The operator introduces the IBM earnings presentation and hands it over to Olympia McNerney, who introduces Arvind Krishna and Jim Kavanaugh. The presentation includes non-GAAP measures and may contain forward-looking statements. Arvind Krishna discusses the company's solid performance in revenue and cash flow, particularly in software and infrastructure, while consulting was slightly below expectations. He also mentions the company's hybrid cloud and AI strategy.

IBM has announced their agreement to acquire HashiCorp, a company that specializes in automating, orchestrating, and securing hybrid and multi-cloud environments. This acquisition will enhance IBM's hybrid cloud capabilities and address the growing complexity of AI-driven applications and infrastructure. HashiCorp's products have a wide adoption in the developer community and have been downloaded over 0.5 billion times. This acquisition aligns with IBM's commitment to industry collaboration, the developer community, and open source hybrid cloud and AI innovation.

IBM's acquisition of HashiCorp for $6.4 billion aligns with their M&A strategy and meets all their criteria for strategic fit, synergies, and financial accretion. The acquisition is expected to close by the end of 2024 and will bring product synergies across multiple strategic growth areas for IBM. These synergies include leveraging Red Hat's automation platforms and IBM's global reach to drive growth for HashiCorp. IBM also sees potential for accelerating HashiCorp's adoption with their clients.

The acquisition of HashiCorp by IBM will allow for a more comprehensive hybrid cloud offering and is expected to drive higher growth and operating efficiencies. The transaction is also expected to be accretive to adjusted EBITDA and free cash flow in the first full year and provide significant cost and product synergies. The global economy is expected to continue to rely on technology, particularly AI, for productivity improvements and customer experience. IBM is seeing success with its AI offerings, with more clients moving from experimenting to deploying AI at scale.

IBM's book of business related to watsonx and generative AI has exceeded $1 billion and continues to grow. The company's AI strategy, including the watsonx platform, consulting services, and infrastructure, is well-positioned to help clients scale AI. The unique advantages of IBM Z, such as on-chip AI processing and the Telum chip, make it a strong choice for AI inferencing. Additionally, IBM's storage offerings are seeing increased demand due to their performance and scalability for data curation and model building. IBM's approach to AI is flexible and tailored to each client's specific needs.

IBM is focused on providing flexible and efficient AI solutions for their clients, leveraging a combination of their own models, open source models, and partnerships with companies like Red Hat and Nvidia. They see parallels between open source AI and Linux, and are committed to driving open source AI with Red Hat. They have also announced collaborations with the Spanish government and Providence Health to utilize AI in various use cases, and are working with partners like Nvidia to accelerate clients' AI journeys.

In the first quarter, ServiceNow announced their partnership with Adobe and their plans to integrate AI capabilities into their platform. They also continue to invest in emerging technology, such as quantum computing, and have had a positive start to the year with strong revenue and earnings. They have also closed the sale of The Weather Company and expect to complete the acquisition of StreamSets and webMethods. Jim Kavanaugh, CFO of ServiceNow, will provide more details on the quarter's performance.

The infrastructure sector of the company had a strong performance, with growth in all hardware offerings and increased profit margins. The divestiture of The Weather Company resulted in a pre-tax gain of $241 million, but was offset by charges for workforce rebalancing. Despite this, operating pre-tax margin improved by 50 basis points. The company also saw growth in adjusted EBITDA and generated $1.9 billion in free cash flow in the quarter. This was largely due to the performance of the underlying business and timing of balance sheet dynamics and CapEx. The company is on track to deliver $12 billion in free cash flow for the year, largely driven by adjusted EBITDA.

The company's operating net income to free cash flow realization has averaged 120% since acquiring Red Hat, with two main factors driving this: stock-based compensation and deferred income. The company returned $1.5 billion to shareholders in dividends and has a strong liquidity position with $19.3 billion in cash. Software revenue grew 6%, driven by Red Hat, recent acquisitions, and strong recurring revenue and transaction processing. Red Hat revenue grew 9%, with OpenShift up over 40% and RHEL and Ansible each up double digits. Recent acquisitions and new innovation areas also contributed to the growth of Hybrid Platform & Solutions, particularly in the FinOps solution for technology investments.

In the most recent quarter, Apptio has partnered with Microsoft to bring their services to Azure and will be co-selling to customers. Their recurring revenue base has grown by 8%, with transaction processing and software segment profits also seeing growth. Consulting revenue was up 2%, with clients prioritizing AI and analytics projects. Signings grew by 4%, and backlog remains healthy. Strategic partnerships make up over 40% of consulting revenue, with both AWS and Azure practices growing double digits. However, there was a lengthening of backlog duration and reduced revenue realization due to clients tightening discretionary spending.

In this paragraph, the speaker discusses the growth of their Red Hat practice and partnerships, as well as their success in the generative AI market. They also mention the growth of their Business Transformation and Technology Consulting revenue, as well as declines in Application Operations revenue. They then move on to discuss their Infrastructure segment, highlighting growth in Hybrid Infrastructure and declines in Infrastructure Support. They also mention the success of their IBM Z product, which is uniquely positioned for AI and has seen strong demand from clients.

IBM's Distributed Infrastructure platform has driven hardware adoption, as well as software, storage, and services. The segment saw 7% revenue growth, with strong performance in power and storage, driven by data-intensive workloads and demand for high-end storage. Clients are also utilizing IBM's storage offerings for generative AI. The company's overall performance in the first quarter reflects sustained revenue and free cash flow growth, with constant currency revenue growth, operating gross margin and pre-tax margin expansion, and strong free cash flow. IBM is holding its view on revenue and free cash flow for the full year 2024, expecting mid-single-digit revenue growth and $12 billion in free cash flow, driven by growth in adjusted EBITDA. In software and consulting, the company expects growth above its mid-single-digit model.

IBM is experiencing pressure on smaller projects, but expects mid-single-digit revenue growth in consulting and a decline in revenue in Infrastructure. They expect operating pre-tax margin to expand and are maintaining their view on operating tax for the year. They also expect a 150-200 basis point impact on revenue growth due to currency fluctuations. The first half of the year is expected to have higher net income compared to the previous year. The company is positioned to grow revenue, expand operating profit margin, and increase free cash flow for the year. A Q&A session will follow, and supplemental information is provided at the end of the presentation.

The speaker is responding to a question about the consulting side of their business. They mention that revenues have slowed down in the March quarter, but their AI-centric backlog is doing well. They then discuss the demand for their services and mention that their signings in the quarter were the strongest they've had in a first quarter. They also mention a strong book-to-bill ratio.

IBM's backlog is strong and has been steadily increasing, but the duration has gone up in the last two quarters. The company is seeing growth in demand for their Gen AI technology and strategic partnerships, and their revenue growth in the first quarter was all organic. IBM is also taking share from competitors and expects the year to continue to accelerate due to a strong backlog and the impact of Easter on billing days.

Wamsi Mohan asked about the macro demand backdrop and the potential risk of tightened discretionary spending affecting the company's guidance for accelerating growth. He also asked for more details on the cost synergies from the HashiCorp acquisition, specifically in terms of net income and free cash flow in the first and second year.

Arvind Krishna and Jim Kavanaugh discuss the current global demand for technology and consulting services. They note that demand is strong and comparable to 2023 projections, supported by IMF GDP estimates. Japan, South Asia, and the Middle East have particularly strong demand, while Europe and North and South America remain consistent. Higher interest rates have led to increased demand for technology and infrastructure, but there is some pressure in discretionary areas. To address this, they plan to pivot towards areas such as digital transformation and working with partners to drive growth in consulting.

In the paragraph, it is stated that the combination of HashiCorp with IBM and Red Hat is strategically beneficial and financially attractive for IBM. The acquisition is expected to accelerate IBM's revenue growth, be adjusted EBITDA accretive in the first 12 months, and levered free cash flow accretive by the end of year two. IBM also sees potential for significant near-term operating efficiencies and cost synergies, which could lead to a significant increase in free cash flow margin in the coming years. The multiple paid for the acquisition is supported by the stand-alone revenue growth and potential cost synergies. Additionally, IBM expects to benefit from revenue synergies related to Red Hat, data security, watsonx, and consulting and IT automation. The company also plans to capitalize on G&A operating efficiencies and expand globally using the same playbook as they did with Red Hat.

The speaker discusses the company's outlook and financial performance, mentioning significant synergies that allow for investment in product, R&D, and innovation. They also clarify a decrease in the consulting outlook for the year and provide more information on the growth of their AI business.

IBM's underlying business fundamentals across its segments are strong, with mid-single digit growth in software and consulting. The company is pleased with its software performance and expects double-digit growth for the full year, driven by Red Hat and acquisitions. Consulting is expected to contribute 1.5 points of growth, while infrastructure, including mainframe and distributed infrastructure, is expected to have a slightly better impact than previously thought.

The speaker discusses the company's overall performance and mentions the closure of The Weather Company, which contributed to a half a point in their full year results. They also mention their AI book of business, which includes consulting and software subscriptions. The consulting backlog has grown to about $30 billion, which is a significant increase in less than nine months. They also mention the success of their hybrid cloud platform-centric play and the strong performance of Red Hat, which saw accelerated growth in the quarter. They express confidence in reaching mid-teens growth for Red Hat and discuss the potential impact of HashiCorp on Red Hat's growth. They also mention the synergies between Red Hat and HashiCorp and their overall satisfaction with Red Hat's performance.

Red Hat has experienced strong bookings growth in the past three quarters, with OpenShift, Ansible, and RHEL showing significant growth. This, combined with a 9% revenue increase, indicates that Red Hat's growth will continue or even accelerate throughout the year. While the addition of Hashi to the Red Hat portfolio is a positive move, it will not directly impact Red Hat's growth numbers as it is part of IBM's software division. However, the combined portfolio is expected to generate more demand and make IBM more appealing to clients. Hashi's infrastructure management and security offerings are seen as valuable assets in the current complex environment.

The speaker, James Kavanaugh, adds to the points made by Arvind in paragraph 23, stating that the company has seen a two-plus point acceleration in their subscription-based business and a stabilization in their consumption-based services. He also mentions that the company is confident in their double-digit growth for the year, especially due to the three-point acceleration in the subscription business and strong bookings in areas such as Red Hat OpenShift and Ansible. The company has made several acquisitions since their 2021 Analyst Day, including Software AG and HashiCorp, and still has a large amount of M&A firepower available. The speaker, Erik Woodring, asks Arvind about the company's willingness to pursue more M&A for the rest of the year.

Arvind Krishna and Jim Kavanaugh discuss IBM's M&A strategy and their commitment to financial discipline. They are focused on finding acquisitions that align with their strategy and provide synergy opportunities, while also being financially beneficial within the second year. They also mention their upcoming acquisitions and the need to build consulting practices and enable their sales teams. IBM is committed to maintaining an investment-grade balance sheet and prioritizes investing in their business and providing attractive returns to shareholders.

Arvind Krishna, CEO of IBM, is confident in the company's software business, which has been growing at a consistent rate over the past four years. While there are some slower growing pieces, they are important for client retention and cash flow. IBM will continue to focus on both organic innovation and M&A to improve the growth trajectory of its software business.

The speaker discusses how the mix of software is changing over time and their goal is to continue growing. They mention being at the upper end of the mid-single-digit model and hint at potential future steps. They then address a question about the Red Hat pipeline and mention an interest in finding the platform for the next 10-20 years. They also discuss the benefits of the Red Hat portfolio, including container and virtualization options, and the upcoming integration with HashiCorp.

The speaker discusses the success of RHEL, OpenShift, Ansible, and HashiCorp in increasing automation and reducing complexity. They mention a mid-teens growth in bookings on the subscription side, indicating high demand. A question is asked about GenAI and the speaker explains that enterprises are now more focused on addressing issues such as ROI and people changes in order to fully realize the potential of GenAI.

The paragraph discusses how the consulting team helps clients with their transformation process and how they can recognize the ROI. It also mentions the importance of picking a few use cases that can scale and have a large impact on the business. The paragraph concludes by stating that the company has executed their strategy and looks forward to sharing their progress in the future.

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