Q4 2025 International Business Machines Corp Earnings Call

January 28, 2026

Speaker #1: Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Operator: Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Olympia McNerney, IBM's Global Head of Investor Relations. Olympia, you may begin.

Speaker #1: Now, I will turn the

Olympia McNerney: Thank you. I'd like to welcome you to IBM's Q4 2025 earnings presentation. 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. We'll post today's prepared remarks with a replay of today's webcast on the IBM Investor website within a couple of hours. The earnings presentation is already available. 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 provided reconciliation charts for these and other non-GAAP financial measures at the end of our presentation, which is posted to our investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995.

Q4 2025 International Business Machines Corp Earnings Call

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Q4 2025 International Business Machines Corp Earnings Call

IBM

Wednesday, January 28th, 2026 at 10:00 PM

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Arvind Krishna: Thank you for joining us today. Let me start by reflecting on our strong performance in 2025 and the execution of our Investor Day model, then get into more detail on the quarter. We are excited about the progress we made in 2025, delivering 6% revenue growth, our highest level of revenue growth in many years, and $14.7 billion of free cash flow, our highest level of cash generation in over a decade. As we laid out at our Investor Day in February 2025, we are executing on our strategy to advance IBM as a software-led hybrid cloud and AI platform company. We entered 2025 intently focused on investing in innovation and productivity initiatives to accelerate our shift towards durable, higher growth end markets in software, with expanding margins and strong free cash flow.

Arvind Krishna: Today's software represents approximately 45% of our business, up from about 25% in 2018. Software grew 9%, our highest annual growth rate in history, with three of our four software sub-segments delivering double-digit growth rates. Innovation value can also be seen in our IBM Z performance, up 48% this year, achieving the highest annual revenue for Z in about 20 years. I am proud of our achievements in 2025, as we exceeded all of our target metrics for revenue growth, profitability, and free cash flow that we laid out at our Investor Day. Our flywheel for growth is underpinned by client trust, flexible and open platforms, sustained innovation, deep domain expertise, and a broad ecosystem, and that's exactly what played out for the year. Let me now touch on the macro.

Today's software represents approximately 45% of our business, up from about 25% in 2018. Software grew 9%, our highest annual growth rate in history, with three of our four software sub-segments delivering double-digit growth rates. Innovation value can also be seen in our IBM Z performance, up 48% this year, achieving the highest annual revenue for Z in about 20 years. I am proud of our achievements in 2025, as we exceeded all of our target metrics for revenue growth, profitability, and free cash flow that we laid out at our Investor Day. Our flywheel for growth is underpinned by client trust, flexible and open platforms, sustained innovation, deep domain expertise, and a broad ecosystem, and that's exactly what played out for the year. Let me now touch on the macro.

Arvind Krishna: We continue to operate in a dynamic environment, but one where client demand remains resilient in the categories that matter most to IBM. Enterprises are prioritizing technology investments that drive productivity, resilience, and flexibility, particularly in hybrid cloud, AI, and mission-critical infrastructure. These technologies are no longer viewed as incremental tools, but as platforms that fundamentally change how businesses scale, compete, and operate. As clients modernize core systems, redesign workflows, and seek to extract more value from growing volumes of data, expectations for integration, security, and performance continue to rise. These trends are structural, and they align closely with IBM's strategy and strengths. Now, turning to our execution in Q4. We delivered total revenue growth of 9%, our highest level in over three years. Software growth accelerated to 11% in Q4, driven by the strength of our diversified portfolio.

We continue to operate in a dynamic environment, but one where client demand remains resilient in the categories that matter most to IBM. Enterprises are prioritizing technology investments that drive productivity, resilience, and flexibility, particularly in hybrid cloud, AI, and mission-critical infrastructure. These technologies are no longer viewed as incremental tools, but as platforms that fundamentally change how businesses scale, compete, and operate. As clients modernize core systems, redesign workflows, and seek to extract more value from growing volumes of data, expectations for integration, security, and performance continue to rise. These trends are structural, and they align closely with IBM's strategy and strengths. Now, turning to our execution in Q4. We delivered total revenue growth of 9%, our highest level in over three years. Software growth accelerated to 11% in Q4, driven by the strength of our diversified portfolio.

Arvind Krishna: Both data and automation are gaining strong momentum with clients, growing 19% and 14%, respectively, in the quarter. As AI adoption accelerates, enterprise clients are increasingly focused on how to keep operations running smoothly in a more complex and hybrid environment, fueled by a surge of new applications. Our end-to-end portfolio of leading automation and data solutions help clients manage and optimize operations, automate infrastructure and workflows, build resiliency, secure and govern data, and drive cost efficiency. Consulting continued to grow up 1%, reflecting increased demand for AI services as clients need help designing, deploying, and governing AI at scale. Infrastructure delivered another robust quarter, growing 17%, driven by strength in z17, which has been outpacing z16 performance.

Both data and automation are gaining strong momentum with clients, growing 19% and 14%, respectively, in the quarter. As AI adoption accelerates, enterprise clients are increasingly focused on how to keep operations running smoothly in a more complex and hybrid environment, fueled by a surge of new applications. Our end-to-end portfolio of leading automation and data solutions help clients manage and optimize operations, automate infrastructure and workflows, build resiliency, secure and govern data, and drive cost efficiency. Consulting continued to grow up 1%, reflecting increased demand for AI services as clients need help designing, deploying, and governing AI at scale. Infrastructure delivered another robust quarter, growing 17%, driven by strength in z17, which has been outpacing z16 performance.

Arvind Krishna: A key contributor to this momentum is the innovation value we are delivering with z17 processing 50% more AI inferencing operations per day than z16, and bringing real-time inferencing capabilities inside IBM Z. The breadth of our AI offerings is another key differentiator, combining an innovative technology stack with consulting at scale and our client zero journey. Our cumulative GenAI book of business now stands at over $12.5 billion, of which software is more than $2 billion, and consulting is more than $10.5 billion, with both seeing the largest quarterly increase to date. As we look at the evolution of AI, our opportunity is to make it easy for clients to build AI that is specific to their data, their processes, and their competitive needs, including the effective use of smaller, more efficient models where they make sense.

A key contributor to this momentum is the innovation value we are delivering with z17 processing 50% more AI inferencing operations per day than z16, and bringing real-time inferencing capabilities inside IBM Z. The breadth of our AI offerings is another key differentiator, combining an innovative technology stack with consulting at scale and our client zero journey. Our cumulative GenAI book of business now stands at over $12.5 billion, of which software is more than $2 billion, and consulting is more than $10.5 billion, with both seeing the largest quarterly increase to date. As we look at the evolution of AI, our opportunity is to make it easy for clients to build AI that is specific to their data, their processes, and their competitive needs, including the effective use of smaller, more efficient models where they make sense.

Arvind Krishna: That is why IBM's approach spans consulting, watsonx, our agentic platform, Orchestrate, and Red Hat AI. Our announced acquisition of Confluent is another pillar in this strategy, helping unify our hybrid cloud and automation solutions through a smart data platform. Confluent has the most capable technology to unlock the real-time value of data across applications, clouds, APIs, and as AI agents enter the enterprise, they will need access to that data in real time. Confluent is a great way to deliver that in a controlled, secured, and governed manner. Our hybrid approach to models also enables clients to use the best option for each use case: IBM's Granite models, third-party models, or open models from Hugging Face, Meta, and Mistral. In addition to being a demand driver, AI is also a powerful productivity driver for IBM, contributing to our strong financial performance.

That is why IBM's approach spans consulting, watsonx, our agentic platform, Orchestrate, and Red Hat AI. Our announced acquisition of Confluent is another pillar in this strategy, helping unify our hybrid cloud and automation solutions through a smart data platform. Confluent has the most capable technology to unlock the real-time value of data across applications, clouds, APIs, and as AI agents enter the enterprise, they will need access to that data in real time. Confluent is a great way to deliver that in a controlled, secured, and governed manner. Our hybrid approach to models also enables clients to use the best option for each use case: IBM's Granite models, third-party models, or open models from Hugging Face, Meta, and Mistral. In addition to being a demand driver, AI is also a powerful productivity driver for IBM, contributing to our strong financial performance.

Arvind Krishna: In 2023, we set out on a goal to achieve $2 billion of productivity savings exiting 2024, and today we are well ahead of that, exiting 2025 with $4.5 billion of annual run rate savings. We have been accelerating our productivity initiatives to enable investment in innovation and highly strategic acquisitions, like HashiCorp and Confluent, while continuing to deliver strong margin expansion and free cash flow growth. HashiCorp continues to accelerate within IBM, benefiting from our go-to-market distribution and joint product innovation. We see a similar opportunity with the announced acquisition of Confluent, leveraging IBM's global go-to-market reach to accelerate growth and disciplined G&A structure. Accelerating organic innovation is a core focus for IBM. Project Bob is IBM's next generation, AI-based software development system, designed to transform developer productivity.

In 2023, we set out on a goal to achieve $2 billion of productivity savings exiting 2024, and today we are well ahead of that, exiting 2025 with $4.5 billion of annual run rate savings. We have been accelerating our productivity initiatives to enable investment in innovation and highly strategic acquisitions, like HashiCorp and Confluent, while continuing to deliver strong margin expansion and free cash flow growth. HashiCorp continues to accelerate within IBM, benefiting from our go-to-market distribution and joint product innovation. We see a similar opportunity with the announced acquisition of Confluent, leveraging IBM's global go-to-market reach to accelerate growth and disciplined G&A structure. Accelerating organic innovation is a core focus for IBM. Project Bob is IBM's next generation, AI-based software development system, designed to transform developer productivity.

Arvind Krishna: Bob introduces intelligent orchestration between industry-leading frontier models, such as Anthropic, Claude, and Mistral, small language models, including IBM Granite, and custom models, all optimized for cost and performance. We have more than 20,000 IBMers that are using Project Bob, reporting productivity gains averaging 45%, a powerful Client Zero use case. We are also advancing innovation through deep M&A product synergies. For example, we recently developed HashiCorp InfraGraph, a real-time graph of infrastructure and application configuration. By fusing InfraGraph's insights with IBM automation products like Concert, we unlock true root cause analysis and proactive prevention for clients. All this leads to real, tangible value for our clients. Companies like Morgan Stanley and FedEx are leveraging our technology solutions and infusing our GenAI products into core workflows. Mastercard is leveraging our technology solutions, including data management platforms, software platforms, and GenAI products and solutions.

Bob introduces intelligent orchestration between industry-leading frontier models, such as Anthropic, Claude, and Mistral, small language models, including IBM Granite, and custom models, all optimized for cost and performance. We have more than 20,000 IBMers that are using Project Bob, reporting productivity gains averaging 45%, a powerful Client Zero use case. We are also advancing innovation through deep M&A product synergies. For example, we recently developed HashiCorp InfraGraph, a real-time graph of infrastructure and application configuration. By fusing InfraGraph's insights with IBM automation products like Concert, we unlock true root cause analysis and proactive prevention for clients. All this leads to real, tangible value for our clients. Companies like Morgan Stanley and FedEx are leveraging our technology solutions and infusing our GenAI products into core workflows. Mastercard is leveraging our technology solutions, including data management platforms, software platforms, and GenAI products and solutions.

Arvind Krishna: In infrastructure, clients such as CVS are turning to z17's AI capabilities for enhanced management of mainframe application workloads and increased resiliency. We also announced new or deepened strategic partnerships through the year with AMD, Anthropic, AWS, Microsoft, OpenAI, and Oracle. Recently, we announced a partnership between Red Hat and NVIDIA that aligns our hybrid AI solutions and NVIDIA's AI stack. This collaboration allows enterprises to deploy AI-accelerated applications across any environment, from the data center to the public cloud, using a unified automated infrastructure. It represents a significant step forward in making high-performance AI more accessible and scalable for the hybrid enterprise. Innovation, combined with our strategic partnerships across consulting with key hyperscaler and ISV relationships and software with key data providers, drive a multiplier effect that fuels our flywheel for growth. We continue to make steady progress in quantum computing.

In infrastructure, clients such as CVS are turning to z17's AI capabilities for enhanced management of mainframe application workloads and increased resiliency. We also announced new or deepened strategic partnerships through the year with AMD, Anthropic, AWS, Microsoft, OpenAI, and Oracle. Recently, we announced a partnership between Red Hat and NVIDIA that aligns our hybrid AI solutions and NVIDIA's AI stack. This collaboration allows enterprises to deploy AI-accelerated applications across any environment, from the data center to the public cloud, using a unified automated infrastructure. It represents a significant step forward in making high-performance AI more accessible and scalable for the hybrid enterprise. Innovation, combined with our strategic partnerships across consulting with key hyperscaler and ISV relationships and software with key data providers, drive a multiplier effect that fuels our flywheel for growth. We continue to make steady progress in quantum computing.

Arvind Krishna: Over the past quarter, we advanced our development roadmap, improved error correction capabilities, and expanded ecosystem partnerships. Our collaboration with organizations such as Cisco and participation in government initiatives like the US Department of Energy's Genesis Mission and DARPA's Quantum Benchmarking Initiative reflect growing confidence in IBM's approach to building scalable, fault-tolerant quantum systems. Quantum advantage will require high-performing hardware, and in December, we deployed our first 120-qubit IBM Quantum Nighthawk-based system for use by our clients. Back in 2024, we predicted that we'd see quantum advantage by the end of 2026, and with the help of IBM hardware, software, and rapid cycles of learning, our partners in the scientific computing community are starting to make the first credible advantage claims. We remain on track to deliver the first large-scale, fault-tolerant quantum computer by 2029.

Over the past quarter, we advanced our development roadmap, improved error correction capabilities, and expanded ecosystem partnerships. Our collaboration with organizations such as Cisco and participation in government initiatives like the US Department of Energy's Genesis Mission and DARPA's Quantum Benchmarking Initiative reflect growing confidence in IBM's approach to building scalable, fault-tolerant quantum systems. Quantum advantage will require high-performing hardware, and in December, we deployed our first 120-qubit IBM Quantum Nighthawk-based system for use by our clients. Back in 2024, we predicted that we'd see quantum advantage by the end of 2026, and with the help of IBM hardware, software, and rapid cycles of learning, our partners in the scientific computing community are starting to make the first credible advantage claims. We remain on track to deliver the first large-scale, fault-tolerant quantum computer by 2029.

James Kavanaugh: Thanks, Arvind. As we enter 2025, we provided guidance of accelerating 5+% revenue growth, greater than 0.5 point of operating pre-tax margin expansion, double-digit adjusted EBITDA growth, and about $13.5 billion of free cash flow. We exited 2025 beating all of these metrics, delivering 6% revenue growth, 100 basis points of operating pre-tax margin expansion, 17% adjusted EBITDA growth, and $14.7 billion of free cash flow, growing 16% over last year. This represents our highest free cash flow margin in reported history, and we delivered 12% growth in operating diluted earnings per share. This performance reflects strong execution of our flywheel for growth through client trust, leadership in hybrid cloud and GenAI, accelerating innovation, deep domain expertise, and an ecosystem multiplier effect.

James Kavanaugh: In 2025, we were intently focused on strengthening and accelerating our software portfolio, delivering innovation value with our next-generation mainframe launch, expanding our early leadership in GenAI and Quantum, and executing M&A growth synergies across IBM. All of our segments accelerated in the second half of 2025, with these drivers playing out and demonstrating momentum across our diversified business. For the full year, software grew 9%, our highest annual growth rate in history, with three of our four sub-segments delivering double-digit growth rates. Infrastructure was up 10%, reflecting a record z17 launch, achieving the highest annual revenue for IBM Z in about 20 years, and outpacing z16 over the first three quarters of the program.

In 2025, we were intently focused on strengthening and accelerating our software portfolio, delivering innovation value with our next-generation mainframe launch, expanding our early leadership in GenAI and Quantum, and executing M&A growth synergies across IBM. All of our segments accelerated in the second half of 2025, with these drivers playing out and demonstrating momentum across our diversified business. For the full year, software grew 9%, our highest annual growth rate in history, with three of our four sub-segments delivering double-digit growth rates. Infrastructure was up 10%, reflecting a record z17 launch, achieving the highest annual revenue for IBM Z in about 20 years, and outpacing z16 over the first three quarters of the program.

James Kavanaugh: Consulting inflected back to growth in the second half, driven by GenAI momentum, with our GenAI book of business and consulting at more than $10.5 billion inception to date. Let me now dive deeper into our Q4 performance. Software revenue growth accelerated to 11%, on top of last year's growth of 11.5%, which was the highest in 15 years. Growth was driven by the strength of our recurring revenue base, our shift to higher growth end markets, innovation, including our early leadership in GenAI, M&A growth synergies, and monetization of our strong IBM Z placement, with an inflection in transaction processing. Our ARR was strong at $23.6 billion, up over $2 billion from the end of 2024. This quarter's performance was broad-based across our synergistic portfolio, with organic growth accelerating to over 7%.

Consulting inflected back to growth in the second half, driven by GenAI momentum, with our GenAI book of business and consulting at more than $10.5 billion inception to date. Let me now dive deeper into our Q4 performance. Software revenue growth accelerated to 11%, on top of last year's growth of 11.5%, which was the highest in 15 years. Growth was driven by the strength of our recurring revenue base, our shift to higher growth end markets, innovation, including our early leadership in GenAI, M&A growth synergies, and monetization of our strong IBM Z placement, with an inflection in transaction processing. Our ARR was strong at $23.6 billion, up over $2 billion from the end of 2024. This quarter's performance was broad-based across our synergistic portfolio, with organic growth accelerating to over 7%.

James Kavanaugh: Data grew 19%, fueled by the demand for our GenAI products and strong performance with established strategic partners, who enable customers to power our AI innovation and mission-critical workloads. These market dynamics underscore the synergy opportunity we see with Confluent. Automation grew 14%, including another record bookings quarter for HashiCorp. Red Hat decelerated to 8%, driven partially by the wrap on last year's elevated consumption-based services that we called out last quarter, and also from the in-quarter yield on single-digit bookings growth, driven by delays in US federal business deal activity related to the government shutdown. While a longer growth arc, virtualization continues to gain momentum, including over $500 million of contracts signed over the last two years. OpenShift is now $1.9 billion ARR business, growing more than 30%.

Data grew 19%, fueled by the demand for our GenAI products and strong performance with established strategic partners, who enable customers to power our AI innovation and mission-critical workloads. These market dynamics underscore the synergy opportunity we see with Confluent. Automation grew 14%, including another record bookings quarter for HashiCorp. Red Hat decelerated to 8%, driven partially by the wrap on last year's elevated consumption-based services that we called out last quarter, and also from the in-quarter yield on single-digit bookings growth, driven by delays in US federal business deal activity related to the government shutdown. While a longer growth arc, virtualization continues to gain momentum, including over $500 million of contracts signed over the last two years. OpenShift is now $1.9 billion ARR business, growing more than 30%.

James Kavanaugh: As we expected last quarter, given the record z17 placement this year, transaction processing inflected back to growth of 4%. Consulting revenue grew 1% in Q4, with intelligent operations up 3% and strategy and technology remaining stable. Performance was driven by steady demand across key offerings: business application transformation, application migration and modernization, application operations, and cybersecurity, as clients prioritize cost efficiency while continuing to invest in AI-enabled transformation. As Arvind noted, clients are moving beyond experimentation and need support designing, deploying, and governing AI at scale. Our consulting generative AI book of business surpassed $2 billion in the quarter, our largest quarter of GenAI, reflecting continued momentum. We are also expanding our impact through Client Zero, applying our generative AI experience in driving productivity and efficiency to help clients operationalize AI at scale.

As we expected last quarter, given the record z17 placement this year, transaction processing inflected back to growth of 4%. Consulting revenue grew 1% in Q4, with intelligent operations up 3% and strategy and technology remaining stable. Performance was driven by steady demand across key offerings: business application transformation, application migration and modernization, application operations, and cybersecurity, as clients prioritize cost efficiency while continuing to invest in AI-enabled transformation. As Arvind noted, clients are moving beyond experimentation and need support designing, deploying, and governing AI at scale. Our consulting generative AI book of business surpassed $2 billion in the quarter, our largest quarter of GenAI, reflecting continued momentum. We are also expanding our impact through Client Zero, applying our generative AI experience in driving productivity and efficiency to help clients operationalize AI at scale.

James Kavanaugh: This practical experience, combined with our domain expertise, is resonating with clients. While overall signings were down as we wrapped on record Q4 signings last year, the mix continued to improve, with a greater share of strategic wins from both new clients and expanded engagements within existing ones. Infrastructure revenue grew 17% this quarter, with hybrid infrastructure up 24% and infrastructure support down 2%. Within hybrid infrastructure, IBM Z had another outstanding quarter, delivering its highest Q4 revenue in more than two decades, up 61% year-over-year, reflecting the enduring value of the platform and the success of our latest z17 program. Clients are investing in z17 for its differentiated capabilities, real-time AI inferencing, quantum safe security, and AI-driven operational efficiency, which are critical as enterprises modernize mission-critical workloads and scale for data-intensive environments.

This practical experience, combined with our domain expertise, is resonating with clients. While overall signings were down as we wrapped on record Q4 signings last year, the mix continued to improve, with a greater share of strategic wins from both new clients and expanded engagements within existing ones. Infrastructure revenue grew 17% this quarter, with hybrid infrastructure up 24% and infrastructure support down 2%. Within hybrid infrastructure, IBM Z had another outstanding quarter, delivering its highest Q4 revenue in more than two decades, up 61% year-over-year, reflecting the enduring value of the platform and the success of our latest z17 program. Clients are investing in z17 for its differentiated capabilities, real-time AI inferencing, quantum safe security, and AI-driven operational efficiency, which are critical as enterprises modernize mission-critical workloads and scale for data-intensive environments.

James Kavanaugh: IBM Z continues to be the backbone of enterprise IT, enabling clients to integrate seamlessly with hybrid cloud while unlocking new levels of resiliency, scalability, and performance. Distributed infrastructure revenue was flat, with product cycle dynamics impacting storage, offset by growth in power, supported by solid adoption of our newly launched solutions. Now turning to profitability. In 2025, we delivered our highest operating gross profit margin in reported history, and highest operating pre-tax margin in a decade, demonstrating the evolution of our portfolio mix and our laser focus on productivity. For the full year, productivity, mix, and revenue scale drove expansion of operating gross profit margin by 170 basis points, adjusted EBITDA margin by 230 basis points, and operating pre-tax margin by 100 basis points. We achieved this despite absorbing more than $300 million of dilution from HashiCorp.

IBM Z continues to be the backbone of enterprise IT, enabling clients to integrate seamlessly with hybrid cloud while unlocking new levels of resiliency, scalability, and performance. Distributed infrastructure revenue was flat, with product cycle dynamics impacting storage, offset by growth in power, supported by solid adoption of our newly launched solutions. Now turning to profitability. In 2025, we delivered our highest operating gross profit margin in reported history, and highest operating pre-tax margin in a decade, demonstrating the evolution of our portfolio mix and our laser focus on productivity. For the full year, productivity, mix, and revenue scale drove expansion of operating gross profit margin by 170 basis points, adjusted EBITDA margin by 230 basis points, and operating pre-tax margin by 100 basis points. We achieved this despite absorbing more than $300 million of dilution from HashiCorp.

James Kavanaugh: The primary driver of this growth is adjusted EBITDA, up $2.8 billion year over year, partially offset by increased investments in CapEx, higher cash taxes, and higher net interest expense, as we expected coming into 2025. Let me talk about our free cash flow evolution in a little more detail. Our repositioning to a software-led business, in addition to our cost discipline and productivity initiatives, drives significant operating leverage in our financial model. Since 2022, we have consistently delivered double-digit growth in free cash flow, well in excess of revenue growth, demonstrating this business model evolution. Our flywheel for growth and disciplined execution of productivity initiatives lead to sustainable and high-quality free cash flow generation. This durable cash flow engine enables us to invest in our business to accelerate growth.

The primary driver of this growth is adjusted EBITDA, up $2.8 billion year over year, partially offset by increased investments in CapEx, higher cash taxes, and higher net interest expense, as we expected coming into 2025. Let me talk about our free cash flow evolution in a little more detail. Our repositioning to a software-led business, in addition to our cost discipline and productivity initiatives, drives significant operating leverage in our financial model. Since 2022, we have consistently delivered double-digit growth in free cash flow, well in excess of revenue growth, demonstrating this business model evolution. Our flywheel for growth and disciplined execution of productivity initiatives lead to sustainable and high-quality free cash flow generation. This durable cash flow engine enables us to invest in our business to accelerate growth.

James Kavanaugh: This includes increased organic innovation, with R&D up about $2.5 billion since 2019. It allows us to pursue highly strategic M&A transactions like Apptio, Software AG, HashiCorp, DataStax, and Confluent, that drive M&A synergies across IBM. Our diversified and integrated business drives a platform multiplier effect that uniquely allows us to deliver M&A synergies. This includes synergies from our global go-to-market distribution scale, platform synergies that amplify value with IBM's complementary offerings, and operational synergies through our G&A discipline. Most recently, this can be seen with HashiCorp, delivering adjusted EBITDA accretion ahead of expectations within the first full year in IBM. Our financial flexibility fuels innovation and our disciplined capital allocation policy, including our commitment to return capital to shareholders. We exited 2025 with a strong liquidity position and a solid investment-grade balance sheet, with cash of $14.5 billion.

This includes increased organic innovation, with R&D up about $2.5 billion since 2019. It allows us to pursue highly strategic M&A transactions like Apptio, Software AG, HashiCorp, DataStax, and Confluent, that drive M&A synergies across IBM. Our diversified and integrated business drives a platform multiplier effect that uniquely allows us to deliver M&A synergies. This includes synergies from our global go-to-market distribution scale, platform synergies that amplify value with IBM's complementary offerings, and operational synergies through our G&A discipline. Most recently, this can be seen with HashiCorp, delivering adjusted EBITDA accretion ahead of expectations within the first full year in IBM. Our financial flexibility fuels innovation and our disciplined capital allocation policy, including our commitment to return capital to shareholders. We exited 2025 with a strong liquidity position and a solid investment-grade balance sheet, with cash of $14.5 billion.

James Kavanaugh: We invested $8.3 billion in acquisitions and returned $6.3 billion to shareholders in the form of dividends. Our debt balance ending the year was $61.3 billion, including $15.1 billion of debt for our financing business, with a receivables portfolio that is almost 80% investment grade. Now, let me discuss our expectations for 2026. Our strong performance in 2025 reflects the strength of our diversified portfolio and a multi-year execution of our strategic repositioning. Consistent with our Investor Day model, we expect to sustain constant currency revenue growth of 5%+ in 2026, and free cash flow to be up about $1 billion year-over-year, growing high single digits. Our revenue expectations are underpinned by our durable and accelerating software business, which we expect to grow 10% this year.

We invested $8.3 billion in acquisitions and returned $6.3 billion to shareholders in the form of dividends. Our debt balance ending the year was $61.3 billion, including $15.1 billion of debt for our financing business, with a receivables portfolio that is almost 80% investment grade. Now, let me discuss our expectations for 2026. Our strong performance in 2025 reflects the strength of our diversified portfolio and a multi-year execution of our strategic repositioning. Consistent with our Investor Day model, we expect to sustain constant currency revenue growth of 5%+ in 2026, and free cash flow to be up about $1 billion year-over-year, growing high single digits. Our revenue expectations are underpinned by our durable and accelerating software business, which we expect to grow 10% this year.

James Kavanaugh: This acceleration is led by organic growth, driven by the strength of our recurring revenue base, our shift to higher growth end markets, GenAI traction, M&A growth synergies... and monetization of our record Z placement with an inflection in transaction processing, a tremendous source of profitability and free cash flow for IBM. We continue to expect Confluent will close by the middle of 2026. In consulting, our backlog levels and momentum in GenAI, with backlog penetration over 25%, support an acceleration in revenue growth to low to mid-single digits for the year. The powerful combination of our integrated platforms, services as software model, and Client Zero experience allow us to deliver differentiated value to clients. We enter 2026, three quarters into the z17 launch.

This acceleration is led by organic growth, driven by the strength of our recurring revenue base, our shift to higher growth end markets, GenAI traction, M&A growth synergies... and monetization of our record Z placement with an inflection in transaction processing, a tremendous source of profitability and free cash flow for IBM. We continue to expect Confluent will close by the middle of 2026. In consulting, our backlog levels and momentum in GenAI, with backlog penetration over 25%, support an acceleration in revenue growth to low to mid-single digits for the year. The powerful combination of our integrated platforms, services as software model, and Client Zero experience allow us to deliver differentiated value to clients. We enter 2026, three quarters into the z17 launch.

James Kavanaugh: AI is now embedded across our business, from how we deliver services, to our software portfolio, to the capabilities we're adding to our infrastructure platforms, and how we drive our own productivity. As a result, a standalone GenAI metric no longer reflects the full scope of how AI is driving value across IBM. For the full year, we expect IBM's operating pre-tax margin to expand by about a point. Our software portfolio mix and ongoing productivity initiatives continue to drive margin expansion and mitigate Z product cycles and the impact of dilution from acquisitions. Our operating tax rate for the year should be in the mid-teens, and the timing of discrete items can cause the rate to vary within the year. Let me give a little bit more color on Confluent dilution dynamics.

AI is now embedded across our business, from how we deliver services, to our software portfolio, to the capabilities we're adding to our infrastructure platforms, and how we drive our own productivity. As a result, a standalone GenAI metric no longer reflects the full scope of how AI is driving value across IBM. For the full year, we expect IBM's operating pre-tax margin to expand by about a point. Our software portfolio mix and ongoing productivity initiatives continue to drive margin expansion and mitigate Z product cycles and the impact of dilution from acquisitions. Our operating tax rate for the year should be in the mid-teens, and the timing of discrete items can cause the rate to vary within the year. Let me give a little bit more color on Confluent dilution dynamics.

James Kavanaugh: Looking to Q1, we expect our constant currency revenue growth rate to be similar to the full year, and for operating pre-tax margin, we expect about 100 basis points of expansion, with workforce rebalancing fairly consistent with the prior year. Our Q1 operating tax rate should be in the mid-teens. We are excited about our prospects in 2026. Our growth accelerators, portfolio mix, integrated value, and continued investment in innovation are driving sustainable revenue growth and strong free cash flow. As we shift toward a software-led business and speed our pace of innovation, our growth flywheel continues to strengthen. We enter 2026 with a solid momentum across our business and remain focused on disciplined execution with unwavering focus on productivity, enabling investing for the future and delivering value for our shareholders. Arvind and I are now happy to take your questions.

Looking to Q1, we expect our constant currency revenue growth rate to be similar to the full year, and for operating pre-tax margin, we expect about 100 basis points of expansion, with workforce rebalancing fairly consistent with the prior year. Our Q1 operating tax rate should be in the mid-teens. We are excited about our prospects in 2026. Our growth accelerators, portfolio mix, integrated value, and continued investment in innovation are driving sustainable revenue growth and strong free cash flow. As we shift toward a software-led business and speed our pace of innovation, our growth flywheel continues to strengthen. We enter 2026 with a solid momentum across our business and remain focused on disciplined execution with unwavering focus on productivity, enabling investing for the future and delivering value for our shareholders. Arvind and I are now happy to take your questions.

Arvind Krishna: If I look at data, data benefits both from our data products that we provide, the organic innovation we have done with watsonx, both the AI pieces and the watsonx Orchestrate piece for agents, and we expect that that demand will keep pulling through and going forward as people are deploying AI for enterprise productivity and inside the enterprise. Then, we also have a lot of partnerships in the data space that we see strong demand for and that we expect are going to continue. Mainframe, given the very strong cycle we had, somewhere between low to mid-single digit growth is reasonable, and we have seen that dynamic play through, but it kind of follows the hardware placement by a few quarters. So all that hardware, as people consume it, is gonna cause that to grow. And then we get to Red Hat.

If I look at data, data benefits both from our data products that we provide, the organic innovation we have done with watsonx, both the AI pieces and the watsonx Orchestrate piece for agents, and we expect that that demand will keep pulling through and going forward as people are deploying AI for enterprise productivity and inside the enterprise. Then, we also have a lot of partnerships in the data space that we see strong demand for and that we expect are going to continue. Mainframe, given the very strong cycle we had, somewhere between low to mid-single digit growth is reasonable, and we have seen that dynamic play through, but it kind of follows the hardware placement by a few quarters. So all that hardware, as people consume it, is gonna cause that to grow. And then we get to Red Hat.

Arvind Krishna: First, we are very pleased with their doubling, almost more than doubling, of the Red Hat business since we acquired it. It was three point, early $3 billion, $3.2 billion when we made the acquisition, finishing the year at $7.5 billion on a run rate, just extrapolating from the fourth quarter towards $8 billion. We see strong demand in many of the pieces there, including on Red Hat Linux, but that's probably in the mid-single digits more than in the high to double, which is in line with server growth. You're still taking share, and the piece there that continues to be very, very, attractive to growth is OpenShift, which is almost at $2 billion and running at a 30% growth rate. And we expect that to continue, both for containers, for hybrid applications, and for virtualization.

First, we are very pleased with their doubling, almost more than doubling, of the Red Hat business since we acquired it. It was three point, early $3 billion, $3.2 billion when we made the acquisition, finishing the year at $7.5 billion on a run rate, just extrapolating from the fourth quarter towards $8 billion. We see strong demand in many of the pieces there, including on Red Hat Linux, but that's probably in the mid-single digits more than in the high to double, which is in line with server growth. You're still taking share, and the piece there that continues to be very, very, attractive to growth is OpenShift, which is almost at $2 billion and running at a 30% growth rate. And we expect that to continue, both for containers, for hybrid applications, and for virtualization.

James Kavanaugh: The work we've done around repositioning the portfolio, a disciplined capital allocation to build out an automation portfolio, a data portfolio, and always capitalizing on that high profit margin transaction processing portfolio, has just been phenomenal, and it's leading to a sustainable, durable growth engine that gives us that conviction of double-digit growth here in 2026. But when you cut to the underpinnings, it reflects that diversity. ARR, roughly $24 billion, growing high single digits. GenAI, over $2 billion book of business, up 2x in Q4, and that M&A growth synergies, you're just seeing the beginnings of that play out with Hashi, with another record quarter overall. So we are excited about the opportunity ahead, and we feel confident about software now at double digits, not approaching double digits.

The work we've done around repositioning the portfolio, a disciplined capital allocation to build out an automation portfolio, a data portfolio, and always capitalizing on that high profit margin transaction processing portfolio, has just been phenomenal, and it's leading to a sustainable, durable growth engine that gives us that conviction of double-digit growth here in 2026. But when you cut to the underpinnings, it reflects that diversity. ARR, roughly $24 billion, growing high single digits. GenAI, over $2 billion book of business, up 2x in Q4, and that M&A growth synergies, you're just seeing the beginnings of that play out with Hashi, with another record quarter overall. So we are excited about the opportunity ahead, and we feel confident about software now at double digits, not approaching double digits.

James Kavanaugh: The underpinnings behind that cash flow were entirely driven by the fundamentals of our business, the acceleration we saw in our revenue growth throughout the year, and the strong operating leverage we continue to get out of this business. So where we started with adjusted EBITDA at double-digit growth, we finished at 17%. That's an incremental $1 billion of adjusted EBITDA from where we were a year ago. By the way, that's a flywheel engine. Revenue acceleration, operating leverage, and driving an efficient balance sheet, where we're very proud about a solid investment-grade balance sheet, generates significant, substantial free cash flow. So now you fast-forward to this year. We enter 2026 with a lot of momentum, confidence. By the way, I should have said over the last three years, we've grown free cash flow $5.5 billion.

The underpinnings behind that cash flow were entirely driven by the fundamentals of our business, the acceleration we saw in our revenue growth throughout the year, and the strong operating leverage we continue to get out of this business. So where we started with adjusted EBITDA at double-digit growth, we finished at 17%. That's an incremental $1 billion of adjusted EBITDA from where we were a year ago. By the way, that's a flywheel engine. Revenue acceleration, operating leverage, and driving an efficient balance sheet, where we're very proud about a solid investment-grade balance sheet, generates significant, substantial free cash flow. So now you fast-forward to this year. We enter 2026 with a lot of momentum, confidence. By the way, I should have said over the last three years, we've grown free cash flow $5.5 billion.

James Kavanaugh: Yes, thanks, Ben. I didn't say the dilution effect because, to be honest with you, dilution is part of our model. Our investors expect us to be disciplined capital allocators. I think we've earned the credibility about that, and we have to take that into account. That's why we drive portfolio mix, we drive revenue scale, we drive productivity, which, by the way, I also didn't say, we exited $4.5 billion over the last two years, and we see that going up by another $1 billion this year. We got a lot of levers in this business, and we understand that dilution. But you know what? The strategic value of Confluent and the synergistic value of what it does to our portfolio, we definitely could take into account that dilution. I know you were trying to help on 15 sevens higher.

James Kavanaugh: We're going to do that. One, we have to acknowledge we're operating in an attractive TAM, with a market backdrop for tech that we think is pretty exciting, and Arvind has been on that point about opportunistic. Two, we continue. The thing I think is underappreciated in our disciplined capital allocator, we continue to shift this portfolio mix to higher growth end markets. With companies that we buy, which we always say category leaders in structurally growing markets, that we can provide unique value, integrate, and deliver differentiated synergies to accelerate growth. That is shifting our underlying portfolio; that's also advancing our organic growth profile. Annuity strength, $24 billion exiting the year, growing high single digits, 8%+. New innovation, GenAI. GenAI in Q4, up 2x, and we see that continuing as we move forward.

We're going to do that. One, we have to acknowledge we're operating in an attractive TAM, with a market backdrop for tech that we think is pretty exciting, and Arvind has been on that point about opportunistic. Two, we continue. The thing I think is underappreciated in our disciplined capital allocator, we continue to shift this portfolio mix to higher growth end markets. With companies that we buy, which we always say category leaders in structurally growing markets, that we can provide unique value, integrate, and deliver differentiated synergies to accelerate growth. That is shifting our underlying portfolio; that's also advancing our organic growth profile. Annuity strength, $24 billion exiting the year, growing high single digits, 8%+. New innovation, GenAI. GenAI in Q4, up 2x, and we see that continuing as we move forward.

James Kavanaugh: M&A growth synergies kicking in off of a record HashiCorp year, and Arvind talked about TP cycle monetization. By the way, one point on TP that I think is underappreciated. We talk about it very similar to z16 cycle. z16, first year of that cycle, TP was flat. We finished this year flat. One big difference, that flat on z16 was off a down 9. The flat this year in 2025 was off a plus 10. So you could see the compounding effect of what's happening to TP, and we see that inflecting the growth. So underpinning, and Arvind gave you some of the math. One, data, high teens, contributing about four points to that software growth, well above model. That's going to be driven by new innovation, GenAI capability, platform economics. Two, hybrid cloud. We think that's double digit.

M&A growth synergies kicking in off of a record HashiCorp year, and Arvind talked about TP cycle monetization. By the way, one point on TP that I think is underappreciated. We talk about it very similar to z16 cycle. z16, first year of that cycle, TP was flat. We finished this year flat. One big difference, that flat on z16 was off a down 9. The flat this year in 2025 was off a plus 10. So you could see the compounding effect of what's happening to TP, and we see that inflecting the growth. So underpinning, and Arvind gave you some of the math. One, data, high teens, contributing about four points to that software growth, well above model. That's going to be driven by new innovation, GenAI capability, platform economics. Two, hybrid cloud. We think that's double digit.

James Kavanaugh: Back to where I started my first answer. 3, 4 years ago, we only had 1 growth factor. Now we got 3 growth factors that are growing double digit. Underpinning that, we got a subscription revenue under contract that's growing mid-teens. That's not at model. We only delivered single-digit ACV bookings in the fourth quarter because, as we stated in prepared remarks, we were disrupted by the shutdown in the federal government. We got to get through that. We're monitoring it, and I would say the word choices were being prudent on Red Hat's guidance right now, because we only need that at double digit to get software over, over the line of double digit. Upside, we'll deliver, upside to software overall. Automation, great portfolio, low double digit, 2.5 point contribution to software, on or better than the model.

Back to where I started my first answer. 3, 4 years ago, we only had 1 growth factor. Now we got 3 growth factors that are growing double digit. Underpinning that, we got a subscription revenue under contract that's growing mid-teens. That's not at model. We only delivered single-digit ACV bookings in the fourth quarter because, as we stated in prepared remarks, we were disrupted by the shutdown in the federal government. We got to get through that. We're monitoring it, and I would say the word choices were being prudent on Red Hat's guidance right now, because we only need that at double digit to get software over, over the line of double digit. Upside, we'll deliver, upside to software overall. Automation, great portfolio, low double digit, 2.5 point contribution to software, on or better than the model.

[Analyst] (Bank of America): Yes, thank you so much. Just to follow up a clarification quickly on the last couple of questions around hybrid cloud growth. Are you anticipating any potential pressure on the server refresh cycle from higher memory pricing, and could that sort of have any adverse effect on the Red Hat Enterprise Linux side of things? And my question really is, Jim, on the cadence of PTI improvement, clearly you're driving a lot of productivity improvement in being able to absorb entirely the dilution from Confluent and then some. So how should we think about the cadence of the progress of that, given that Confluent is going to hit mid-year, but you've already taken some productivity actions here in Q4 of last year. So should we be seeing more outsized PTI improvements in-

Wamsi Mohan: Yes, thank you so much. Just to follow up a clarification quickly on the last couple of questions around hybrid cloud growth. Are you anticipating any potential pressure on the server refresh cycle from higher memory pricing, and could that sort of have any adverse effect on the Red Hat Enterprise Linux side of things? And my question really is, Jim, on the cadence of PTI improvement, clearly you're driving a lot of productivity improvement in being able to absorb entirely the dilution from Confluent and then some. So how should we think about the cadence of the progress of that, given that Confluent is going to hit mid-year, but you've already taken some productivity actions here in Q4 of last year. So should we be seeing more outsized PTI improvements in-

Arvind Krishna: Now, the demand side, there is no AI server without a bunch of CPUs right next to it. So the reality becomes that the AI demand also drives demand for normal servers that in turn feed and load up those servers. So I don't expect that the overall server dynamic, on which there may be a little bit of an issue, is actually going to be any headwind to us on the hybrid cloud or the Linux side. And the reason for that is that there is enough growth going on. There is also a market share movement towards Red Hat as opposed to alternative answers in the marketplace. So that mix overall, I think, keeps us growing well. I also believe that both Red Hat AI and OpenShift AI will feed into the demand from the AI servers, which was going to help that demand.

Now, the demand side, there is no AI server without a bunch of CPUs right next to it. So the reality becomes that the AI demand also drives demand for normal servers that in turn feed and load up those servers. So I don't expect that the overall server dynamic, on which there may be a little bit of an issue, is actually going to be any headwind to us on the hybrid cloud or the Linux side. And the reason for that is that there is enough growth going on. There is also a market share movement towards Red Hat as opposed to alternative answers in the marketplace. So that mix overall, I think, keeps us growing well. I also believe that both Red Hat AI and OpenShift AI will feed into the demand from the AI servers, which was going to help that demand.

James Kavanaugh: Yeah. The skew of profitability, Ramzi, I think was your question. So thanks very much, and I appreciate that. Just given we do still expect Confluent to close by mid-year, this year, obviously very excited about the strategic capabilities that's going to add. But I think I was very transparent in the prepared remarks about the level of dilution, et cetera. But let me bring it up a level first, around how do we run this company, and how do we drive the operating leverage that's been going up well above our model over the last 3 to 4 years? We drive this through portfolio mix. That's why software being the underpinning of IBM's leverage around 45% of IBM's revenue, but about 2/3 of our profit. Also, the high-value recurring revenue, our ARR book of business, high marginal profit dollars.

James Kavanaugh: So portfolio mix being one lever. Productivity, every dollar we invest in this company around go-to-market, around R&D, around innovation, and around our consulting services, we look and we drive a very maniacal ROI concept around that profile, just as you would expect us to, as an investor, like an inorganic M&A acquisition. And 3, we drive to bring this company the most productive company in the world and getting G&A scale leverage overall. Fundamentally, you manage those three separate buckets differently. When you look at 2026, we set about 1 point growth in margin. We're going to get about 0.5 point out of revenue scale, just given the leverage of the acceleration of revenue. We will lose 0.5 point on portfolio mix, because we are going to ramp on an unprecedented launch momentum on mainframe, which carries higher prior profit and higher mix.

So portfolio mix being one lever. Productivity, every dollar we invest in this company around go-to-market, around R&D, around innovation, and around our consulting services, we look and we drive a very maniacal ROI concept around that profile, just as you would expect us to, as an investor, like an inorganic M&A acquisition. And 3, we drive to bring this company the most productive company in the world and getting G&A scale leverage overall. Fundamentally, you manage those three separate buckets differently. When you look at 2026, we set about 1 point growth in margin. We're going to get about 0.5 point out of revenue scale, just given the leverage of the acceleration of revenue. We will lose 0.5 point on portfolio mix, because we are going to ramp on an unprecedented launch momentum on mainframe, which carries higher prior profit and higher mix.

James Kavanaugh: The remaining full point, basically, is going to be driven out of productivity. Our model, as you know quite well, we've been driving north of 300 basis points per year of productivity, and we've been reinvesting about 200 basis points of that. That's why you've seen over the last handful of years, our R&D up double-digit growth year over year, and we've taken over the last, what, 5 years? We've taken $2.5 billion of R&D up overall. But when you look at 2026, productivity is going to drive the day. We feel confident we took up our productivity target to $5.5 billion. We will get revenue scale leverage on G&A, which will mitigate dilution and mitigate product cycles overall. To your last question, we think the skew of that profitability is going to follow our normal historical attainment.

The remaining full point, basically, is going to be driven out of productivity. Our model, as you know quite well, we've been driving north of 300 basis points per year of productivity, and we've been reinvesting about 200 basis points of that. That's why you've seen over the last handful of years, our R&D up double-digit growth year over year, and we've taken over the last, what, 5 years? We've taken $2.5 billion of R&D up overall. But when you look at 2026, productivity is going to drive the day. We feel confident we took up our productivity target to $5.5 billion. We will get revenue scale leverage on G&A, which will mitigate dilution and mitigate product cycles overall. To your last question, we think the skew of that profitability is going to follow our normal historical attainment.

James Kavanaugh: ... Great, Jim, it's good to hear from you, and I appreciate the question. First of all, we're encouraged by the inflection shift that we see in consulting business exiting 25. We returned the business back to durable, sustainable growth in the second half, a little bit over 1%. But more importantly, and I think underappreciated, we got a lot of headroom to go, and the team is working diligently around improving the fundamentals of this business, and our operating pre-tax margins were up by almost 200 basis points in 2025. When you look at the market, market definitely remains dynamic, as we talked about earlier. We continue to see opportunity for growth as clients accelerate their investments in AI-driven transformation to unlock operational efficiency, to unlock business model innovation, and unlock growth.

James Kavanaugh: Great, Jim, it's good to hear from you, and I appreciate the question. First of all, we're encouraged by the inflection shift that we see in consulting business exiting 25. We returned the business back to durable, sustainable growth in the second half, a little bit over 1%. But more importantly, and I think underappreciated, we got a lot of headroom to go, and the team is working diligently around improving the fundamentals of this business, and our operating pre-tax margins were up by almost 200 basis points in 2025. When you look at the market, market definitely remains dynamic, as we talked about earlier. We continue to see opportunity for growth as clients accelerate their investments in AI-driven transformation to unlock operational efficiency, to unlock business model innovation, and unlock growth.

James Kavanaugh: I think it's a very different mindset and client buying behavior, and we saw 18 months ago when it was pure disruption and discretionary spend that's moving out. So as we look at 2026, that's what gives us the confidence that we guided low single to mid-single, which we think is gonna be pretty much where the market is at overall. And we still believe we've got continued headroom on operating margins. We guide about another point and a half improvement year over year. Both of them are gonna be accretive in contribution to IBM overall. How's that gonna happen? One, I would, I would put it in a handful of buckets. One, backlog realization in what we see. Two, our GenAI momentum and the rate and pace and growth and acceleration we're seeing. Three, strategic partnership headroom that we still have.

I think it's a very different mindset and client buying behavior, and we saw 18 months ago when it was pure disruption and discretionary spend that's moving out. So as we look at 2026, that's what gives us the confidence that we guided low single to mid-single, which we think is gonna be pretty much where the market is at overall. And we still believe we've got continued headroom on operating margins. We guide about another point and a half improvement year over year. Both of them are gonna be accretive in contribution to IBM overall. How's that gonna happen? One, I would, I would put it in a handful of buckets. One, backlog realization in what we see. Two, our GenAI momentum and the rate and pace and growth and acceleration we're seeing. Three, strategic partnership headroom that we still have.

James Kavanaugh: Four, our portfolio composition we've been talking about is aligned to much more growth, end markets, higher growth end markets. You know, where our portfolio is less around pure BPO, it's more around digital transformation, application modernization, AI, around data transformation, cybersecurity, governance. And then five, you know, Mohamad and team, we've been doing a ton of work around reshaping our model to an asset-based services as software model with our industry-leading IBM Consulting advantage. So let me talk about just a couple of them to give you some math and statistics on why we feel confident. One, backlog $32 billion, up 2%, overall, but underpinning record low erosion, duration, that has continued to come down.

[Analyst] (Morgan Stanley): Awesome. Thank you, guys, for squeezing me in here. You know, Arvind, a really strong infrastructure year, obviously outstanding performance in Z. You know, I think there's an argument to be made, and I hear from you that, you know, with the Telum two processor, given the amount of data and transactions on the mainframe, you know, the mainframe can be an AI workhorse. You had really strong outperformance relative to your historical model in Z. You're guiding to a bit of infrastructure decline in 2026, and so I'm just trying to understand, was there just some kind of different buying trends in 2025 and perhaps a bit of pull forward that was different than maybe past Z launches? Or could you just be a bit conservative as you look out into 2026?

Erik Woodring: Awesome. Thank you, guys, for squeezing me in here. You know, Arvind, a really strong infrastructure year, obviously outstanding performance in Z. You know, I think there's an argument to be made, and I hear from you that, you know, with the Telum two processor, given the amount of data and transactions on the mainframe, you know, the mainframe can be an AI workhorse. You had really strong outperformance relative to your historical model in Z. You're guiding to a bit of infrastructure decline in 2026, and so I'm just trying to understand, was there just some kind of different buying trends in 2025 and perhaps a bit of pull forward that was different than maybe past Z launches? Or could you just be a bit conservative as you look out into 2026?

Arvind Krishna: Number one, there is a lot more demand for people to have, we can use the word sovereignty, or we can use the word on-premise control, which goes along with the economics of the mainframe platform. I think more and more clients have woken up to that, for certain workloads, the mainframe is actually the lowest unit cost economics platform, and that is really important. Number two, the ding often is, well, but it's a very hard platform for our developers to use and for our operators to leverage. The GenAI tools we have provided with the Watson Code Assistant for Z really takes that onus away. It can refactor COBOL into Java. It can help people understand code that is already running on the platform. It can help you refactor that code if you want to keep it exactly as it is.

Number one, there is a lot more demand for people to have, we can use the word sovereignty, or we can use the word on-premise control, which goes along with the economics of the mainframe platform. I think more and more clients have woken up to that, for certain workloads, the mainframe is actually the lowest unit cost economics platform, and that is really important. Number two, the ding often is, well, but it's a very hard platform for our developers to use and for our operators to leverage. The GenAI tools we have provided with the Watson Code Assistant for Z really takes that onus away. It can refactor COBOL into Java. It can help people understand code that is already running on the platform. It can help you refactor that code if you want to keep it exactly as it is.

Arvind Krishna: It can help you take things out so that headwind of people saying, "This is a hard platform to modernize," has gone away. That then comes to your AI capabilities. You're right. I'm incredibly excited by our ability to do AI right in line. If you can do it right in line with the transaction, that's a milliseconds delay as opposed to multiple seconds if you take it off platform, which is how people have been doing it so far. That capability, while we introduced it in the beginning of 2025, really came to market only in the fourth quarter of 2025. So I do expect, and we look forward to helping our clients install that, and a very large number of our clients actually told us they're interested, and they kept space in the machines to put in those cards.

It can help you take things out so that headwind of people saying, "This is a hard platform to modernize," has gone away. That then comes to your AI capabilities. You're right. I'm incredibly excited by our ability to do AI right in line. If you can do it right in line with the transaction, that's a milliseconds delay as opposed to multiple seconds if you take it off platform, which is how people have been doing it so far. That capability, while we introduced it in the beginning of 2025, really came to market only in the fourth quarter of 2025. So I do expect, and we look forward to helping our clients install that, and a very large number of our clients actually told us they're interested, and they kept space in the machines to put in those cards.

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