The paragraph is from IBM's first quarter 2025 earnings presentation, introduced by Olympia McNerney, the company's Global Head of Investor Relations. She welcomes participants and notes the presence of Arvind Krishna, IBM's Chairman and CEO, and Jim Kavanaugh, the CFO. The presentation will be posted online, featuring non-GAAP financial measures and forward-looking statements subject to risk factors. Arvind Krishna highlights that IBM has exceeded expectations for the quarter, with strong revenue growth, profitability, and cash flow. This performance is attributed to their strategic focus on hybrid cloud and AI, addressing client needs for cost savings, productivity, and scaling capabilities.

The paragraph discusses the company's focus on client trust and flexible solutions in hybrid cloud and AI as key drivers of growth. The quarterly performance showed a 9% increase in software, led by Red Hat and other areas. The company's early leadership in generative AI and their consulting platform have strengthened their market position. Their infrastructure program, z16, is highlighted for its success. The company's generative AI business has grown significantly, with the majority stemming from consulting services and the rest from software, reflecting their comprehensive AI portfolio designed to help clients integrate AI in their operations.

The paragraph discusses the growing demand for AI solutions and the role of AI agents in unlocking generative AI value for enterprises. The company is focusing on hybrid environments, AI strategies, and multimodal capabilities, with a significant client conference planned in Boston. They highlight the launch of z17, which offers improved AI acceleration, security, and efficiency. In quantum computing, the company has partnered with the BASC government to establish Europe’s first IBM quantum system in Spain. Mergers and acquisitions, like those with HashiCorp and AST, continue to support their strategy. Despite current economic uncertainties, the company believes hybrid cloud automation and data solutions will remain crucial for businesses.

The paragraph discusses varying industry and geographic impacts on business, highlighting growth in containerization and virtualization due to client focus on cost savings and modernization. Volatility in certain sectors, like financial services, increases demand for capacity, while policy impacts can slow client activity. Consulting faces potential pullbacks, but the company remains resilient due to its diverse operations and strong team. Despite early uncertainty in the second quarter, there has been no significant change in client spending, and the company maintains its full-year growth and cash flow guidance. It remains confident in achieving sustainable long-term revenue growth and strong cash flow.

The financial summary presented by Jim Kavanaugh highlights a successful first quarter, with $14.5 billion in revenue, $3.4 billion in adjusted EBITDA, and an operating earnings per share of $1.60. Free cash flow reached $2 billion, marking the highest first-quarter performance in years. The company saw a 2% increase in revenue at constant currency, driven by a strategic shift towards software, which grew by 9%, including notable growth in areas like automation, Red Hat, and AI capabilities. Red Hat experienced high bookings growth, especially in OpenShift, while software's annual recurring revenue increased by 11% to $21.7 billion. Consulting revenue remained stable, and although strategy and technology revenue fell by 1%, intelligent operations revenue was flat. However, client decision delays in discretionary projects affected in-period signings.

The paragraph discusses IBM's financial performance, highlighting growth in hybrid cloud, data, application management, and cloud platform services, as well as their expanding generative AI consulting business. However, infrastructure revenue declined, especially in the IBM z and distributed infrastructure sectors. Despite these challenges, IBM focused on controlling supply chain, margin, and cash flow, resulting in improved operating profit margins and strong margin expansion in software and consulting segments. Infrastructure margins fell due to product cycle dynamics and continued investments. The company remains committed to enhancing productivity.

IBM is transforming its operations by integrating technology and AI across various workflows, resulting in significant cost savings and increased efficiency. The company has optimized its supply chain and service delivery, achieving $3.5 billion in annual savings by 2024. This allows for reinvestment and enhances financial flexibility and margin expansion. The company's robust financial model and improved productivity have increased free cash flow to $2 billion in the quarter, marking a historic first-quarter margin. Despite global trade challenges, IBM has maintained strong supply chain management, with less than 5% of goods imported to the US.

The paragraph discusses IBM's financial and strategic position, highlighting minimal impact from current US tariffs, a strong liquidity position with $17.6 billion in cash, and recent borrowing of over $8 billion. The company maintains a $63 billion debt balance and has returned $1.5 billion to shareholders through dividends. Despite macroeconomic uncertainties, IBM is confident in its diversified portfolio and client base, operating in over 175 countries and nearly 20 industries. The company is maintaining its guidance for 5%+ revenue growth and approximately $13.5 billion in free cash flow, driven by a strategic focus on software.

The paragraph discusses IBM's business performance, highlighting that software constitutes 45% of their business with 80% as recurring revenue. In the first quarter, they achieved $21.7 billion in ARR, marking an 11% growth. The company anticipates mid-teens growth for Red Hat and is seeing sequential growth and a solid backlog in consulting, although remains cautious due to the current economic environment. IBM expects infrastructure growth, driven by new mainframes and innovation. However, they acknowledge potential variability in parts of their portfolio in case of economic downturns, especially affecting consulting and some Doge-related projects. They project a yearly operating pretax margin expansion by over half a point, with tax rates in the mid-teens, and foresee a free cash flow of $13.5 billion by 2025, despite higher cash taxes and CapEx. IBM is also enhancing productivity initiatives to adapt to various scenarios.

The paragraph discusses the company's focus on maintaining profitability and free cash flow by managing costs and leveraging a strong balance sheet and liquidity for long-term investments. There has been no significant change in client buying behavior in the early weeks of the second quarter, and the company expects at least 4% revenue growth at constant currency, with projected revenues between $16.4 billion and $16.75 billion. The operating pretax margin for the second quarter is expected to expand in line with the full year, maintaining a tax rate in the mid to high teens. The company is committed to executing strategies to boost revenue growth and free cash flow through a diversified portfolio, disciplined innovation investments, and a focus on productivity. The section concludes by opening the floor to questions in a Q&A session, with a note to avoid multipart questions.

The paragraph features a Q&A session during an earnings call, where James Schneider from Goldman Sachs asks about the impact of macroeconomic factors on software and consulting services. He inquires about potential slowdowns in software consumption, particularly with Red Hat, and its effect on hitting financial targets. He also questions whether the Doge impact is affecting consulting results or if a broader business mix is responsible for any slowdown. Furthermore, he asks about sub-segment growth expectations in software and consulting discussed on Investor Day. Arvind Krishna and Jim Kavanaugh respond, noting no significant slowdown in the first quarter, but they acknowledge that a decrease in global GDP might slightly affect Red Hat's consumption business.

The paragraph discusses the company's business outlook and strategic positioning. It mentions that transaction processing is expected to remain strong unless there is an economic downturn. While some consulting contracts, like those with USAID, were affected, most consulting work remains critical and continues. However, consulting may face challenges faster if the economy weakens. The company has shifted towards a software-centric model and aims for mid-single-digit revenue growth by 2025, maintaining their guidance and focusing on shareholder value creation. Jim Kavanaugh highlights this strategic transition and the company's progress towards its growth goals.

In the paragraph, the speaker discusses changes and growth strategies, emphasizing a shift from a cyclical to a secular growth model, particularly noting the innovation and repositioning in infrastructure and a new mainframe launch. They express confidence in the long-term growth of consulting, despite some year-to-year variability, and highlight the integrated value of consulting within their portfolio. The speaker mentions starting the year cautiously, seeing stabilization in the business, and expresses overall confidence in maintaining stable operations. Olympia McNerney then prompts the operator to take the next question, which comes from Wamsi Mohan of Bank of America. Mohan inquires about achieving a 5% growth target, seeking insights on challenges with Red Hat and transaction processing, and how they plan to approach double-digit growth in software contributions.

In this paragraph, Jim Kavanaugh addresses concerns about being cautious with consulting contributions and highlights the overall strategic investment approach for the company's long-term growth. He emphasizes starting the year with a strong position built on a solid software portfolio, recurring revenue, and innovation, while noting the momentum of Red Hat, opportunities in AI, the release of a new mainframe, leadership in Gen AI, and disciplined capital investment, including M&A growth. Despite a 2% growth in the first quarter, with a headwind in infrastructure, Kavanaugh remains confident in achieving a 5% growth for the year, supported by turning an infrastructure headwind into a tailwind and excitement over closing the HashiCorp acquisition.

The paragraph discusses IBM's growth expectations and strategic initiatives for the year. It highlights the company's inorganic growth of about 1.5% in the first quarter, projecting it to exceed 2.5% for the entire year by 2025. Red Hat, part of IBM, is experiencing strong demand and double-digit growth in virtualization, automation, and Linux capabilities, leading to a contribution of an additional 0.5% towards IBM's growth. The company aims for mid-teens growth in Red Hat for the year. An annuity profile with strong renewal rates is also mentioned. Consulting is approached cautiously due to macroeconomic factors, with no expected contributions. Amit Daryanani from Evercore ISI questions IBM about its federal consulting exposure and discretionary consulting business. Jim Kavanaugh acknowledges IBM's atypical approach of providing a revenue guide for the June quarter.

In the paragraph, Jim Kavanaugh explains the decision to provide an explicit financial guide for the June quarter, attributing it to the need for transparency and credibility in a volatile and uncertain macroeconomic environment. He highlights the recent significant devaluation of the US dollar, which has seen an 8% to 9% depreciation over the past three weeks. As a result, the company has offered guidance both in constant currency terms and in absolute dollar terms. Kavanaugh notes that constant currency growth is projected at 4%, translating to different dollar values depending on current FX rates, emphasizing that the company is not attempting to predict FX market volatility.

The paragraph discusses IBM's US federal business, highlighting that it comprises less than 5% of IBM's total annual revenue, with about 60% being consulting services, which are more vulnerable to discretionary programs, and 40% being high-value technology contracts. Despite potential impacts, IBM remains confident in managing its operational performance with at least a 4% growth target. The company's federal consulting business accounts for less than 10% of its total consulting business and includes essential services such as processing veterans' benefits and helping with government procurement and payroll systems. Consequently, while no business is immune to market changes, IBM's federal consulting primarily involves critical work that is not optional, with only a small portion potentially being discretionary.

In the conference call, Ben Reitzes inquires about the performance of the Red Hat business, noting a deceleration and questioning its dynamics and future potential, especially in light of virtualization changes at VMware. Jim Kavanaugh responds by expressing satisfaction with Red Hat's performance, highlighting a 13.5% growth within their guidance range and noting strong ACV signings for the seventh consecutive quarter. He emphasizes that 80% of Red Hat's portfolio consists of subscription-based businesses, which continue to show strong performance and double-digit growth. Specific areas of strong performance include Red Hat Enterprise Linux (REL) with 13% growth and Red Hat OpenShift with 23% growth, supported by virtualization and hybrid cloud application modernization.

The paragraph discusses IBM's business growth and strategy, particularly focusing on their consumption-based services and Red Hat portfolio. It highlights the company's ability to capitalize on cost efficiency and productivity for its clients, emphasizing the strong value of IBM's offerings. Despite a moderation in growth for consumption-based services from low mid-teens to high single digits, the company remains confident, especially with the growth in virtualization, artificial intelligence, automation, and containerization. IBM has secured significant virtualization bookings and sees a promising pipeline, which supports their positive outlook for the remainder of 2025. Additionally, OpenShift is noted as a leading platform for containerization and virtualization, which clients are increasingly adopting.

The paragraph features a discussion during a conference call where Jim Kavanaugh addresses a question from Erik Woodring of Morgan Stanley regarding the company's free cash flow guidance. Erik notes that currency exchange effects have shifted from a headwind to a tailwind, suggesting an additional $2 billion in revenue from foreign exchange alone. Despite this, the company has maintained its full-year profit target and margin expansion goals. Erik inquires why this positive shift in foreign exchange isn't reflected in an updated higher free cash flow projection. Jim acknowledges the question and emphasizes the company's focus on accelerating top-line growth beyond 5% and enhancing its free cash flow generation.

The company is experiencing strong performance in the first quarter, with a $2 billion free cash flow marking the highest free cash flow margin in its history. They have achieved 15% of their free cash flow target for the year, strengthening their position towards a $13.5 billion goal. However, they choose not to raise this target due to the current economic environment. The company emphasizes its disciplined approach to execution, particularly in managing currency fluctuations. They highlight their robust hedging program, which focuses on hedging cash flows rather than revenues, and only covers around 30 currencies for economic viability. Additionally, they hedge up to 100% within the current quarter and around 75% for future quarters, contributing to some free cash flow tailwinds despite pre-tax margin headwinds from currency devaluation.

The paragraph discusses the company's financial strategy and approach towards managing free cash flow and leasing. The speaker notes that the main driver of free cash flow is high-quality adjusted EBITDA, which has grown by 12% with an improved margin in the first quarter. The company aims for double-digit EBITDA growth and expects overall margin growth of over 100 basis points for the year. Regarding the mainframe cycle, the speaker reassures that the company is willing to lease hardware and software to clients who prefer it over capital expenditure, a service they've extended for years, and emphasizes that it doesn't significantly impact their balance sheet as they record a receivable against the debt. The company is willing to facilitate leasing for any creditworthy client globally.

The paragraph discusses the early testing and positive client reactions to mainframe enhancements in areas like security, AI, and capacity, with clients expressing strong interest in these improvements. The speaker expects a strong cycle for mainframe adoption through 2025 and the first half of 2026, with potential minor delays in smaller geographies by late 2026 or early 2027. The mainframe remains a crucial aspect of the business, supporting major global banks, retailers, and airlines. The company aims to manage the mainframe's value and capital structure prudently to protect its significant client relationships.

The paragraph discusses the confidence of the company in its capital structure and liquidity position, emphasizing a track record of disciplined capital allocation. The CFO highlights the focus on preserving the balance sheet and maintaining liquidity to invest in innovation and sustain competitive advantage. The company has a strong cash position and free cash flow, providing financial flexibility. The conversation then shifts to a question from Matt Swanson of RBC Capital Markets, inquiring about the impact of a challenging macroeconomic environment on the company's ROI-focused approaches, particularly in relation to Gen AI products and whether these make the product offerings more defensive.

Arvind Krishna discusses the typical progression of technology adoption, identifying three waves: the initial focus on enabling hardware, a subsequent shift to systems, and a long-term emphasis on applications that provide value. He notes that AI is currently transitioning to the application phase, where the focus is on improving customer experience and enterprise operations. Krishna illustrates this point with an example of a midsized client aiming for significant cost savings by optimizing their back office finance processes with AI. The conversation then attempts to field a question from Param Singh of Oppenheimer, but there is no response, leading Olympia McNerney to conclude the session.

In the closing segment of the call, Arvind Krishna expresses confidence in the company's diverse business portfolio and its ability to navigate current challenges. He looks forward to sharing progress throughout the year. Olympia McNerney thanks Arvind, and the operator concludes the call by ending the conference.

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