IBM's Fourth Quarter 2023 Earnings Presentation began with a warm welcome from Olympia McNerney, IBM's Global Head of Investor Relations. She introduced Arvind Krishna, IBM's Chairman and CEO, and Jim Kavanaugh, IBM's Senior Vice President and CFO. The presentation included non-GAAP measures and forward-looking statements, and the company's SEC filings were referenced for more information. Krishna highlighted the company's solid performance in the fourth quarter and full year, with growth across all businesses and strong cash generation. He expressed satisfaction with the progress made in 2023, with 3% revenue growth and over $11 billion in free cash flow, and stated his pride in the company's achievements two-thirds of the way through their midterm model.

IBM has experienced strong revenue growth in 2021 and is confident in achieving their midterm revenue model. They have focused on enhancing their Software portfolio and strengthening their Consulting position, which has resulted in durable revenue growth. The company's AI and data platform, watsonx, has been well-received and their consulting performance has outpaced competitors. The demand for technology, specifically hybrid cloud and AI, is expected to continue driving global economic and business growth. IBM's strategy execution includes their AI approach and the introduction of watsonx.

IBM believes that AI will be multi-model, with clients using a combination of models from IBM, open source, and other companies. The flexibility of deployment is important, and IBM has released a toolkit to help clients govern and trust generative AI. They have also formed an AI Alliance and offer consulting services for deploying and managing generative AI. IBM's consulting business is expected to benefit from AI, and their book of business related to generative AI has doubled in the fourth quarter.

In the fourth quarter, there were a significant number of hands-on client interactions and an increase in pilots completed. One-third of the book of business was related to generative AI, with a balance of large and small transactions. Enterprise use cases, such as code modernization and customer service, continue to provide benefits to clients. IBM has collaborated with various clients, including Citi, NatWest, Lockheed Martin, and Boehringer Ingelheim, and is working on an interesting use case with the Sevilla Football Club. As clients focus on ROI and productivity, the importance of optimizing IT spend is highlighted, with Apptio being a valuable tool for managing technology investments. In addition to AI, IBM had important client wins, such as helping NATO with cybersecurity and working with Riyadh Air on their digital and technology strategy.

IBM has seen success in consulting renewals and new partnerships with companies like SAP, AWS, Microsoft, Salesforce, and Adobe. They are also expanding their capabilities through collaborations and partnerships, such as embedding watsonx into Adobe's platform. The company continues to invest in new innovations, including enhancements to their Ansible automation platform and advancements in quantum computing. They have also completed several acquisitions and announced the sale of their Weather assets. Their Enterprise AI Venture Fund aims to partner with start-ups and tap into the latest AI innovations. Overall, the changes made to the business in recent years have positioned IBM well for the changing technology landscape.

In the fourth quarter, IBM delivered average revenue growth in line with their midterm model across all segments, with software and consulting exceeding expectations and infrastructure performing well. This gives the CEO confidence for the new year, with expectations for mid-single digit revenue growth and $12 million of free cash flow in 2024. The CFO then goes into more detail about the quarter and the full year, highlighting the company's solid performance and growth in software and consulting. However, infrastructure was down due to product cycle dynamics. Overall, IBM's results demonstrate their focus on digital transformation and driving productivity for clients.

In the fourth quarter, our company saw strong revenue growth and increased margins due to our productivity initiatives. Despite a slight headwind from currency dynamics, our operating gross profit margin expanded by 130 basis points and operating pretax margin by 40 basis points. Our software revenue increased by 2% and our consulting segment had a solid quarter with 5.5% revenue growth. Additionally, our Infrastructure segment had a 2% revenue increase, despite being in the seventh quarter of the z16 cycle. Our profit metrics also saw growth, with a 140 basis point increase in operating gross margin and a 110 basis point increase in operating pretax margin. These improvements were driven by our operating leverage and ongoing investments in innovation.

IBM's operating tax rate and operating earnings per share remained flat compared to last year. The company is focused on productivity initiatives, including digital transformation and scaling AI, which have already resulted in $1.5 billion in annual run rate savings. This has allowed for increased investments in innovation and skills while also growing profit margin and free cash flow. IBM now believes they can achieve $3 billion in annual run rate savings by the end of 2024. The company's operating pretax profit grew by 9% in the quarter, contributing to their strong free cash flow performance for the year. This growth was driven by adjusted EBITDA and working capital efficiencies, as well as decreased CapEx due to real estate optimization efforts.

In the past year, the company reduced their net CapEx and invested in acquiring companies while also returning money to shareholders. They ended the year with a strong cash position and total debt increased. The company's retirement plans are in good financial standing. Their software segment saw 2% growth, driven by recurring revenue. Transaction processing and Hybrid Platform & Solutions both saw growth, with Red Hat revenue increasing by 7%. The company's annual recurring revenue is now at $14.4 billion, showing the strength of their recurring business. The fourth quarter faced tough comparisons due to strong transactional performance in the previous year.

In the fourth quarter, transactional revenue was down compared to the previous year, but future growth indicators are positive. Red Hat annual bookings saw double-digit growth and renewals were strong. The platform-based approach is resonating with clients, with growing interest in the generative AI platform, watsonx. Investments have been made in hybrid cloud and AI capabilities, including new offerings and acquisitions. In Consulting, revenue was up and demand for data and technology transformation projects remains solid, with a focus on AI and analytics. Signings grew at a high rate, with a book-to-bill ratio of over 1.15 for the trailing 12 months.

The company's consulting business has outperformed its competitors due to its unique integrated value proposition, investments in skills and strategic partnerships, and focused execution. The company's strategic partnerships, particularly with AWS and Azure, have contributed to double-digit growth in both signings and revenue. The company has consistently delivered solid revenue performance in its three lines of business within consulting, with data and technology transformations driving growth. Consulting profit has also increased, with an expansion of gross margin and an increase in pretax margin.

In the Infrastructure business, revenue increased by 2%, with growth in hybrid infrastructure and a decline in infrastructure support. The z16 product cycle has been successful, driving demand for more capacity and resulting in a doubling of installed MIPS. This also leads to growth in related software, storage, and services. Distributed infrastructure revenue grew by 7%, driven by demand for data-intensive workloads on Power10 and storage traction. Infrastructure support revenue declined due to successful hardware performance. Gross profit and pretax margin expanded, despite currency impact. IBM is now 2/3rds of the way through their midterm model and has made significant progress.

IBM has taken several actions to execute their strategy and achieve sustainable revenue and free cash flow growth. These include aligning their business to a platform-centric model, focusing on hybrid cloud and AI, investing in innovation and skills, and pursuing strategic partnerships and acquisitions. As a result, the company now has a higher-value recurring revenue base and their growth vectors of software and consulting represent 75% of their revenue. For 2024, IBM expects constant currency revenue growth in line with their mid-single-digit model and free cash flow of $12 billion. They anticipate solid growth in both software and consulting, with software revenue slightly above the high end of their model and consulting revenue growing between 6% to 8%.

In 2024, IBM expects to see over a point of pretax margin expansion in its segments, with a decline in Infrastructure revenue due to the z16 cycle. This will lead to a 0.5 point increase in IBM's operating pretax margin, similar to 2023. The company also expects to generate $12 billion in free cash flow, with lower cash requirements offset by higher CapEx. IBM will also see workforce rebalancing and the sale of the Weather Company assets, which will impact revenue growth and pretax gain. In the first quarter of 2024, the company will realign its management structure and expects similar revenue growth to the full year.

The speaker discusses the expected profit and net income for the company in the first half and second half of the year, as well as the progress made in the past year. They also mention their strong free cash flow generation and provide supplemental information for the presentation. The first question from a Bank of America representative asks for a breakdown of the company's cash flow performance and the factors driving the projected $12 billion in free cash flow for the following year. The speaker explains that the team has executed well and the company's free cash flow has increased significantly from the previous year. They also mention their consistent guidance and confidence in the sustainability of their projected free cash flow.

In 2023, the company saw significant growth in their business due to sustainable revenue growth, operating leverage, and working capital efficiency. They also capitalized on productivity actions and real estate rationalization, leading to a decrease in CapEx and an increase in cash tax. This strong performance sets a solid foundation for continued growth in 2024, with expected consistent growth in revenue, margin, and productivity. Additionally, the company will benefit from changes in retirement plans.

The speaker discusses the company's software performance and their confidence in their future growth. They mention factors such as higher cash taxes and continued investments in CapEx, but also highlight the success of their recurring revenue stream and the innovation in their hardware platform business. The company expects to see an acceleration in growth in 2024, with a focus on both organic and inorganic growth. They are confident in their ability to meet their mid-single-digit growth target and have a strong portfolio and competitive edge.

The paragraph discusses the expected growth for IBM in 2024, with 2 points coming from high-value recurring revenue, less than 2 points from acquisitions, 2.5 points from Red Hat, and 0.5 points from transaction processing. The remaining growth will come from the company's continued investment in software and innovation, particularly in their AI platform. The company believes that customers who are satisfied with one aspect of their portfolio are likely to utilize other parts as well.

The company's AI portfolio automation is helping clients with productivity, and the CEO mentioned other technologies such as Apptio and Turbonomic that fall under the category of AIOps. The company also expects growth in its mainframe business due to increased MIPS and innovation. This balanced approach, along with M&A, Red Hat innovation, and automation, gives the company confidence in its ability to deliver growth. In terms of free cash flow, the company expects to reach $12 billion from a net income of $9 billion in fiscal year 2024, with a significant contribution from depreciation expense and CapEx. The AI book of business, which doubled in the last quarter, is worth low hundreds of millions and includes both software and consulting signings. The CEO will provide more details on the AI business.

The company has been working towards increased transparency and has spent a lot of time with investors to understand their concerns. To address these concerns, they have provided a bridge from operating pretax income to adjusted PTI in their financials, which shows the quality and sustainability of their free cash flow. In 2024, the company expects growth in adjusted EBITDA to drive their net income, with a projected $900 million increase. The AI book of business is not all revenue in the current quarter, but rather a measure of client commitment and momentum. Consulting is measured by signings.

In paragraph 21, the speaker discusses the average length of consulting signings, which typically range from 12 to 24 months. They also mention that their software offerings are usually committed to for 12 months, and that this includes both license and service components. The speaker notes that it may take some time for the consulting business to translate into significant revenue, but they are confident in their high teens bookings growth in 2023. In response to a question about competition, the speaker expresses confidence in their team's ability to outperform their competitors in the consulting market.

The company has seen strong growth in signings, backlog, and duration, which has given them confidence in their 6% to 8% growth projection for the full year. They expect an acceleration in growth throughout 2024 and a healthy backlog for 2025. They are focused on taking market share and have offerings that appeal to clients while maintaining a healthy margin. They are confident in their bookings to justify their growth projection.

Arvind Krishna, CEO of the company, stated that the booking is justified and the company is focused on strategic partnerships, digital transformation, and data and AI. He also mentioned that the business climate is similar to the previous quarter and the company is not seeing reduced software budgets. The economy in various regions, including South Asia, Europe, North America, and Latin America, has remained resilient. However, the company does not forecast GDP.

The speaker discusses how other people are forecasting a 2% growth rate for the company, but they believe that technology budgets will stay in line with 2023 and continue to grow into 2024. They attribute this to the pressures their CEO clients face and their reliance on technology as a solution. The next question from an analyst asks about the deceleration of some businesses in the software sector, and the speaker explains that they had previously set a mid-term growth model and have already exceeded it with a 2-year compound growth rate of 6%. They express confidence that these businesses will continue to accelerate in the future.

Arvind and his team are focused on investing in new innovation to drive growth. They set their goals for the year based on the strength of their recurring revenue portfolio and have delivered on those goals. However, they faced a headwind in the fourth quarter due to a peak ELA cycle, which impacted their performance. Despite this, they still achieved 5% growth over a 2-year period and saw strong performance in Red Hat, automation, and Data & AI. They acknowledge an execution gap in security but see it as an opportunity to improve in the future.

The speaker discusses the growth of the company's innovation and M&A portfolio, which is driving their confidence in accelerating growth in 2024. The questioner asks about the demand for Red Hat and the impact of cloud cost optimizations. The speaker mentions that Red Hat Linux, security concerns, and the embrace of hybrid environments are driving demand for Red Hat products, particularly OpenShift.

The speaker discusses the company's increase in bookings and confidence in Red Hat's growth. They also address the topic of acquisitions and their criteria, which is centered around strategic fit to their hybrid cloud and AI platform. They emphasize the importance of both software IP assets and consulting expertise in their targeted areas of hybrid cloud, data, automation, and security.

The company has a platform-centric model that aims to create a synergistic multiplier effect in their business. They prioritize financial attractiveness, including high growth, recurring revenue, and profitability. They have a strong capital structure and will continue to be opportunistic in the marketplace. The CEO is confident in their strategy and looks forward to continued success in the future. The call has now ended.

This summary was generated with AI and may contain some inaccuracies.