The paragraph is from IBM's Third Quarter 2024 Earnings Presentation. Olympia McNerney, the Global Head of Investor Relations, introduces the presentation featuring IBM's CEO Arvind Krishna and CFO Jim Kavanaugh. The presentation includes non-GAAP financial measures with reconciliations available on IBM's investor website. Arvind Krishna highlights the company's performance, noting double-digit revenue growth in software due to Red Hat's reacceleration and strong transaction processing. Infrastructure growth is supported by successful adoption of the z16 mainframe, surpassing previous product cycles.

The consulting business is facing challenges due to economic uncertainties, influenced by geopolitical issues, elections, and changes in interest rates and inflation. However, technology spending remains robust as businesses leverage it for competitive advantage. The company is shifting its portfolio towards high-growth, high-margin areas like hybrid cloud and artificial intelligence. Despite mixed revenue performance, strong operating profitability and cash generation have been achieved. Software now accounts for nearly 45% of total revenue, driven by organic innovation, with significant growth seen in Red Hat and key platforms. Recurring software revenue remains strong, with ARR for hybrid platforms and solutions reaching $14.9 billion, marking a significant growth year-over-year. The paragraph also highlights the successful five-year partnership since acquiring Red Hat.

Since IBM's acquisition of Red Hat, the company has seen significant growth, with its revenue doubling to $6.5 billion and OpenShift's ARR increasing from $100 million to $1.3 billion. Red Hat has expanded its global presence and continues to innovate with new products like Ansible 2.5, RHEL.ai, and OpenShift AI. It has been recognized as a leader in container management and is establishing a strong position in enterprise AI. The company has a growing book of business in generative AI, split between software and consulting, and offers AI tools like watsonx and Granite models to help clients integrate AI efficiently within their enterprises. The focus on consulting aids clients in designing AI strategies, while infrastructure plays a key role in data management. The newly updated Granite models are more cost-effective and easier to train and fine-tune.

The paragraph discusses IBM's recent developments and partnerships. It highlights the availability of Granite models on platforms like watsonx and Red Hat, and collaborations with partners such as AWS, Salesforce, and others. IBM announced new partnerships with companies like NatWest and Toyota Systems and delivered AI solutions at the U.S. Open. The company is deepening relationships with technology partners, including Dell and Microsoft. IBM introduced new innovations like Telum II and the Spyre Accelerator to enhance AI capabilities. The opening of Europe's first IBM Quantum Data Center marks significant progress in quantum computing. Despite macroeconomic influences, IBM remains confident in its software strategy and revenue guidance, expecting growth in 2025. The paragraph concludes with a transition to Jim for further details on the quarter's performance.

In the third quarter, the company achieved $15 billion in revenue and $3.8 billion in adjusted EBITDA, with a notable $6.6 billion in free cash flow generated over the first nine months. The company saw an 8% increase in operating pretax profit and 5% growth in operating diluted earnings per share, driven by revenue growth and a 100 basis point expansion in operating pretax margin. Revenue for the quarter increased by 2% at constant currency, with software growth accelerating to 10%, despite consulting being flat and infrastructure declining by 7%. The company's portfolio mix and productivity initiatives resulted in strong gross margins and pretax margins, reaching the highest third quarter levels in recent years. The successful closing of the Palo Alto QRadar transaction provided a $350 million pretax gain, partially offset by costs related to productivity initiatives. Investment in innovation continued with R&D expenses up 10% year-to-date.

The paragraph discusses the financial growth of a company, highlighting an $800 million increase in adjusted EBITDA year-over-year and a $500 million gain from the Palo Alto QRadar transaction in the current quarter. Despite expecting only a modest full-year free cash flow, the company is ahead of its two-year average attainment levels. Shareholders received $4.6 billion in dividends year-to-date, and the company maintains strong liquidity with $14 billion in cash and a stable debt balance of $56.6 billion. Software revenue grew by 10%, driven by key platforms like Hybrid Cloud and Red Hat, which saw a 14% increase, with OpenShift and Ansible growing over 20%. The company's growth was supported by innovation, recurring revenue, and a targeted M&A strategy.

The paragraph highlights the demand for hybrid cloud solutions, particularly focusing on application modernization using OpenShift containers and Ansible automation. It mentions the growth in Red Hat's subscription and consumption-based services businesses. The company anticipates ongoing revenue growth, driven by strong bookings and opportunities, including generative AI and integration synergies with HashiCorp. The recurring revenue base has grown significantly, with the hybrid platform and solutions ARR reaching $14.9 billion, up 11% from the previous year. Transaction processing also saw a 9% increase, aided by customer interest in the new AI product, watsonx Code Assistant for Z. The company continues to innovate and invest, launching new offerings like RHEL.ai and forming a partnership with Dell for AI deployments on PowerEdge servers. Recent software acquisitions also contributed to the quarter's strong revenue performance.

In August, a year after acquiring Apptio, the company sees strong synergies with its software and automation capabilities, driving growth in bookings and ARR. The HashiCorp acquisition is expected to close by year-end. Despite a challenging macroeconomic environment and flat consulting revenue, the company anticipates growth from generative AI, securing $1 billion in new AI-related bookings. There's a decline in overall signings compared to last year's peak but growth in AI and hybrid cloud solutions, bolstered by its Red Hat practice's double-digit increase and major signings. IBM Consulting is positioning itself as a strategic partner in AI strategy development.

In this article paragraph, the focus is on the financial performance and strategic actions within the company's consulting and infrastructure segments. The consulting sector saw a 2% growth in business transformation revenue, driven by data, finance, and supply chain projects, despite declines in technology consulting and application operations. There is a shift from on-premise services to cloud-based applications. Consulting gross profit margin improved by 1%, with a 2% increase in segment profit margin due to productivity efforts. The infrastructure segment experienced a 7% revenue decline, influenced by product cycle dynamics. Despite a 19% decline in IBM Z revenue, it achieved growth in 8 out of 10 quarters since the z16 launch, with strong demand driven by AI, quantum-safe security, and cloud-native development. Distributed infrastructure revenue dropped by 3%, although storage saw solid growth, and infrastructure profit margins expanded by 120 basis points.

In the paragraph, IBM reports a solid financial performance through the first nine months, with a 3% revenue growth, a 150 basis point increase in operating pretax margin, and a $1.5 billion rise in free cash flow. The company highlights a successful transition to a higher growth, higher margin portfolio. For the fourth quarter, IBM expects continued revenue growth similar to the third quarter. Software revenue is projected to grow in low double digits, driven by Red Hat's mid-teens growth and strong transaction processing. Consulting revenue has risen 1% year-to-date, reflecting a challenging macroeconomic environment, and is expected to remain consistent in the fourth quarter. The infrastructure and a strengthening dollar are anticipated to impact annual revenue growth by 1 point and 0.5 points, respectively. IBM is raising its full-year operating pretax margin expansion forecast to about 1 point, attributing success to revenue scale, portfolio mix, and productivity initiatives.

In the third quarter, actions taken have accelerated productivity initiatives, leading to an expected increase in annual run rate savings from $3 billion to approximately $3.5 billion by the end of 2024. The company anticipates a significant increase in profit margins for the Software segment, while the Consulting segment's profit margin is expected to remain flat, and Infrastructure segment margins are projected to be in the mid to high-teens. The operating tax rate is expected to stay in the mid-teens for the year. The company is confident in achieving over $12 billion in free cash flow for the year, mainly due to growth in adjusted EBITDA. As they approach 2025, they expect to grow revenue, expand operating profit, and increase free cash flow, bolstered by their software acceleration, opportunities with Red Hat, a new mainframe cycle, generative AI, and acquisitions. The Q&A session with Jim and Arvind is about to begin, with the first question from Amit Daryanani of Evercore ISI.

In the paragraph, Arvind Krishna discusses IBM's growth outlook, particularly focusing on the software and consulting segments. He mentions that IBM is experiencing an upward growth trend projected for 2025, largely due to strong performance from Red Hat and their Gen AI and automation products. The company anticipates these factors, along with mainframe deployments and recent mergers and acquisitions, like HashiCorp, to boost software growth by about 3 percentage points. However, he acknowledges that the consulting sector may face challenges due to macroeconomic issues impacting discretionary labor.

In the paragraph, Toni Sacconaghi raises concerns about IBM's growth performance, highlighting that growth has been 3% or less in three of the past four years, which falls short of the company's 4% to 6% growth model. Sacconaghi questions why upcoming improvements in 2025, attributed to the mainframe cycle and acquisitions, shouldn't be seen as temporary rather than sustainable. Also, there is a question about whether Consulting signings will improve in the fourth quarter, as they have been negative in the last two quarters, suggesting that if they remain negative, it may not indicate growth for 2025. Sacconaghi seeks clarification on these issues.

Arvind Krishna discusses the company's growth trajectory, emphasizing that despite some years of just 3% growth, 2022 saw significantly higher growth partly due to changes in revenue recognition from intercompany to intracompany. He highlights efforts to rebuild the company's portfolio to provide sustainable value through innovation, cost management, and complexity reduction for clients using technology. Krishna points out a 7% organic growth in their software segment, 80% of which is now on a recurring revenue model, indicating strong demand. He expresses confidence in maintaining mid-single digit growth in mainframe software, supported by anticipated mergers and acquisitions, including a deal with HashiCorp, moving into next year.

The paragraph discusses the company's financial position and outlook. It mentions that increased cash flows have improved their ability to pursue mergers and acquisitions. The Consulting division has experienced flat or negative growth in recent years, but there is optimism due to the quality and expected yields of recent signings. While overall signings are down compared to last year, the focus is on their yields and backlog, which are beginning to improve. Although consulting growth is not expected to match the double-digit growth seen in software, it is projected to become a positive contributor, especially in the second half of the year. The introduction of Generative AI business is anticipated to generate real revenue. Additionally, within the Infrastructure business, the hardware maintenance segment is transitioning from a headwind to potentially flat, contributing positively to the business. Finally, the paragraph concludes with Olympia McNerney handing over to the operator to introduce the next question.

In the paragraph, James Kavanaugh addresses a question about the Consulting business amidst a dynamic and uncertain macroeconomic environment. Despite a slight revenue growth decrease, he emphasizes the growth in their AI-related Consulting services. The company's AI book of business has grown significantly, now above $3 billion with about 80% in Consulting, compared to $2 billion at 75% Consulting, 90 days ago. This indicates strong progress in establishing themselves as a strategic Consulting provider focused on digital transformation and generative AI-based deals, with around $1 billion in new business generated each quarter over the last two quarters. Kavanaugh also mentions the year-to-date PTI margin improvement, run rate savings, and acknowledges both opportunities and challenges in profit dynamics.

The paragraph discusses the company's consulting business, highlighting the impact of differing revenue yields on its backlog and growth strategy. While higher duration projects have lower yields, they are vital for long-term growth, supported by the company's positioning as a strategic provider in the Gen AI space. Despite current pressure on consulting revenue, the company remains optimistic about its growth prospects, particularly towards 2025. It outlines three drivers for profit: a high-value portfolio mix, recurring revenue streams, and productivity enhancements, with progress on a $3.5 billion target ahead of schedule. The cautious guidance for the fourth quarter reflects prudence in light of these dynamics.

In this paragraph, James Kavanaugh addresses a question from Benjamin Reitzes regarding the company's potential for high-single digit growth in free cash flow by 2025, considering the Hashi acquisition and a possible flat performance in Consulting. Kavanaugh avoids giving specific numbers but expresses confidence in the company's strategy, portfolio, and growth opportunities for 2025. He highlights the company's progress over the past three years, transitioning from a no-growth to a mid-single digit growth company, significantly improving its pretax margin, and growing its previously stagnant free cash flow. Kavanaugh emphasizes the progress made and the expected upward growth inflection moving forward.

The article discusses the company's growth strategy and financial goals, focusing on driving operating leverage and increasing free cash flow faster than revenue despite potential dilution effects from a proposed transaction. The company is confident about the strategic and financial synergies of the transaction, particularly in their Software and Consulting portfolios. During a Q&A session, Jim Schneider from Goldman Sachs inquires about the consulting revenue conversion and M&A targets. James Kavanaugh addresses the consulting aspect, while Arvind is set to discuss M&A strategies related to Software, considering potential shifts from previous open source and DevOps deals.

The paragraph discusses IBM's strong start in its Generative AI (Gen AI) book of business within its Consulting division, highlighting significant financial growth. The Gen AI business is valued at $2.5 billion, showing an increase of nearly $1 billion quarter-over-quarter and growing over 35%. The projects are described as mid to long-term digital transformation deals with longer durations averaging in the high 40 months, compared to traditional consulting averages in the low 20s. Although revenue yields are currently lower than traditional yields, it's projected that growth will accelerate by 2025 as the industry navigates current short-term financial adjustments. Arvind Krishna also underscores the importance of M&A strategies aligning with IBM's existing focus areas, particularly around hybrid cloud solutions, using Hashi as an example.

The paragraph discusses the strategic focus areas of a company, highlighting efforts in automation, data, and AI, with examples like Apptio, Turbonomic, and Instana. The company seeks synergies with IBM to ensure economic returns for investors. While open source is not a strict criterion for their investments, they maintain a strategic fit in three key areas. They see considerable potential ("headroom") in helping clients optimize infrastructure and reduce costs, indicating that they won't need to expand into new areas for several years. The paragraph ends with a transition to a Q&A session, where Brent Thill from Jefferies commends the company's software margins.

In the paragraph, James Kavanaugh discusses IBM's strong software performance, which is central to the company's strategy, particularly in hybrid cloud and AI. Software accounts for 45% of IBM’s revenue and two-thirds of its profit. Kavanaugh highlights IBM's achievement of the Rule of 40 in the third quarter and mentions the margin improvements over the last three years due to both revenue growth and entry into new markets. He emphasizes the high-margin nature of areas like transaction processing and notes that productivity initiatives are helping IBM invest in innovation while maintaining strong margins. He expresses confidence in the continued growth of operating margins. Olympia McNerney then invites the next question from Erik Woodring of Morgan Stanley, who asks about the impact of AI projects in IBM's Consulting division.

The paragraph features James Kavanaugh discussing the early stage of the generative AI (Gen AI) consulting market and IBM's strategy to become a leading provider in this space. Despite longer project durations leading to slightly lower revenue yields compared to traditional consulting, IBM remains optimistic about growth. Kavanaugh explains that once discretionary spending stabilizes and clients invest more in long-term Gen AI projects, revenue should improve. Drawing parallels with past technological shifts, Kavanaugh anticipates significant growth in the Gen AI sector by 2025, similar to previous transitions such as with cloud technology and Red Hat.

The paragraph discusses the future growth strategy for consulting, focusing on building volume and demand in the current and upcoming quarters to achieve healthy growth similar to the past. Olympia McNerney prompts the final question from Matt Swanson of RBC Capital, who asks Arvind Krishna about the cost efficiency of the new Granite models. Arvind explains that while there was initial excitement about deploying Generative AI (Gen AI) at scale, enterprises found the potential costs prohibitive. This led to a focus on optimizing model size and performance for specific tasks to make them more cost-effective.

The paragraph discusses the need for specialized AI models in enterprises, highlighting a model with 8 to 30 billion parameters that focuses on high-quality document summarization. It notes that such a model is more efficient, offering enterprises 97% more efficiency for their specific use cases, along with flexible licensing that permits refinement without obligation. The speaker transitions to summarizing the company's improved software performance, including Red Hat, during the third quarter of 2024, expressing optimism for the 2025 growth prospects. The call concludes with gratitude towards the participants and the end of the conference.

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