Q1 2025 International Business Machines Corp Earnings Call
Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded.
Speaker Change: 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, 2025 Earnings Presentation.
Olympia Mcnerney: I'm Olympia McNerney and I'm here today with Arvind Krishna, IBM's Chairman, President and Chief Executive Officer, and Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer.
Olympia Mcnerney: To provide additional information to our investors, our presentation includes certain non-GAAP measures.
Olympia Mcnerney: For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation which is posted to our investor website.
Olympia Mcnerney: 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 today. We are off to a strong start in 2025, exceeding our expectations for the quarter, driven by solid revenue growth, profitability and cash flow generation.
Arvind Krishna: While sentiment and the operating environment have been rapidly shifting, our performance reflects the continued success of our focus strategy for our hybrid cloud and AI, especially where clients are looking for cost savings, productivity gains, and trusted partners to help them move
Thoth needs to remain front and center in today's market.
Arvind Krishna: Before going deeper into our results, let me start by saying that we appreciate the administration's focus on economic growth and rational regulation, which will strengthen the U.S. competitive position.
Arvind Krishna: We believe this will result in long-term value creation and make it easier for technology to contribute to economic growth.
Arvind Krishna: I'm going to not talk about a result for the quarter and then address the macro and how we are positioning within these conditions.
Arvind Krishna: Our performance this quarter reflects the flywheel for growth we discussed at our investor day. It all starts with client crest with a hundred plus year history of delivering mission critical solutions and navigating different operating environments.
Arvind Krishna: Trust is complemented by the flexible solutions we offer in hybrid cloud and AI. The innovation value we provide are domain expertise to help clients digitally transform and scale AI and our partner ecosystem to broaden our region impact.
Arvind Krishna: We saw these play out in the first quarter. Our growth was led by software up 9%, which strength across Red Hat, Automation, Data, and Transaction Processing.
Arvind Krishna: or Early Leadership in Generative AI and the Consulting Advantage platform using digital assets to deliver client value have positioned us well in today's evolving market.
Arvind Krishna: In infrastructure, Z16 is our most successful program in history, highlighting customer adoption and the value proposition of the mainframe.
In Generative AI, we continue to see strong traction.
Arvind Krishna: Our book of business is now over six billion dollars in section to date, up over one billion in the quarter. Approximately one-fifth of this book of business comes from software and the remaining four-fifths is consulting. This is similar to last quarter.
Arvind Krishna: The AI portfolio we have built is designed to give clients a comprehensive set of tools to deploy AI within their enterprise.
Arvind Krishna: In software, the ability to deploy our AI assistance and agents as well as AI middleware in a hybrid environment, leveraging multi-model capabilities is resonating with clients.
Arvind Krishna: AI agents will accelerate the ability of many enterprises to turn the promise of regenerative AI into real value.
Arvind Krishna: Consulting is helping clients design and deploy AI strategies and use cases.
Arvind Krishna: We continue to see our infrastructure segment play a larger role as Client Spring AI to their data. Our clients will see these solutions at length at our client conference think in early May in Boston.
We remain focused on accelerating innovation speed and impact.
Arvind Krishna: Earlier this month, we announced the upcoming launch of Z17, which delivers enhanced AI acceleration through multi-model AI capabilities, new security features to protect data, and tools that leverage AI for improving system usability.
Arvind Krishna: Z17's value proposition, particularly resonated with clients given significantly lower power
Arvind Krishna: In quantum, we are proud to partner with the BACC government to deploy Europe's first IBM Quantum System II in Spain, a milestone in global quantum leadership.
M&A remains a key enabler of our strategy.
Arvind Krishna: This quarter, we close the acquisitions of Harshikop and AST. Harshikop brings leading automation and security tools that integrate with our hybrid cloud strategy and we're excited about the synergy opportunities ahead. Let's go ahead.
Let me now touch on the macro environment. [inaudible]
Arvind Krishna: Technology remains a key competitive advantage, allowing businesses to drive cost efficiencies, productivity, and preserve the balance sheets.
Arvind Krishna: In the near term, uncertainty may cause clients to pause and take a wait-and-see approach. However, the value of hybrid cloud automation, data sovereignty, and on-premise solutions becomes even more critical in volatile windows.
Arvind Krishna: Recent conversations that have had with clients reflect this view of the current environment.
Arvind Krishna: These conversations vary by industry, business and geography. For example, our containerization and virtualization pipeline continues to grow, with clients focused not only on near-term costs but also longer term savings driven by our modernization capabilities. Let's go to the next slide.
Arvind Krishna: There are also areas of our business where volatility acts as a catalyst for demand, driving increased capacity requirements, particularly across our mainframe environments.
Arvind Krishna: This played out over the last couple of weeks, amongst our financial services clients.
Arvind Krishna: However, for clients with a more direct impact from current policy, the slowdown may be more pronounced consulting is also more susceptible to discretionary pullbacks and doge related initiatives.
Arvind Krishna: While no one is immune to uncertainty, we enter this environment from a position of relative strength and resiliency. [inaudible]
Art lines run the world's most essential processes.
Arvind Krishna: Our diversity across businesses, geographies, industries, and large enterprise clients position us well to navigate the current climate.
Arvind Krishna: We have an experience theme that is focused on areas we can control around our supply chain, accelerating our productive initiatives and maintaining the strength of our balance sheet.
Put this backdrop, let me touch on our outlook. .
Arvind Krishna: For the last several years, we have been strengthening our portfolio and building on our track record of execution and our outperformance this quarter was another proof point.
Arvind Krishna: While it is still very early in the second quarter, we have not seen a material change in client-buying behavior.
Arvind Krishna: With the caveat that the macro situation is fluid, based on what we know today, we are maintaining our full-year guidance for accelerating revenue growth to 5% plus, and about 13.5 billion
Arvind Krishna: Over the long term, I am confident in our ability to deliver on our model presented in the investor day for sustainable higher revenue growth and strong free cash flow.
Arvind Krishna: With that, I'll turn it over to Jim to walk through the financials. Jim, over to you.
Jim Kavanaugh: Thanks, Arvind. In the first quarter, we delivered $14.5 billion in revenue, $3.4 billion of adjusted EBITDA, $1.7 billion of operating pre-text income, and operating earnings per share of $1.60.
Jim Kavanaugh: Our revenue growth, scale, and accelerating productivity, drove 240 basis points of adjusted to EBITA margin expansion, and 12% adjusted EBITA growth.
Jim Kavanaugh: We exceeded our expectations on revenue, profitability, adjusted EBITDA, and earnings per share.
Jim Kavanaugh: Our revenue for the quarter was up 2% of constant currency. As we discussed at our investor day, our makeshift toward software is driving growth.
Jim Kavanaugh: We saw this play out in the quarter with software up 9% driven by growth of 15% in automation, 13% in Red Hat, 7% in data, and 2% in transaction processing.
Jim Kavanaugh: This performance reflects the man for our focus portfolio that provides end-to-end hybrid cloud and AI capabilities.
Jim Kavanaugh: Red Hat delivered another strong quarter, driven by Bookings growth in the high teens.
Jim Kavanaugh: An OpenShift is now at $1.5 billion AR, growing about 25%.
Jim Kavanaugh: About six points of our growth and software was organic, with contribution from our generative AI products, like our AI systems and agents, and what's the next platform.
We also benefited from our high-value recurring revenue base.
Jim Kavanaugh: which comprises about 80% of our annual software revenue. Software's annual recurring revenue grew to 21.7 billion dollars up 11% since last year.
Jim Kavanaugh: Consulting revenue was flat and a sequential growth improvement quarter to quarter with solid backlog growth of mid single digit.
Jim Kavanaugh: Strategy and Technology Revenue declined 1% and Intelligent Operations Revenue was flat for the quarter.
Jim Kavanaugh: While we are seeing clients delay decision making, especially in discretionary projects, which impacted our in-period signings, [inaudible]
Jim Kavanaugh: We had good growth in transformational offerings like hybrid cloud and data as well as application management and cloud platform engineering services.
Jim Kavanaugh: We also continue to build our Consulting Generative AI Book of Business, which is now over $5 billion inception of date.
Infrastructure Revenue to Client 4% [inaudible]
Jim Kavanaugh: Hybrid infrastructure was down 7% driven by IBM Z, down 14%. As we wrapped on the 12th and final quarter of the Z16 program which delivered strong performance in both revenue and capacity.
Jim Kavanaugh: Distributed Infrastructure Revenue was down 4% with product-cycle dynamics impacting power, while storage delivered another quarter of double-digit growth as our latest innovations continue to address the rising data demands of our clients.
Jim Kavanaugh: Now turning to profitability. In the current environment, we are focused on taking action to control things we can, to protect supply chain, margin and free cash flow.
Jim Kavanaugh: IBM has been driving a productivity mindset for many years. In this quarter's margin performance reflects that intentional discipline and our flexibility of our operating model.
Jim Kavanaugh: During the quarter, operating leverage and yield from accelerated productivity initiatives drove expansion of operating gross profit margin of 190 basis points.
Jim Kavanaugh: Davis, adjusted EBITDA margin of 240 basis points and operating pre-tax margin of 50 basis points.
Jim Kavanaugh: Excluding year-over-year divestiture dynamics and net-year-to-year workforce rebalancing, operating pre-text margin was up 180 basis points ahead of our expectations and well above our model.
Jim Kavanaugh: We deliver very strong segment profit margin expansion in software and consulting of over three hundred and seventy basis points and two hundred and eighty basis points respectively.
Jim Kavanaugh: While infrastructure was down about 150 basis points, reflecting product cycle dynamics and continued investments in innovation.
Jim Kavanaugh: Let me give you some more color on our productivity initiatives.
Jim Kavanaugh: As discussed that our investor day, we remain laser focused on accelerating our productivity initiatives. [inaudible]
Jim Kavanaugh: We have built a best-in-class enterprise IT platform leveraging our own IBM software solutions across hybrid cloud automation and AI.
Jim Kavanaugh: Decreased our vendor spend by more than $1 billion by optimizing our supply chain and service delivery, and right-sized our physical infrastructure.
Jim Kavanaugh: We exited 2024 at 3.5 billion dollars of annual run rate savings achieved. We exited 2024 at 3.5 billion dollars of annual run rate savings achieved
Jim Kavanaugh: and we continue to see these efforts play out in our margin performance this quarter.
Jim Kavanaugh: These actions create a flywheel that allows us to invest back in our business. [inaudible]
Jim Kavanaugh: Both organically and inorganically. Increase our financial flexibility and deliver margin expansion.
Jim Kavanaugh: The combination of our revenue scale and productivity enabled solid contribution to free
Jim Kavanaugh: In the quarter, we generated $2 billion of free cash flow, up $100 million year over year, resulting in our highest first quarter free cash flow margin in reported history.
Jim Kavanaugh: The largest driver of this growth comes from adjusted EBITDA, up over 350 million dollars year
Jim Kavanaugh: Partially offsetting this, giving global trade dynamics, we proactively took actions to bolster our supply chain ahead of our Z17 launch.
Resulting in higher inventory levels.
Jim Kavanaugh: Despite these actions, we are a couple points ahead of our three-year average attainment levels through the first quarter.
Let me briefly address our supply chain dynamics.
Arvind Krishna: As Arvind mentioned, IBM has a long track record of operating globally in managing supply chain complexity. [inaudible]
Arvind Krishna: Over the last several years, we have strategically diversified in streamline our supply chain.
Arvind Krishna: Goods imported to the US represent less than 5% of our overall spend and under current US tariff policy, the impact the IBM is minimal.
Arvind Krishna: While we have limited direct exposure outside the United States, we are technically evaluating alternative sources and other strategy to mitigate tariffs.
Arvind Krishna: We continue to maintain a strong liquidity position, solid investment grade balance sheet, and a disciplined capital allocation policy.
Arvind Krishna: We ended the quarter with cash of $17.6 billion, which is up $2.8 billion from the end of 2024, including spending $7.1 billion in acquisitions.
Driven largely by the closing of Hashi Court. [inaudible]
Arvind Krishna: In February , we accessed the debt markets raising over $8 billion on attractive terms. [inaudible]
Arvind Krishna: Our debt balance ending the quarter was over $63 billion, including $10 billion of debt for our financing business.
with the receivables portfolio that is over 75% investment grade.
Arvind Krishna: In addition, we return just over $1.5 billion to shareholders in the form of dividends.
Now, let me talk about what we see going forward.
Arvind Krishna: As everyone knows, there is a level of macro uncertainty that exists and is hard to predict.
Arvind Krishna: That said, we are operating from a position of relative strength.
The combination of our repositioned and focused portfolio. Let's go.
Arvind Krishna: Investment in Innovation, and our diversity across businesses, geographies, industries and large enterprise clients positions us to perform in a variety of macro scenarios. This is one of the most important things in the world.
Arvind Krishna: Our flywheel for growth begins with the incumbency and trust we have with clients from decades and the ground in over 175 countries.
Arvind Krishna: which is a real point of differentiation in the current environment. [inaudible]
Arvind Krishna: Our client base is diverse, operating across almost 20 industries, spanning 95% of the Fortune 500.
Arvind Krishna: Based on what we know today, we are maintaining our full year guidance for accelerating revenue growth of 5% plus and about 13.5 billion dollars of free cash flow.
Let me go through the drivers of these key metrics. [inaudible]
Arvind Krishna: As discussed that our investor day, our mix shift towards software is a key driver of our growth acceleration.
Arvind Krishna: Software is now about 45% of our business with 80% recurring revenue.
Arvind Krishna: As a reminder, in the first quarter, we generated $21.7 billion of ARR, growing 11%.
Arvind Krishna: The combination of our portfolio strength, investment in innovation and contribution from acquisitions to drive our full year performance and software.
Arvind Krishna: and we continue to expect mid-teens growth for Red Hat underpin by six month revenue under contract which is growing in the mid-teens.
Arvind Krishna: In consulting, we are encouraged by this quarter sequential growth and revenue. Our solid backlog of 6% and our Book of Business in Genie I.
Arvind Krishna: But given the current environment, we are appropriately more cautious on consulting's contribution to IBM this year.
Arvind Krishna: with our new mainframe launch, innovation across the portfolio and capacity dynamics that could benefit our mainframe environments and storage needs we expect infrastructure to grow. [inaudible]
Arvind Krishna: While we feel good about the core growth drivers of our business, there are areas of our portfolio that could see greater variability in the event that the macroeconomic environment deteriorates.
Arvind Krishna: This includes consulting which is more sensitive to discretionary pullbacks and doge-related initiatives.
Arvind Krishna: Consumption-based services and software, including in Red Hat, and areas of distributed infrastructure. [inaudible]
Arvind Krishna: We continue to expect IBM's full year operating pre-text margin to expand by over a half a point driven by productivity initiatives, revenue scale and mix.
Mitigated by the impact of delusion from acquisitions.
Arvind Krishna: and our tax rate expectation for the year remains in the mid-teens.
Arvind Krishna: As always, the timing of the screen items can cause the rate to vary within the year. [inaudible]
Arvind Krishna: For free cash flow, we expect to generate about $13.5 billion in 2025, driven primarily by growth and adjusted EBITDA.
Arvind Krishna: The headwoods I discuss last quarter of higher cash taxes and higher cap-backs remain the same.
Arvind Krishna: As we look forward to the rest of the year, we will remain disciplined about managing our cost.
Arvind Krishna: The strength of our balance sheet and strong liquidity position allow us to make investments in our business for the longer term.
Arvind Krishna: As Arvind mentioned, while still early, through the first three weeks of the second quarter, we have not seen any material change in climb buying behaviors.
Arvind Krishna: We expect revenue growth of at least 4% at constant currency and given the increased currency volatility, a revenue range of $16.4 billion to $16.75 billion.
Arvind Krishna: and second quarter operating pre-tax margin expansion should be consistent with the full year with our tax rate in the mid to high teens.
Arvind Krishna: Let me conclude by saying that we have a durable and differentiated business model that positions us well to navigate a range of economic environments.
Arvind Krishna: While there is uncertainty, we remain laser focused on taking actions to control what we can and executing our strategy to accelerate revenue growth and free cash flow.
Arvind Krishna: We believe our focus portfolio, discipline investments in innovation, diverse set of businesses and clients, relentless focus on productivity and strong liquidity drive the durability of our performance.
Arvind Krishna: Arvind and I are now happy to take your questions. Olympia, let's get started.
Speaker Change: 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 multi-part questions. Operator, let's please open it up for questions.
Speaker Change: Thank you, and at this time we'll 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.
Speaker Change: You may press star 2 if you would like to remove your question from the queue.
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 Jim Schneider with Goldman Sachs, please do your question.
Jim Schneider: Good afternoon and thanks for taking my question. I was really thinking maybe you start off with sort of framing the macro impact that you're seeing on both software and consulting. You talked about some of the potential drivers.
Jim Schneider: But I'm sort of curious at this point. Are you seeing any kind of significant softening in, say, the consumption portion of the portfolio, either red hat or otherwise? And, you know, do you see any...
Slowdown in specifically transaction processing for the year that wouldn't allow you to not sort of hit the target you laid out at the investor day. Similarly on consulting, are you seeing
Jim Schneider: You know, the doge impact, the story of significantly impacting the near-term results, or is this more of an expectation of a slowdown in a broader sort of enterprise mix of business? And then just broadly speaking, if you could address the sort of sub-segment guidance you had provided at investor day, approaching double digits in software and low single digits and consulting, and whether we expect either of those to change very much. Thank you. Thank you.
Jim Kavanaugh: Okay, Jim, I'm hoping I can remember, I think it was five thoughts to your question.
Speaker Change: Let me address the macro pieces and then I'm going to ask Jim Kavanaugh to address the last piece on the Sub-Sagman guidance.
Speaker Change: So if we look at what happened in the first quarter and then if you project forward, there's a difference.
Jim Kavanaugh: We did not really see much of a slowdown in one queue on the consumption part of the software business.
Speaker Change: Whether it's in TPS or whether it's in Radhat, just to be straight forward. [inaudible]
Speaker Change: We are projecting though that if there is slowdown in global GDP
There could be a small slowdown, not a big slowdown [inaudible]
in the red hat part of the consumption business. [inaudible]
Speaker Change: We just to remind you is only between 10% and 20% of the total business. Thank you very much.
If I look at production processing, [inaudible]
Jim Kavanaugh: If anything, we see Thill wins right now, not Edwin's. So we expect that part of the portfolio to remain strong, unless we approach recession or negative GDP, which we are not projecting from everything that we can see and read. Thank you very much.
Go into consulting and doge.
Jim Kavanaugh: Yes, we are not immune from all those activities, just like everybody else. We had a couple of contracts that were impacted in the first quarter. You would expect USAID where we did some work was impacted, but not really in most other cases.
Jim Kavanaugh: The work we tend to do is much more mission critical is much more about... [inaudible]
Jim Kavanaugh: Building the government systems which make them more efficient and so we see them carry on.
Jim Kavanaugh: Now, it's hard to predict where that goes over the rest of the year, so I'm not going to try and make that prediction on doge and consulting except to caution as Jim said in his prepared remarks if there is pressure in the economy, consulting tends to see headwinds before other parts of the business. [inaudible]
Speaker Change: I think there was three or four of your five parts and sub-segment compared to yesterday, Jim, I'll leave to you.
Speaker Change: All right. Thanks, Jim, for the question overall. If you go back to investor day, what did we talk about? We talked about the strategic repositioning of our portfolio and our company overall to much more software-centric, platform-centric model.
Speaker Change: That said, we would take this business from a no-growth profile to the last three years, kind of low single-digit profile to an accelerating revenue growth profile amid single-digit plus. And that's how we guided 2025.
Speaker Change: Underpinning that was an accelerating revenue growth profile of software, and right now when you look at us maintaining our guidance in 2025, we are right on path to that. And I'm sure we could talk about the underpinnings of software a little bit later. And I'm sure we could talk about the underpinnings of software a little bit later.
Speaker Change: Second, what was the big change we made? We said with the new innovation investments in the repositioning of infrastructure that we were moving that business from a cyclical business to a secular grower. [inaudible]
Speaker Change: and in our guidance for 2025 of the 5 plus percent.
Speaker Change: We are the first instantiation in 25 of a secular grower as we're very excited about the new innovation of our mainframe that was just launched here in the beginning of April .
Speaker Change: And then we said consulting over time, the market, which we have confidence in, that's been growing on average, you know, five, six percent.
Speaker Change: Over a decade long, yeah, are there some years up and down? [inaudible]
Speaker Change: Absolutely. But we have confidence in a long-term growth factor of consulting, and more importantly, the integrated value of what consulting brings to our portfolio.
Speaker Change: The tip of the spear, driving and pulling our technology and driving that attractive economic multiplier effect.
Speaker Change: So you look at 25, we started the year out this year and we said given the demand environment we were prudently cautious at the low end of low single digits, we started out first quarter here we stabilized the business flat. [inaudible]
Speaker Change: We see that pretty much the same. There's a lot of dynamics going on in the year, but we're kind of confident in that stat, flat stabilized area overall. So hopefully it gives you some perspective. Yep.
Great. Operator, let's take the next question.
Speaker Change: The next question comes from Wamsi Mohan with Bank of America, please state your question.
Wamsi Mohan: Hiya, thanks so much. Maybe just to follow on in terms of just the way to get to your 5% loss.
Wamsi Mohan: Guide for the full year. It'll be helpful if you could maybe just give us some sense, put on red hat, we're just going to face tougher comps and transaction processing, we're just starting off it at 2%. How we get to sort of this double digit.
Wamsi Mohan: Software, or approaching double digit software contribution. And Jim, you know that, you know, maybe it's proven to be a little more cautious on the contribution from consulting. Is that largely going to be offset maybe by better expectations on on infrastructure as well. Thank you so much.
Yes, thanks, Wamsi, I'll take this. [inaudible]
Let's take a step back.
You go through what we talked about in January . [inaudible]
Speaker Change: and then we played out to Jim's question around our strategic investment thesis for a long-term perspective.
Speaker Change: which aligned overall about how we accelerate this company and leverage all the work we've done. I'm building a durable, sustainable, inflecting higher growth business. And I'm going to start with you guys.
Speaker Change: We talked entering the year. One, we were coming into the year with a position of strength. That was centered around our software portfolio, our high value recurring revenue, and our investment in innovation. .
Speaker Change: Two, Red Hat Momentum. The opportunity in front of us on virtualization AI was going to grow mid-teens.
Three, our next generation mainframe.
Speaker Change: that was coming out late in the first half, that would fuel a second half. [inaudible]
Speaker Change: for our early leadership position in Gen AI, and five, our discipline, capital investment allocation, and what we've seen with regards to M&A growth in synergies.
Speaker Change: I would tell you right now coming out of first quarter, I'm actually feeling more confident on each one of those five and let me put some numbers to it.
Speaker Change: Well, embedded in that 2%, we got about 4 points of contribution from software. We had a one point headwind given we were at the last 12 quarter cycle of our infrastructure business and consulting stabilized was flat. [inaudible]
Speaker Change: What goes forward? Number one, that new innovation in our infrastructure turns a point headwind in you to a point tailwind for the four year. That's a full two point change.
So you go from 2% already to 4%
Number two. [inaudible]
Speaker Change: We are very excited. We closed Hashi Corp at the end of February . Our actual contribution around inorganic in the first quarter, Givertake was about a point and a half. To IBM for the full year at 25, it's going to be north to two and a half. We get another point of M&A. So now you're up to five percent growth.
Speaker Change: Now you get to, okay, how do we get north of that 5% growth, which is what our guide is? [inaudible]
Speaker Change: 3, Red Hat, 7th consecutive quarter of high teens, ACV bookings. [inaudible]
Speaker Change: We are seeing great demand around virtualization, around automation, around our Linux capability, by the way, all three who've doubled digits here in a quarter pervasive and grew share.
Speaker Change: Our Acceleration and Red Hat coming off of roughly 13.5% in the first quarter, we're going to commit and we maintain mid teams for the year. We get another half a point out of Red Hat. I haven't even went to our annuity profile which is in a strong position with strong renewal rates. [inaudible]
Speaker Change: etc. And we'll see how the consulting backlog plays out, but I think to your question, we are being very prudent on, cautiously prudent, on consulting and not expecting any contribution. So that's kind of a walk from a first quarter to full year.
Operator, let's take the next question.
Speaker Change: Our next question comes from Amit Daryanani with Evercore ISI. Please state your question.
Amit Daryanani: Federal and Doge exposure. So I'd love to understand how big is the federal business for you folks and how do you think about the discretionary part of your consulting business stacking up in the back half of the year, given some of the macro noise. Just anything on the consulting side would be really helpful and then
Speaker Change: Jim, if I could just follow up, you folks not only don't give a quarterly explicit revenue guide, you're doing it during a diss time around for June quarter. So I'm just curious what led to the decision to give a more explicit June quarter guide other than you were afraid you were all going to miss model it. Thank you.
Speaker Change: Yeah, let me first of all thanks Amit. Let me take the second question first and then I'll go into the doge.
Speaker Change: specifics, the groundless in numbers, and then if Arvind has any of the client pieces back as we've been actively engaged with the administration, as you can quite imagine.
Speaker Change: on currency in particular and given a quarterly guide. Why did we do that?
Speaker Change: Full transparency, we feel obligated with our credibility on what we see in the near term given we're operating as we talked about in a very dynamic and uncertain macroeconomic environment. Our best visibility right now is probably in the next 90 days.
Speaker Change: The rate, the magnitude, and the breadth of the US dollar depreciation. We have not seen in quite some time like eight to nine percent evaluation. So what do we do? We gave you both.
Speaker Change: We always guide on constant currency and we guide it on constant currency [inaudible]
Speaker Change: and we can talk about the underpinnings a little bit later. Second, just given the extreme volatility in the market, we guided on an absolute dollar range all in. Why did we do that?
Speaker Change: because at 4% constant currency growth, if you just dial back to where the FX rates were, as we entered April 1st, that would put you at 16.4 billion dollars.
Speaker Change: If you actually take that same 4% and you look at today's actually today's spot rate devalued or actually appreciated about a point to already give a point back. But if you look at it from yesterday, we'd be at $16.75 billion. $16.75 billion.
Speaker Change: So, we're not in the business of predicting the FX volatility.
We're giving you a range, but we're saying as always... [inaudible]
Speaker Change: Well, we can control, which is the underlying dynamics of the operational performance of our business. We feel confident of at least 4%. So hopefully that gives you that. I'm douche. Let me ground some data and facts here. [inaudible]
Arvind Krishna: One is Arvind said, no one's going to be immune from this. [inaudible]
Speaker Change: But our US federal business is less than 5% of IBM's total annual revenue.
Speaker Change: About 60% of that is consulting, which is more susceptible to discretionary efficiency type programs.
Speaker Change: 40% of it is technology, which is all high value and monetized revenue under contract. Let's put that off to decide. In consulting, our US federal is less than 10% of the total. By the way, we have less than 3% market share.
Speaker Change: Arvind. Now, when you look at it, Arvind indicated, and by the way, all this data is public. We've had a handful of contracts. See, their statement of work that have, or canceled. Thank you.
Speaker Change: And on our annualized backlog of over 30 billion dollars in total consulting, this is like less than a hundred million dollars at backlog over a duration of multiple years. [inaudible]
Speaker Change: So, while no one's immune, we are absolutely focused on monitoring the dynamic process, and I think back to Wamsi's question, we're prudently cautious around consulting for the year.
I think the best thing for you to understand Amit. [inaudible]
Speaker Change: Consulting is less, Federal Consulting is less than 10% of Consulting. I think that's
Within that, the vast majority is critical work.
Speaker Change: We actually process veterans' benefit claims. We help process how the GSA does procurement.
I don't think of these as optional.
Speaker Change: Now, are there some areas around the edges which could be viewed as discretionary? Yes, but in our case that is the minority of our business, not the majority.
Thank you for tuning in. I'm Arvind Krishna.
Operator, let's take the next question.
Ben Reitzes, your line is open. Please unmute yourself. Thank you very much.
Speaker Change: I was wondering if we could just talk a little bit more about the dynamics, why that occurred. I think you said the consumption business didn't get hit. And then it looks like it's going to reaccelerate because of the great bookings. [inaudible] I'm sorry, I'm sorry, I'm sorry
Speaker Change: And then you mentioned virtualization. I don't know if you've mentioned that before in the conference calls but I'm wondering how much of a driver that is for Red Hat given some of the changes going on at VMware. So thanks a lot for that.
Arvind Krishna: Thanks, Ben. Let me take some of the numbers around Red Hat and then Arvind can add some of the color around the portfolio, et cetera. You know, I would tell you, we're very pleased with our Red Hat performance entering the year. Very different profile where we were a year ago, by the way.
Arvind Krishna: When we were trying to accelerate to get the double digits for the year
Ben: Yes, it decelerated, but let me unpack some of this for you. One, we grew 13.5%
Arvind Krishna: I think well within our guidance range of where we wanted to start the year. Underpinning that, the most important thing, as you called out Ben, thank you. Our seventh consecutive quarter of strong ACV signings bookings, high teams overall.
Arvind Krishna: The way I like to look at this business, you've got to break it out between the different compositions, one 80% of our portfolio subscription based businesses.
We continue to see strong performance, high mid-teens level overall.
Arvind Krishna: Pervasive double-digit growth across support folio, as I stated earlier, in gaining share,
Arvind Krishna: Red had open ship up 23% oh by the way, one and a half billion dollar ARR business overall capitalizing on virtualization hybrid cloud application modernization.
Ansible Up.
Arvind Krishna: Strong Midteens Overall, Capitalizing on Clients, Cost Efficiency, Productivity Ingenia, and Oh, by the way, very strong synergistic value of the IBM portfolio overall. So a very healthy profile, and within that, as we always do, we give you a CRPO next six months.
Arvind Krishna: We only see that actually accelerating overall. Now, to Arvind's earlier point to 20% of the business on consumption base [inaudible]
We did not see a decline, we saw a moderation. [inaudible]
Arvind Krishna: We remember, 90 days ago, we actually were surprised to the upside. We grew our consumption-based services low-mentines.
Arvind Krishna: In first quarter, that moderated to high single digits. By the way, our model can take high single digits.
Arvind Krishna: It's just when you look at the quarter to quarter growth, that had about a point and a half plus . . .
Arvind Krishna: You know, deceleration overall but growing high single digits on consumption given the acceleration of our red hat portfolio overall we feel pretty good and to your point excited about the portfolio growth process.
Arvind Krishna: around the growth factor of virtualization, around AI, around automation, around containerization and the moderation happening there and just to put some numbers to it, virtualization are ready, just the last couple quarters.
Arvind Krishna: We've already notched in over 200 million dollars of annualized bookings.
Arvind Krishna: And we've been building a pipeline that is well north of a half a billion dollars worth of virtualization that gives us the confidence as we go through the remainder of 2025 and why we feel confident in guiding the teams. We've been building a pipeline that gives us confidence as we go through the remainder of 2025 and why we feel confident in guiding the teams.
Speaker Change: Yes, thanks, Jim. Let me just add a little bit of color on the portfolio of the portfolio.
Speaker Change: So OpenShift has become the leading platform which clients were using for both containerization but also how you run a collection of servers on premise and in private clouds.
Speaker Change: Now, as they look forward, it's not just containerization. They're saying if I'm doing containerization, why wouldn't I also do virtualization on that environment? [inaudible]
Speaker Change: Since that set of products is sold by the number of cores or processes managed, then as the ad virtualization that adds to the footprint.
Speaker Change: Of course, as we all know, wants to make a platform decision, then most new applications, most migrated applications, tend to come on to that infrastructure, their skills around that platform grow and you get a flywheel.
Speaker Change: That over time, then we believe, include both Harshikabh and Ansible that will come in there.
Speaker Change: That is the way I think you should think about virtualization, not so much as recently comparators only. It's going to be much more about a platform and people are making a decision which platform can I depend upon for the next 10 to 20 years.
Great. Opera, let's take the next question.
Speaker Change: Our next question comes from Erik Woodring with Morgan Stanley , please state your question.
Thank you.
Eric Woodring: Hey guys, thanks so much for taking my question. Jim, I just want to dig into your free cash flow guide. You reiterated the full year.
Eric Woodring: Revenue Guide and Constant Currency, but FX just went from a two point headwind to a one and a quarter point tailwind. So, an incremental call it two billion of rev from FX alone, you maintain your full year PTI margin expansion target. So obviously really strong flow through to the bottom line. And so I guess my question is, you know, why aren't we seeing that necessarily show up in a higher free cash flow guide for the year? Are we just being conservative because it's early in the year, or are there any new kind of
Eric Woodring: of incremental free cash flow offsets that we now need to think about. Thanks so much.
Yes, thanks, Erik. I really appreciate the question.
as we talk about...
Eric Woodring: We've got two key measures in this company. One is to continue to accelerate the top line growth profile of this company, which we committed to 5 plus percent and second.
Eric Woodring: Free Casual Print, Highest Free Casual Margin, in a first quarter in the history of our company overall, and by the way historically, compared to where we're at attainment wise, where a few points ahead. Now to your point, we're 15% of our free Casual attain through first quarter. [inaudible]
Eric Woodring: You know, I think it's prudent for us right now. We feel even stronger about our position around the 13 and a half billion, but why take that up right now in this environment. Let's go ahead and see what we can do.
Eric Woodring: Sutton Benefitist at all. We're focused on the durability, resiliency, and driving the discipline execution overall. Now with regards to currency overall, as you know, we spent a lot of time
Eric Woodring: Both through the last recession of COVID, about when we see fundamental unprecedented rate, magnitude of breadth changes in currency.
It's always good to refresh.
Eric Woodring: Our investor is about how we handle currency. Number one per gap you can't hedge revenue. That revenue is going to flow whether the dollars appreciating or devaluing. But I think a couple important points overall. We have a very robust hedging program. [inaudible]
But around that we hedge only cash flows. [inaudible]
as a proxy for earnings. That's all you can do. We don't hedge
Eric Woodring: All 100 plus currencies we operate in today. We only hedge about 30 because it's not economically viable the hedge more than 30. So when you take a look at it at today, we don't also hedge out more than 12 months because we don't speculate. So let's take a look at the next one.
Eric Woodring: So when you look at it, the interesting thing is we have to overcome a operating pretext margin headwind.
Eric Woodring: when the dollar actually devalues because we have to wrap around on the hedges from last year.
Eric Woodring: Right? You'll get absolute profit dollars, yes, but it's mitigated because we try to hedge as much as we can in quarter. We doubt about 100% and out of quarters, we hedge about 75% [inaudible]
Eric Woodring: So around that, we have some tailwinds on free castle, absolutely, but the most biggest driver of our free castle continues to be the same thing we talked about 90 days ago.
Eric Woodring: The driver of high-quality adjusted EBITDA, which by the way, we grew 12% in the first quarter, up 240 basis points of margin and adjusted EBITDA in the first quarter.
Eric Woodring: Our free cash flow is going to be driven by double digit EBITDA for the year?
Eric Woodring: and it's going to be driven by a 100 plus basis point margin overall. That hasn't changed.
Eric Woodring: So, nothing changed overall, I would say net more conservative but prudently given we have 85% of our free cash flow to go.
Robert, let's take the next question.
Speaker Change: The next question comes from Brian Essex with J.P. Morgan, and please state a question.
Brian Essex: Hi, good afternoon. Thank you for taking a question. Arvind, I know it's super early here with regard to the mainframe cycle, but given the experience that you have with previous cycles. Thank you very much.
Brian Essex: What do you anticipate from a macro perspective on for an impact on the mainframe cycle? And would you consider taking on more balance sheet risk, maybe to ease the pain of any customer catbacks for that business this year?
Arvind Krishna: Okay, Brian , thanks for the question. Actually the last part of the question, Jim can add more but it's actually pretty straightforward. We've been happy to lease our own hardware and software where our client wants it.
for decades.
Arvind Krishna: And so, if they don't want to spend the gap, so they prefer to leave it, that is in our financing business, it's in the model and it is surprising on how many people, even those with great balance sheets of their own, often choose to do that in order to maximize it.
Arvind Krishna: It doesn't really impact a balance sheet because in that case we have a receivable against the death that we take on to do that [inaudible]
Arvind Krishna: So we would happily do that for any credit worthy client. Let me just put that one caveat, that's it. And there is across all countries that we operate it. We don't do this only in the United States. Let's go.
Arvind Krishna: The other part of your question, as you can imagine, we start testing very early with our clients, a good six to nine months in sort of more private confidential gatherings on what their reaction is going to be [inaudible]
Arvind Krishna: Given what we showed them around security, around AI and around increased capacity, almost all of them resonated very positively to the mainframe.
Thank you. Thank you.
Arvind Krishna: The ones I would expect to be early have already come and said to me that yes, we are extremely interested.
Arvind Krishna: So I actually expect the volatility plays in our favor because those who are thinking about capacity expansion in the end of the year are wondering whether it's more advantageous to them to do it earlier because there is a financial benefits if you have it as opposed to pay for ovaries.
Orations, which is certainly possible.
Arvind Krishna: I expect that through this year 25 and the first half of 26, it will be a very strong cycle.
Arvind Krishna: If we see any weakness at all compared to the previous cycle just one is to one.
Arvind Krishna: Maybe it'll be in late 26 or early 27, where some clients in smaller geographies, smaller countries may choose to say should I wait another six months or nine months I don't expect that then we be clear but I think
Arvind Krishna: That is the only caution I would put. So in the first year, I expect this to be very much like the previous cycle.
Arvind Krishna: Capital Strux, let me take it up a little. Yes, Mainframe is an integral part.
Arvind Krishna: of our business portfolio overall, and it is an enduring platform that we are going to ensure that we prudently.
Arvind Krishna: But aggressively manage both the client value equation, which is very important because remember we run 45 to the top 50 banks around the world.
Arvind Krishna: Nine of the top ten retailers, four to five top ten airlines of the world, we are going to protect those clients and what the main frame brings to the table. But I want to take a step back, you know, in, we are confident in our capital structure overall and our liquidity position. [inaudible]
Arvind Krishna: And I think over the last four or five years, hopefully all our investors agree. We have a proven track record around being discipline allocators of capital. And I would like to thank you all for your time.
Ramakrishnan.
We take that very seriously in this company.
Speaker Change: Overall, in times of uncertainty around dynamic macro environment, which is what we're operating in today in a very fluid environment. I would tell you as a CFO , as it tell Arvind of time, our job is to preserve the balance sheet is to make sure we have enough liquidity. Why? Because we have to continuously invest. Yes.
Speaker Change: and bringing new innovation both organically and inorganically to this business to create long-term sustainable competitive advantage.
Speaker Change: And I would tell you we are very comfortable. We have over 17 and a half billion dollars of cash on the balance sheet.
Speaker Change: We got a free cash flow engine, we just talked about with Erik's question, we feel very confident in $13.5 billion of free cash flow, then we got the capital structure and its solid investment grade that gives us optionality to ensure we continue that durability and resiliency of our performance going forward. [inaudible] we're going to have a free cash flow engine, we're going to have a free cash flow engine
Thank you.
Opera, let's take our next question.
Speaker Change: The next question comes from Matt Swanson with RBC Capital Markets. Please state your question.
Yeah, thank you guys so much for taking my questions [inaudible]
Speaker Change: You know, Arvind across 2024, every time we had new GNI product announcements, it was always really centered on this ROI-focused approach and that was in a much better macro. Now we're in a more challenging macro. I'm just interested, are you seeing in any spaces, there be to the consulting arm or just more, you know, customer interest in this ROI, you're going to approach whether it be the hybrid or the GNI and does that make your product set, you know, a bit more defenses. That's it.
Speaker Change: So Matt, thanks for that question. If you don't mind, I'm going to like go up a few feet and then come back to answer your question explicitly.
Speaker Change: Every time there's a new technology, you kind of see three waves. [inaudible]
Speaker Change: The first wave typically lasts one, two or three years, which is around the semiconductors that enable that new wave. Think PC and the microprocessor was, think mobile phone and the hardware was.
You then switch to the system. [inaudible]
Speaker Change: So, pretty quickly, if I think about the PC, people stop caring about the microprocessor. Yes, it wasn't until there's a winner, but they care about having a comeback or a Dell or an HP or take your favorite pick of PC. You go to the system.
Speaker Change: That kind of lasts a year or two. And then you've got a long tail of 20 years where people worry about the application because that is what gives them value. I think we're exactly at that point in AI.
Speaker Change: So the client conversations have shifted from well with GPU, which cloud, which model, I think of that all as the lower to the last two. Is this going to improve customer experience? Is this going to improve enterprise operations?
Speaker Change: And I'll reflect on one yesterday from mid-size client, they're a four five billion dollar client, they're at a massive stock of the mid-size
And their question was, What?
Speaker Change: If we believe that we can get 30% savings in our back office finance process and they meant procurement and payments and receivables, we're all in.
Speaker Change: So, I think it is right at this moment, it is shifting to those conversations and I believe that that is where the next two or three years of success in AI is going to go.
Thank you.
Operator, let's take one last question. Let's begin.
Speaker Change: Thank you, and this question comes from Params Singh with Oppenheimer and Company, please do your question.
I'm saying your line is open. Please unmute yourself. Thank you very much.
No response from that caller.
Arvind Krishna: I think we can end. Let me turn it back to Arvind to close. Thank you, Olympia
Arvind Krishna: Look, as I mentioned earlier, the diversity across our business positions are well to navigate the current climate or portfolio and track record of execution, reinforce my confidence on this next chapter of our growth
Arvind Krishna: I look forward to sharing our progress as we move to the rest of the year. Thank you all for listening.
Arvind Krishna: Thank you, Arvind. Operator, let me turn it back to you to close out the call.
Speaker Change: Thank you for participating in today's call. The conference is now ended. You made disconnect at this time.