if I'm wrong. This model just photos one business process.
Arvind Krishna: And they begin to do the math. Wait, if I run this model just for this one business process, the infrastructure cost alone could be $300 million a year. That doesn't close the ROI. Can I do it in a much more cost-effective way, but with an equally good answer?
Speaker Change: Restructure costs alone could be $300 million, a year that doesn't closeout Oi and do it in a much more cost effective way, but at an equally go to answer and that is where you begin to see some of the models that IBM has produced a granite series plays very strongly into helping them recognize that ROI.
Arvind Krishna: And that is where you begin to see some of the models that IBM has produced, our granite series, play very strongly into helping them recognize their ROI by reducing the economics. And then lastly, and this is advice that I usually give to the C-suite, and it resonates, is don't pick lots of little experiments. Try to pick a few use cases that can scale. By scale, meaning that they actually impact a large fraction of the employees or their client customers, and they begin to have a large impact on how business is done by either improving revenue or by making the enterprise significantly more productive.
Speaker Change: By reducing the economics and then lastly.
Speaker Change: And this is advised that I get to the phase III usually added resonate.
Speaker Change: Don't take lots of little experiment try to pick a few use cases, which can scale by scale, meaning that they actually do impact a large fraction of the employees all of our clients customers and to begin to have.
Speaker Change: Large impact and how business is done by either improving revenue or by making the enterprise significantly more productive that's kind of a broad efficient shift from simply this was a net neutral let me try it out to see what I can do not what I should do but what I can do and I think that that is a big change.
Arvind Krishna: That's kind of a conversation shift from simply saying, "Oh, this is a neat new tool. Let me try it out to see what I can do." Not what I should do, but what I can do. And I think that that is a big change in terms of helping the organization scale. Let me now wrap up the call. In the first quarter of 2024, we executed on our strategy to deliver revenue growth and cash generation. Allowing us to invest organically and through strategic acquisitions like HashiCorp.
Speaker Change: As of helping the organization scale.
Let me now wrap up the call in.
Speaker Change: In the first quarter of 2024, we have executed on our strategy to deliver revenue growth and cash generation.
Speaker Change: Allowing us to invest organically and through strategic acquisitions like Hershey cough.
Operator: As always, we need to execute to capture the opportunity in front of us. I look forward to sharing our progress with you as we move through the rest of the year. Thank you, Arvind. Operator, let me turn it back to you to close out the call. Thank you. Thank you all for participating on today's call. The conference has now ended. You may disconnect at this time.
Speaker Change: As always we need to execute to capture the opportunity in front of us.
I look forward to sharing our progress with you as we move through the rest of the year.
Speaker Change: Thank you Arvind operator, let me turn it back to you to close out the call.
Arvind: Thank you all to participate participating on today's call. The conference has now ended you may disconnect at this time.