Worldwide Enterprise Machines (IBM) This autumn 2022 Earnings Name Transcript

January 26, 2023

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Worldwide Enterprise Machines (IBM -0.52%)
This autumn 2022 Earnings Name
Jan 25, 2023, 5:00 p.m. ET


  • Ready Remarks
  • Questions and Solutions
  • Name Individuals

Ready Remarks:


Welcome, and thanks for standing by. Right now, all individuals are in a listen-only mode. At this time’s convention is being recorded. When you have any objections, it’s possible you’ll disconnect at the moment.

Now, I’ll flip the assembly over to Ms. Patricia Murphy with IBM. Ma’am, it’s possible you’ll start.

Patricia MurphyVice President, Investor Relations

Thanks. That is Patricia Murphy, and I might wish to welcome you to IBM’s fourth quarter 2022 earnings presentation. I am right here right now with Arvind Krishna, IBM’s chairman and chief govt officer; and Jim Kavanaugh, IBM’s senior vp and chief monetary officer. We’ll submit right now’s ready remarks on the IBM investor web site inside a few hours, and a replay shall be accessible by this time tomorrow.

To offer further data to our traders, our presentation contains sure non-GAAP measures. For instance, all of our references to income development are at fixed foreign money. Now we have offered reconciliation charts for these and different non-GAAP measures on the finish of the presentation, which is posted to our investor web site. Lastly, some feedback made on this presentation could also be thought of forward-looking below the Personal Securities Litigation Reform Act of 1995.

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These statements contain elements that might trigger our precise outcomes to vary materially. Further details about these elements is included within the firm’s SEC filings. So, with that, I will flip the decision over to Arvind.

Arvind KrishnaChairman and Chief Government Officer

Thanks for becoming a member of us. Our fourth-quarter and full-year outcomes exhibit the execution of our hybrid cloud and AI technique. We delivered robust income development in our enterprise. The expansion was broad-based throughout our software program, consulting, and infrastructure segments, in addition to throughout geographies.

Our purchasers acknowledge that know-how continues to be a basic supply of aggressive benefit. During the last a number of quarters, it has change into clear that know-how is enjoying a major position in boosting productiveness within the face of inflation, demographic shifts, provide chain challenges, and sustainability necessities. We entered 2022, a extra targeted firm and took steps to bolster our place. We strengthened our consulting experience and expanded strategic partnerships.

To bolster our software program portfolio, we invested in hybrid cloud and AI capabilities. We additionally delivered important improvements in infrastructure with our z16 and Energy platforms. All of this was dropped at market with a extra technical and experiential gross sales method. Wanting again on the yr, we’re happy with the progress we made.

We delivered income development above our mid-single-digit mannequin, and we delivered stable free money movement. However I will acknowledge there may be extra to do. This yr, we’ll unlock extra productiveness, increase our strategic partnerships, and put extra funding in particular development markets. For 2023, we see income development consistent with our mid-single-digit mannequin vary and about $10.5 billion of free money movement.

This retains us on a path of sustainable development. I’ll now present some coloration on the progress we’re making within the execution of our technique. Our perspective is evident. Hybrid cloud and AI are the 2 most transformative applied sciences for enterprise right now.

These applied sciences work collectively to drive enterprise outcomes. Hybrid cloud is the place the world goes. Containers are the popular vacation spot for purposes. Hybrid Cloud provides extra worth than counting on a singular public cloud.

It permits organizations to drive enterprise worth throughout a number of clouds, on-premises, or on the edge. This contains scale, safety, ease of use, flexibility of deployment, seamless experiences, and sooner innovation cycles. Our platform constructed on Purple Hat is the main container platform, permitting purchasers to harness the facility of open-source software program improvements. IBM software program and infrastructure applied sciences have been optimized for this platform.

Our consultants and others leverage their in depth technical and enterprise experience to speed up purchasers’ digital transformation journeys. Shoppers realizing actual worth from working with IBM’s hybrid cloud platform method. For instance, we labored with the Canadian Imperial Financial institution of Commerce, CIBC, to undertake a hybrid cloud method. Utilizing Purple Hat know-how, CIBC manages and abilities its infrastructure with better pace and suppleness.

They will now develop purposes in a personal cloud and rapidly deploy them to a public cloud. They ship a whole bunch of latest purposes and decreased provisioning time by 95% and deployment time by 50%. We’re serving to Delta Airways leverage hybrid cloud to modernize choices, automate operations and combine safety. IBM Consulting deployed Purple Hat on Amazon Net Companies and IBM Cloud Packs to offer a constant platform.

Delta now has extra levers that may use to spice up developer productiveness, cut back time to market and enhance worker satisfaction. CIBC and Delta are each nice examples of the worth hybrid cloud can present. Let’s now speak about synthetic intelligence or AI. AI is projected to contribute $16 trillion to the worldwide economic system by 2030, together with an enormous enhance in productiveness by infusing AI into each enterprise course of.

Now we have been co-creating with many purchasers to deploy AI at scale. We automated the drive-through expertise for quick-serve eating places. The accelerated rollout of COVID-19 vaccines by automating the processes that help tens of millions of consumers with inquiries and appointments. By making use of AI and automation, we’ve got helped safety analysts to make use of the time to reply to threats from hours or days to minutes.

Not too long ago, the U.S. Patent and Trademark Workplace partnered with IBM to leverage a bunch of AI capabilities that make it simpler for folks to glean insights from their huge database of patents. The BBC is now utilizing our AI Ops software program to automate the administration of its IT infrastructure. For companies, deploying AI could be difficult as a result of it takes time to coach every mannequin.

However through the use of giant language fashions, firms can now create a number of fashions utilizing the identical knowledge set. This implies companies can deploy AI with a fraction of the time and assets. That’s the reason we’re investing in giant language, our basis fashions for our purchasers, and have infused these capabilities throughout our AI portfolio. Our associate ecosystem performs a essential position within the execution of our technique.

Within the fourth quarter, we made a collection of latest IBM software program choices accessible as a service within the AWS market. Likewise, Purple Hat continued the enlargement of its choices in hyperscaler marketplaces, making Ansible automation platform accessible on each Azure and AWS. Adobe and Salesforce are additionally leveraging open-source innovation primarily based on Purple Hat applied sciences of their choices. Enterprise with our strategic companions continues to develop with SAP, Microsoft, and AWS, throughout $1 billion in income for the yr.

We have had nice success with our strategic companions and as we enter the brand new yr, we’re increasing and higher enabling our broader ecosystem. Not too long ago launched Companions Plus, a brand new simplified program that will increase our attain and scale via new and present IBM companions. We stay targeted on delivering new improvements that matter to our purchasers. Within the fourth quarter, we launched Purple Hat gadget Edge, a light-weight answer to flexibly deploy conventional or containerized workloads on small units comparable to robots, IoT gateways, point-of-sale, and public transport.

We additionally shaped a collaboration with the Japanese consortium, Rapidus, to leverage the depth of our mental property on superior semiconductors. The unveiled Osprey, a 433 cubic quantum processor, that brings us nearer to delivering our objective of constructing a 1,000 cubic system later this yr. On the similar time, we proceed to amass firms to enrich our natural innovation. Within the fourth quarter, we acquired Octo, which improves our footprint within the U.S.

federal market. This caps the yr with eight acquisitions throughout software program and consulting. As sustainability turns into extra of a precedence, firms want digital applied sciences to research knowledge, making a baseline and enhance the best way they function. Our software program has helped IBM cut back its personal carbon footprint.

Throughout IBM’s international actual property presence, we had been capable of cut back carbon emissions by over 61% when in comparison with 2010. Utilizing IBM sustainability software program, we’ve got simplified and automatic our sustainability reporting processes and decreased reporting prices by 30%. Let me wrap by saying I am happy with the progress we’ve got made with our portfolio, our go-to-market, and our ecosystem. I am assured in our capacity to leverage hybrid cloud and AI to assist purchasers flip enterprise challenges into alternatives.

Our technique continues to strongly resonate with purchasers and companions, and this offers us a stable basis to construct upon on this yr. Whereas there may be extra to be executed, we enter the brand new yr as a extra succesful and nimble firm, well-equipped to fulfill our purchasers’ wants. I’ll now flip it over to Jim who gives you extra detailed data on our efficiency and expectations.

Jim KavanaughSenior Vice President and Chief Monetary Officer

Thanks, Arvind. I will begin with the monetary highlights of the fourth quarter. We delivered $16.7 billion in income, $3.8 billion of working pre-tax revenue, and working earnings per share of $3.60. In our seasonally strongest quarter, we generated $5.2 billion of free money movement.

Our income for the quarter was up over 6% at fixed foreign money. Whereas the greenback weakened a bit from 90 days in the past, it nonetheless impacted our reported income by over $1 billion and 6.3 factors of development. As at all times, I will focus my feedback on fixed foreign money. And I will remind you that we wrapped on the separation of Kyndryl in the beginning of November.

The one-month contribution to our fourth-quarter income development was offset by the affect of our divested well being enterprise. Income development this quarter was once more broad-based. Software program income was up 8% and consulting up 9%. These are our development vectors and symbolize over 70% of our income.

Infrastructure was up 7%. Inside every of those segments, our development was pervasive. We additionally had good development throughout our geographies, with mid-single-digit development or higher in Americas, EMEA, and Asia Pacific. And for the yr, we gained share total.

We had robust transactional development in software program and {hardware} to shut the yr. On the similar time, our recurring income, which supplies a stable base of income and revenue additionally grew, led by software program. I will remind you that on an annual foundation, about half of our income is recurring. During the last yr, we have seen the outcomes of a extra targeted hybrid cloud and AI technique.

Our method to hybrid cloud is platform-centric. As we land a platform, we get a multiplier impact throughout software program, consulting, and infrastructure. For the yr, our hybrid cloud income was over $22 billion, up 17% from 2021. Taking a look at our revenue metrics for the quarter, we expanded working pre-tax margin by 170 foundation factors.

This displays a robust portfolio combine and bettering software program and consulting margins. These similar dynamics drove a 60-basis-point improve in working gross margin. Our expense was down yr to yr, pushed by foreign money dynamics. Inside our base expense, the work we’re doing to digitally rework our operations supplies flexibility to proceed to put money into innovation and in expertise.

Our working tax charge was 14% which is flat versus final yr. And our working earnings per share of $3.60 was up over 7%. Turning to free money movement. We generated $5.2 billion within the quarter and $9.3 billion for the yr.

Our full-year free money movement is up $2.8 billion from 2021. As we talked about all yr, we’ve got just a few drivers of our free money movement development: First, I will remind you, 2021’s money movement outcomes included Kyndryl-related exercise together with the affect of spin fees and capex. Second, we had working capital enhancements pushed by efficiencies in our collections and mainframe cycle dynamics. Regardless of robust collections, the mixture of income efficiency above our mannequin and the timing of the transactions within the quarter led to higher-than-expected working capital on the finish of the yr.

This impacted our free money movement efficiency versus expectations. Our year-to-year free money movement development additionally features a modest tailwind from money tax funds and decrease funds for structural actions, partially offset by elevated capex funding for right now’s IBM. When it comes to money makes use of for the yr, we invested $2.3 billion to amass eight firms throughout software program and consulting, mitigated by over $1 billion in proceeds from divested companies and we returned practically $6 billion to shareholders within the type of dividends. From a stability sheet perspective, we ended the yr in a robust liquidity place with money of $8.8 billion, that is up over $1 billion yr to yr, and our debt stability is down practically $1 billion.

Our stability sheet stays robust, and I say the identical for our retirement-related plans. At year-end, our worldwide tax-qualified plans are funded at 114%, with the U.S. at 125%. Each are up yr to yr.

You will recall, again in September, we took one other step to scale back the chance profile of our plans. We transferred a portion of our U.S. certified outlined profit plan obligations to insurers with out altering the advantages payable to plan individuals. This resulted in a major noncash cost in our GAAP ends in the third quarter, and we’ll see a profit in our nonoperating fees going ahead.

You may see the good thing about this and different pension assumptions to the 2023 retirement-related prices in our supplemental charts. Turning to the segments. Software program income grew 8%, fueled by development in each hybrid platform and options and transaction processing. We concluded the yr with seasonally robust transactional efficiency, in addition to a stable and rising recurring income base in software program.

In hybrid platform and options, income was up 10%, with pervasive development throughout our enterprise areas: Purple Hat, automation, knowledge, and AI, and safety. Our platform-based method to hybrid cloud and AI is resonating with purchasers. As a proof level, OpenShift, our industry-leading hybrid cloud platform now has $1 billion in annual recurring income, and we modernize and optimize our software program capabilities, together with via cloud packs throughout automation, knowledge and AI, and safety for that platform. Purple Hat income grew 15% within the quarter, led by energy in OpenShift and Ansible, each rising double digits and gaining market share.

Automation income was up 9%. Progress was led by enterprise automation, software servers and integration as purchasers look to automate enterprise workflows and enhance purposes. Knowledge and AI income grew 8% with enterprise wants to arrange, retailer, and handle their knowledge. This efficiency displays demand in areas together with knowledge administration, knowledge cloth, and asset and provide chain administration.

Safety delivered 10% income development. We’re serving to purchasers detect, stop, and reply to safety incidents, which led to energy throughout menace administration, knowledge safety, and id. Throughout these companies, the annual recurring income or ARR for hybrid platform and options is $13.3 billion. And for all of software program, hybrid cloud income is now greater than $9.3 billion over the past yr, up 16%.

In transaction processing, income was up 3%. Demand for this mission-critical software program has adopted will increase in zSystems put in base capability over the past couple of product cycles and powerful renewal charges continued this quarter. Each are proof of the significance of this platform in a hybrid cloud surroundings. Transferring to software program revenue.

Our pre-tax margin was up two factors this quarter, contributing to a full-year margin of practically 25%. Consulting income grew 9%. Shoppers are leveraging IBM’s hybrid cloud management and deep {industry} experience to navigate the complexity of their digital transformation journeys. Income development was broad-based throughout all enterprise strains and geographies.

And I will remind you that that is on high of the 16% development consulting delivered within the fourth quarter of 2021. Robust demand for our choices led to signings development of 17%. With this, fourth quarter had the very best quarterly book-to-bill of the yr, and we sequentially improved our trailing 12-month book-to-bill ratio to 1.1. Shoppers are partnering with IBM Consulting as they resolve what purposes to modernize and how you can migrate these purposes throughout hybrid, multi-cloud environments.

During the last 12 months, consulting delivered $9 billion in hybrid cloud income, which is up 23%. This quarter, our Purple Hat apply was once more a significant contributor to this development. Income from strategic partnerships additionally grew at a robust double-digit charge. We proceed to see momentum on this house.

In mixture, our strategic partnership bookings had been up over 50% with Azure and AWS greater than doubling. Turning to our strains of enterprise. Enterprise transformation income grew 7%. Progress in enterprise transformation was as soon as once more pushed by knowledge and shopper expertise transformation together with provide chain and finance optimization.

Our partnerships with key ISV companions like SAP, Salesforce, and Adobe allow IBM Consulting to rework essential workloads at scale. In know-how consulting, the place we architect and implement purchasers cloud platforms and methods, income was up 10%. Progress was led by cloud software improvement practices. Purple Hat engagements, together with our strategic hyperscaler partnerships, contributed to the expansion.

Software operations income grew 12%. We assist purchasers to optimize their operations and cut back prices by taking up the administration of purposes in hybrid and multi-cloud surroundings. Our incumbency and understanding of purchasers’ purposes are key differentiators. Transferring to consulting revenue.

Our pre-tax margin was 11% for the quarter and practically 9% for the yr. The fourth quarter margin is up practically two factors yr to yr and over one level sequentially. We’re beginning to see the profit from pricing actions and productiveness and our acquisitions have change into extra accretive. Turning to Infrastructure phase.

Income grew 7% pushed by hybrid infrastructure, which was up 11%. Inside hybrid infrastructure, zSystems income grew 21% this quarter. Among the many new z16 capabilities, purchasers are leveraging cyber resiliency to adjust to enterprise rules and proactively keep away from outages of their operation and the brand new on-chip AI accelerator, for instance, has been serving to mitigate threat and detect fraud in bank card software processes. Our distributed infrastructure income was up 5%.

This efficiency was fueled by energy in Energy following the extension of Energy 10 innovation all through the product line. Infrastructure assist efficiency was flat, together with the affect from shopper adoption of latest {hardware} with the most recent z16 product cycle. Transferring to infrastructure revenue. Pretax margin was down lower than one level within the quarter, and for the complete yr, our pre-tax margin was practically 15%.

Now, let me convey it again as much as the IBM stage to wrap up. At our investor briefing 15 months in the past, we laid out our hybrid cloud and AI technique and our priorities of income development and free money movement technology. Since then, we have been targeted on our portfolio, our go-to-market mannequin, our ecosystem, and our capital allocation to execute that technique and create worth via focus. We now simply accomplished the primary yr as right now’s IBM.

Our 2022 income was up practically 12%, together with practically 4 factors of incremental Kyndryl contribution that is above our mannequin of mid-single-digit development. Over 70% of our income was in our development vectors of software program and consulting and about half of our income is recurring. With this high-value combine and contribution from the incremental Kyndryl income, we expanded our full-year working pre-tax margin by two and a half factors. And our free money movement was $9.3 billion, up $2.8 billion from the prior yr.

We invested organically and inorganically and returned important worth to shareholders via dividends. Now, there have been some exterior elements that we confronted this previous yr that impacted our revenue and money. We exited a worthwhile enterprise in Russia. We’re coping with a a lot stronger greenback, and we’re working in a extremely inflationary surroundings, which put stress on our margins, particularly in consulting.

Placing all of it collectively, we’re happy with the basics of our enterprise and the progress we’ve got made in executing our technique. Our 2022 efficiency demonstrates that we now have a better development, higher-value firm with increased return on invested capital and a robust and rising free money movement. For 2023, we once more count on stable development in our two most vital measures of success: income and free money movement. Arvind talked concerning the vital position know-how performs on this surroundings and the way our options are intently aligned to the wants of our purchasers.

With this, we count on constant-currency income development for the yr to be consistent with our mid-single-digit mannequin. As we enter this yr, I feel it is prudent to count on the low finish of the mid-single-digit mannequin. And without cost money movement, we would count on to generate about $10.5 billion in 2023, which is up over $1 billion yr to yr. Let me spend a minute on our expectations for constant-currency income and pre-tax revenue efficiency by phase.

In software program, with continued momentum in our recurring income stream in each hybrid platform and options and transaction processing, we count on income development consistent with software program’s mid-single-digit mannequin. This income development generates working leverage, and we would count on software program pre-tax margin to increase by about two factors yr to yr. Consulting’s mannequin is to ship excessive single-digit income. We’re coming off a robust yr with income development of 15% as we assist purchasers with their digital transformations.

This momentum and powerful book-to-bill ratio assist consulting income development on the excessive finish of its mannequin regardless of the robust examine. We count on to increase consulting pre-tax margin by at the very least one level as we proceed to appreciate extra of the value will increase and improved utilization. Infrastructure income is roughly flat over the midterm mannequin horizon, with efficiency in any yr reflecting product cycle dynamics. We’re coming into the yr three quarters into the z16 cycle, and we’ll additionally ramp on Energy 10.

Because of this, we count on 2023 infrastructure income beneath its mannequin and pre-tax margin within the low teenagers. For perspective, infrastructure ought to affect IBM’s total income development by over some extent. With these phase dynamics, we might count on IBM’s working pre-tax margin to increase by a few half some extent. That is consistent with our mannequin and our tax charge must be within the mid- to excessive teenagers vary.

Let me touch upon just a few objects inside our expectations. First, as I mentioned, foreign money was a major headwind in 2022, impacting income by $3.5 billion. With the motion of spot charges over the past 90 days, foreign money translation can be pretty impartial to income in 2023 with a headwind within the first half, flipping to a tailwind within the second. However I will remind you that we had over $650 million of hedging features in 2022, which is not going to repeat in 2023, leading to an affect to our revenue and money on a year-to-year foundation.

Second, as you already know, we have taken a variety of important portfolio actions over the past couple of years, which has resulted in some stranded value in our enterprise. We count on to deal with these remaining stranded prices early within the yr and anticipate a cost of about $300 million within the first quarter. We’d begin to see advantages within the second half and pay again by the top of the yr. After which third, we recurrently evaluate the helpful lives of our property.

Because of advances in know-how, we’re making an accounting change to increase the helpful lifetime of our server and networking gear efficient the primary of January. Based mostly on our year-end asset base, we count on this variation to learn 2023 pre-tax revenue by over $200 million, primarily in our Infrastructure phase. Given this can be a change to the depreciation, there isn’t any profit to money. Wanting on the first quarter, our constant-currency income development must be pretty according to the complete yr.

Reported development may even embody a few three-point foreign money headwind at present spot charges. With working leverage, we would count on working pre-tax margin to increase 50 to 100 foundation factors within the first quarter. And that is earlier than the cost I simply talked about for the remaining stranded prices. Given the timing of foreign money and stranded value dynamics, we would count on about one-third of our web revenue within the first half and about two-thirds within the second half.

To sum all of it up, we’ve got made loads of progress this previous yr. Whereas there’s at all times extra work to do, we’re assured within the fundamentals of our enterprise, and the way we’re positioned as we enter the brand new yr. Patricia, let’s go to the Q&A.

Patricia MurphyVice President, Investor Relations

Thanks, Jim. Earlier than we start the Q&A, I might like to say a few objects. First, supplemental data for the quarter and the yr is offered on the finish of the presentation. After which second, as at all times, I might ask you to chorus from multipart questions.

Operator, let’s please open it up for questions.

Questions & Solutions:


Thanks. Right now, we’ll start the question-and-answer session of the convention. [Operator instructions] Our first query will come from Amit Daryanani with Evercore. Your line is open.

Amit DaryananiEvercore ISI — Analyst

Thanks rather a lot for taking my query. I assume my query is across the free money movement numbers. And maybe you may spend a bit of little bit of time on — you touched on form of the 22 levers a good bit and the way you bought there. However as you consider calendar ’23 free money movement of $10.5 billion, uplift of $1.2 billion.

What are the places and takes? What are the bridge that will get you there? After which possibly associated to that, as I take into consideration what you probably did in ’22 and ’23, it does suggest to get to the $35 billion quantity over the three years, ’24 must be $14 billion-plus. So, maybe you may stage set that as a result of I do assume from whenever you offered the $35 billion quantity, a good bit has modified. So, possibly a bridge for ’23 and simply an replace on how you consider the $35 billion quantity over three years as effectively. Thanks.

Jim KavanaughSenior Vice President and Chief Monetary Officer

Thanks, Amit. That is Jim. I respect the query. So, let’s begin there.

We noticed a stable free money movement technology in 2022, up $2.8 billion yr over yr. Now, as you keep in mind, we entered 2022. We talked a few very robust free money movement technology engine. And we put in place a steerage for 2022 effectively in extra of our mannequin of $750 million yr to yr.

First, as we had been very clear, we had been going to get at the very least about half of that out of the Kyndryl-related spin dynamics. That is the costs in capex. And we had been going to get a bit of bit greater than half of that out of our base operations total. And I feel whenever you take a look at 2022, what occurred we bought impacted by two exterior elements: primary, the unlucky humanitarian disaster with the warfare in Russia and Ukraine, and we exited that enterprise, the suitable determination.

Second is unprecedented U.S. greenback appreciation. I feel final time I regarded, the speed, the breadth, the magnitude of the change is essentially the most we have seen in a number of many years. We bought hit with that, however we’re capable of overcome a few of that with the basic underpinnings of our enterprise total and nonetheless delivered nearly $3 billion of free money movement yr over yr.

By the best way, Russian foreign money by themselves is over $600 million of revenue and money we needed to take up. So, now, to your query about 2023, we guided, as you heard within the ready remarks, a $10.5 billion that is up $1.2 billion yr over yr. And once more, above our $750 million yr to yr. The underpinnings of that, although, are going to be very completely different in ’23.

Given the bettering enterprise fundamentals of our now sustainable income development with a high-value combine contribution, we see then continued working leverage. So, our money PTI goes to ship a considerable quantity of that free money movement technology yr over yr. We’re nonetheless going to get working capital effectivity. So, our realization will certainly be up over 100%.

However that is actually given the quantity dynamics of what occurred within the fourth quarter with a really robust and accelerated development profile as we went via fourth quarter, we completed extraordinarily robust on our transactional enterprise within the month of December. So, that now creates a possibility without cost money movement technology in ’23 and that is in our steerage. After which there are another places and takes. Sure, we’ll get modest structural actions tailwind, however they’ll be offset by a money tax headwind for the yr.

So, that form of performs out 2022 and 2023 now. How does that relate to a midterm mannequin? To begin with, we’re one yr into that midterm mannequin. And as I talked about, the dynamics in coping with the choice to exit our Russia enterprise and the numerous U.S. greenback appreciation.

I quantified it for you over a $600 million affect on revenue and money. However as you all know fairly effectively, that is not a one-time affect, that can proceed over a multi-period, and it positively places stress on our midterm mannequin to the tune cumulatively about over $2.5 billion. So, we’re solely targeted on how we execute this firm on a sustainable income development profile and producing that $10.5 billion of free money movement. So, it permits us, with the suitable ample monetary flexibility, to proceed to put money into our enterprise and return worth to our shareholders total.

Patricia MurphyVice President, Investor Relations

Thanks, Amit. Sheila, let’s go to the following query.


Our subsequent query comes from Wamsi Mohan with Financial institution of America. Your line is open.

Wamsi MohanFinancial institution of America Merrill Lynch — Analyst

Sure. Thanks. Arvind, good to see the income information right here. I used to be questioning when you might share some ideas round what’s occurring in software program, particularly, you’ve got had a very robust efficiency in transaction processing over the previous yr.

How are you enthusiastic about the trajectory of that? I do know traditionally, we have form of thought of this as mid-single digit or increased decliner, and clearly, we’re monitoring very otherwise right here. In case you might share some ideas across the trajectory of that in 2023 and past, that might be very useful. Thanks.

Arvind KrishnaChairman and Chief Government Officer

Yeah. Thanks, Wamsi, for the query. So, I will handle your transaction processing query first after which all of software program proper after that. So, a few of you could have heard me speak about that transaction processing can be a mid-single-digit decliner previously.

And that is successfully, Wamsi, is what you requested, what is going on to be completely different. As we take a look at our enterprise there and we glance each on the underlying MIPS development, in addition to the criticality of that software program, in addition to our capacity to have some very modest pricing uplift, we might now take a look at that enterprise as being a slight improve versus a modest decliner. So, I feel if you’re taking a look at that one, Wamsi, low single-digit will increase for transaction processing is what we predict is suitable for the brief to medium-term mannequin trying ahead. Now, that does assist in total software program.

So, first, let us take a look at software program and decompose it. Software program, as Jim talked about in his ready remarks, is nearly 80% recurring income. We see that recurring income growing according to our mannequin of the mid-single digits primarily based on each the consumption, the utilization, in addition to what we’ve got seen via ’22 in folks renewing that base of software program enterprise. Then I’ll acknowledge to you that ’22 was an important ELA yr, ’23 shall be not so good as ’22.

However with the transactional piece of the enterprise being lower than 20%, that has a a lot smaller affect on the general development charge. As you set all that collectively, we see the mid-single digits as being applicable for the software program enterprise.

Wamsi MohanFinancial institution of America Merrill Lynch — Analyst


Patricia MurphyVice President, Investor Relations

Thanks, Wamsi. Let’s go to the following query.


Our subsequent query comes from Toni Sacconaghi with Bernstein. Your line is open.

Toni SacconaghiAllianceBernstein — Analyst

Sure. Thanks. I used to be questioning when you might simply touch upon working revenue extra broadly. I feel your goal in the beginning of the yr was for working revenue to enhance 400 foundation factors, and it got here in at 270.

I feel your goal for the fourth quarter was 250 foundation level enchancment in working margin and got here in at 170. And that is manifesting itself right into a free money movement quantity that was decrease than you had anticipated and this yr and doubtlessly for subsequent yr relative to your $35 billion goal. So, you could have a twin mandate, Arvind. One is to attempt to develop mid-single digits and the opposite is to ship very robust money movement, which is impacted by margins.

The margin was not as robust this yr, and I am questioning when you can spotlight what was completely different out of your expectations. And what had been the challenges in forecasting that and the way traders ought to take into consideration that and free money movement realization going ahead?

Arvind KrishnaChairman and Chief Government Officer

Yeah. Toni, thanks. So, you are fully correct that these numbers are barely beneath our expectations from the start of the yr. I’ll ask Jim to remark and offer you much more coloration on it.

However let me first remark in your assertion of we’ve got a double mandate of income development and free money movement development, however I need to even be clear, income development has — which manifests itself in shopper satisfaction, increased NPS from our purchasers higher consumption of each software program and consulting from our purchasers, which permits them to eat an increasing number of over time is what we’re targeted on. And we’ve got to ship the free money movement development. Jim talked about in a response to the primary query that we weren’t anticipating the enterprise and Russia to get shut down, that impacted it a bit of bit. We weren’t anticipating the foreign money headwinds to be as extreme because it turned out to be.

That is actually impacted. And I will acknowledge an inflation as in wage inflation confirmed up and impacted our margins in consulting much more than we had been anticipating. Now a solution might have been to not rent folks and to not give that however that might have resulted then in decrease capability on the finish of this yr, which might not have allowed us the arrogance into the expansion, each in consulting and in software program that we at the moment are committing for 2023. So, as we stability these, it turns into a enterprise determination to say we’re going to maintain occurring growing capability, which ends up in more healthy income and it’ll end in bettering margins, however that flows via into 2023 versus giving all of it to us in 2022.

So, Toni, that is form of how we take into consideration balancing the investments within the enterprise versus a quarterly end result. And I will ask Jim to remark a bit extra on among the specifics of what you had been asking.

Jim KavanaughSenior Vice President and Chief Monetary Officer

Yeah. Simply to place some numbers round this, Toni, you are precisely proper. We entered the yr, we talked a few enterprise profile, increased income development firm, increased working margins, robust free money movement yield. And we had guided at mid-single-digit income development, and we guided that 4 factors of working margin enchancment.

The 2 factors of exterior that each Arvind and I’ve each talked about Russia and foreign money. By the best way, that was a few half some extent as a result of foreign money, keep in mind, as we have talked about many occasions all through these calls, not solely the speed, breadth, and velocity and alter in magnitude that we’ve not seen in about two to 3 many years, but it surely impacts human capital-based consulting enterprise very otherwise than a product technology-based enterprise. As we talked about, human capital is all just about a pure hedge as a result of your value is principally matched along with your income outdoors of worldwide supply. However in a product-based enterprise, our prices just like the {industry} is predominantly U.S.

greenback supply, and that is why you’ve got seen stress on the gross revenue margin line and the pre-tax revenue margin line round our know-how base of enterprise. Now, underlying that, although, I feel you are seeing a basic enchancment in our margins as we go ahead. So, about 50 foundation factors of foreign money. The remaining 100 foundation factors was consulting.

And we talked about that. That is been a rate-and-pace dialogue. You dial again 15, 18 months in the past, we referred to as a really accelerated demand surroundings of our purchasers shifting to digital transformation and journey to cloud. And beginning within the second half of ’21, we made the wager to make investments round talent functionality ecosystems, and we opened up the aperture to construct prolonged capabilities inorganically.

And we knew as we went via 2022 that we then had been working in a extremely inflationary surroundings. After which it grew to become a charge and tempo dialogue on how fast are you able to get worth margin and optimization and understand via your backlog. And I feel we have acknowledged that we had been fairly gradual all year long. Now, with that mentioned, we completed the yr about 9 factors of margin in consulting.

We had good enchancment. We exited fourth quarter at 11-point PTI mannequin that was up nearly 200 foundation factors yr over yr. Our first half to second half, we noticed an acceleration of three factors of margin from a few seven-point working PTI mannequin to effectively over 10 factors of an working PTI mannequin. And most significantly, the inexperienced shoots are beginning to play out within the fourth quarter.

Our utilization of efficient capability, one of many three levers we talked about all yr, up three factors within the fourth quarter. Our worth margins, third consecutive quarter are up yr to yr, and also you’re seeing that play out in that working revenue efficiency. And eventually, acquisitions. Now, we’re on a gentle state and our acquisitions are again to accretion.

So, we see good inexperienced shoots that result in our steerage in 2023 on the excessive finish of our excessive single-digit mannequin in consulting on income coming off of a really robust 15% development in ’22 and guiding one other one point-plus in working margins going ahead.

Patricia MurphyVice President, Investor Relations

Thanks for the query, Toni. Let’s go to the following query.


Our subsequent query will come from Shannon Cross with Credit score Suisse. Your line is open. Shannon, we’re not capable of hear you in convention. Please test the mute characteristic in your cellphone.

Shannon CrossCredit score Suisse — Analyst

Are you able to hear me?


Sure, we are able to hear you now. You could go forward.

Shannon CrossCredit score Suisse — Analyst

OK. Fascinating. Sure. Arvind, are you able to discuss a bit about AI and the way it runs via your small business? There’s clearly a lot dialogue proper now about open AI and Microsoft making investments.

And I assume I am attempting to consider how we must always take into consideration IBM monetizing it, capitalizing on it, how you consider your aggressive place relative to others. I do not know if there are examples you can provide the place you are using it. However I am simply — I am questioning, as AI will get an increasing number of of a — turns into an increasing number of of a dialogue level apparently for 2023 and you’ve got such a protracted historical past with it, how we must always take into consideration the place you at the moment are and the place you are going to take it. Thanks.

Arvind KrishnaChairman and Chief Government Officer

Thanks, Shannon. So, first, let me acknowledge AI has change into a giant subject of dialog this yr. I used to be in Davos final week, and it most likely got here up at nearly each single dialogue round know-how, what’s occurring with AI, in addition to what’s occurring with OpenAI. If I give it some thought over the past decade, I feel there have been three moments you may speak about, after which I will start to translate these right into a enterprise affect.

One, when IBM gained Jeopardy with Watson, I feel it was a giant second, and AI got here onto everybody’s highway map. Second, when deep thoughts from Google or Alphabet began successful competitions round, for instance, GO, and that grew to become one other massive second together with the protein folding that they did and now with OpenAI and ChatGPT. But when I step again only a second, all of this newest model is predicated on what known as giant language fashions because the underlying science. Universities do it, Google does it, IBM does it as does OpenAI.

To simply get to why it is so thrilling. For instance, for us, it permits us to do 13 language fashions once we are taking a look at understanding completely different pure languages in the identical value as initially one. That’s what is so thrilling about these applied sciences as a result of if you may get an order of magnitude enchancment in value and pace and the useful resource consumed, each when it comes to {hardware} and other people, that’s extremely thrilling. Now, let me translate this into how can we monetize this.

So, our monetization of AI could be very a lot targeted on that $16 trillion of productiveness that I’ve talked about that we will recover from the last decade. The overwhelming majority of that comes from enterprise automation and after I say enterprise, I embody governments into it. Some examples, when you can automate the drive-through and order-taking for quick-serve eating places, that is an instance of what can occur. If we are able to get deflection charges of 40%, 50%, 60% at everybody’s name facilities, that is an enormous operational effectivity for all of our purchasers.

if we can assist retirees get their pensions via interacting with a Watson-powered AI chatbot, that’s an enterprise use case the place all of those applied sciences come into play. By the best way, all my three examples are actual purchasers the place we’re leading to wherever from a whole bunch to 1000’s of individuals, effectivity for every of those purchasers. So, that is how we get it. If I look inside IBM, how we do promotions, how we do folks motion, how we start to enhance our code to money, how we enhance our customer support and other people ask sophisticated questions round triage of IT techniques happening are all very actual examples the place we’re bettering shopper service and saving cash all on the similar time.

Patricia MurphyVice President, Investor Relations

Thanks very a lot. Sheila, can we go to the following query?


Our subsequent query comes from Erik Woodring with Morgan Stanley. Your line is open.

Erik WoodringMorgan Stanley — Analyst

Hey, guys. Good afternoon, and thanks for taking the query. I needed to simply contact on the consulting enterprise. Signings had been very robust within the December quarter, up 17%.

Your quarterly book-to-bill was an enchancment from the September quarter. Are you able to possibly simply, once more, simply step again and elaborate on the surroundings, what we’re in, what you noticed in 4Q that doubtlessly stood out to you the place energy in signings is coming from adjustments to contract length? Perhaps simply double-clicking on the consulting enterprise. Simply to assist us perceive what offers you confidence to be form of on the excessive finish of your midterm mannequin for 2023. Thanks.

Jim KavanaughSenior Vice President and Chief Monetary Officer

Thanks, Eric, for the query. I will take this. Once we entered the fourth quarter, we had a reasonably stable pipeline. And we talked about reaffirmed mid-teens development for consulting for the yr, which as you already know, is effectively above our mannequin.

However once more, as I talked about on the earlier query, we had made the investments in bringing in talent functionality, increasing ecosystem, strategic partnerships, and acquisitions. However we noticed that pipeline coming into the quarter, we noticed a really stable and fairly disciplined gross sales closure charge as we transfer via the yr. Now, how did the yr finish? That positions us for 2023, and let me simply put some stats to essentially convey it dwelling. Primary, ecosystem velocity, we noticed proceed to extend all year long of our strategic partnerships.

I feel we mentioned within the ready remarks, strategic partnerships, one grew income 25% in 2022 and was about 40% of our consulting base of enterprise. That’s up about 50% yr over yr. Now we have noticed — seen in depth acceleration. And by the best way, within the fourth quarter, our signings development which delivered a 1.3 book-to-bill, our hyperscaler partnerships with Azure, and what AWS, our signings had been 2x.

And our ISV portfolio with the likes of SAP, Salesforce, Adobe, we had been up over 50% in signings. So, our guide of enterprise and the partnerships we’ve got large energy that is fueling our backlog, level primary. Level quantity two, Purple Hat. We proceed to see acceleration of consulting being the tip of the spear that is actually driving the size and adoption of our hybrid cloud platform.

And oh, by the best way, can be dragging IBM know-how and software program. Since inception, a bit of over three years we signed $7.4 billion of enterprise in Purple Hat, large energy, and that, once more, fuels our backlog for 2023. And then you definitely take a look at full yr, we grew each giant transformational offers, and we grew small offers double digit, each side. So, it is pervasive throughout the board.

So, once we take a look at our backlog, we take a look at all of our indicators of our enterprise on the conclusion of that mannequin. We glance on the acquisition portfolio and the way it’s scaling. We really feel fairly assured concerning the excessive finish of our excessive single-digit mannequin in 2023. Oh, by the best way, to Toni’s query, at working margins being accretive.

Patricia MurphyVice President, Investor Relations

Erik, thanks for the query. Let’s go to the following one, please.


Our subsequent query comes from Lisa Ellis with SVB MoffettNathanson. Your line is open.

Lisa EllisMoffettNathanson — Analyst

Hello. Good afternoon. Thanks for taking my query. Perhaps following on that, I had a broader query, Arvind, on the general demand surroundings you are seeing.

I feel with earnings coming in from varied enterprise tech gamers, up to now, we’re seeing a reasonably big selection of indicators about how the demand surroundings is shaping up for 2023. Are you able to simply remark a bit on what you are seeing out of your giant purchasers, say, form of relative to this previous yr? Thanks.

Arvind KrishnaChairman and Chief Government Officer

Yeah. Thanks, Lisa, for the query. Look, if I take into consideration our total shopper base, we had been first actually happy that there wasn’t a lot of a distinction by geography. As I form of undergo it, Japan, India, Australia, the Center East, Western Europe, the U.Ok., North America had been actually fairly robust in demand throughout.

So, I feel, Lisa, if I break it down into the 2 parts round know-how and consulting, what we’re seeing is that almost all of our purchasers do consider that even when there are some, I will name, the minor or completely different headwinds in 2023, they’re going to emerge stronger. As they’re to emerge stronger, which means they’re all deploying know-how to assist offset wage inflation, cyber points, provide chain challenges, and all of the demographic shifts, that means there’s simply fewer expert folks to rent. Consequently, we’re seeing them double down, and that’s the reason we’ve got targeted on sure areas and sure companions, each for consulting and in know-how. All of them need to deploy automated methods to get from the entrance to the again.

Perhaps Salesforce and Adobe play a really robust position in that. All of them need to leverage cloud applied sciences, to allow them to scale know-how as much as higher deal with shopper demand. Our partnerships with the hyperscalers play into that. All of them need to leverage much more know-how than they’ve earlier than to counteract the wage inflation and different inflationary points.

And what we do with Purple Hat performs into that. So, I form of see, Lisa, that each one of our purchasers play into that. Now you’ve got talked about a large spectrum from the folks you are seeing lately. I feel the explanation that we’re remaining on this optimistic mind set, we’ve got no shopper enterprise.

I agree that our purchasers might have a shopper enterprise, however we do not have that immediately. And so, I feel, consequently, we may be seeing a bit of bit completely different subset of the economic system than those that may need a big direct publicity to a shopper enterprise.

Patricia MurphyVice President, Investor Relations

Thanks, Lisa. Let’s go to the following query, please.


Our subsequent query comes from David Grossman with Stifel. Your line is open.

David GrossmanStifel Monetary Corp. — Analyst

Thanks. So, you already know, you had an excellent transactional momentum within the Software program enterprise within the fourth quarter, and also you offered some good high-level commentary in your ready remarks concerning the enterprise, and the broad-based development might replicate a lot of these adjustments that you’ve got been speaking about within the go-to-market technique and gross sales adjustments. That mentioned, Arvind, are you able to discuss particularly or determine any product-specific adjustments in software program that you simply assume could also be driving that momentum and which will recommend your aggressive positioning is shifting in any of these three non-Purple Hat segments? After which only one different factor, simply sorry concerning the two-part query. However only for Jim, I simply needed to make clear with that working capital headwind within the fourth quarter that you simply talked about reverses in 2023.


Arvind KrishnaChairman and Chief Government Officer

Yeah. Thanks, David. Let me discuss a bit of bit concerning the product capabilities and as you mentioned, outdoors Purple Hat referred to as give attention to automation, knowledge, AI, and cyber. If I take a look at these — let’s take automation.

I am actually happy with the progress we’ve got made round an space I will name AIOps. But when you consider, we made a few small acquisitions, Instana and Turbonomic, we constructed our personal AIOps portfolio, and we’re seeing large pickup from that as our purchasers need to take out labor complexity but in addition need to optimize their total IT infrastructure, {hardware}, and software program. In addition they need to have uptime that’s now the speak about not simply two nines and three nines however as much as 5 nines. And so they additionally need to fear about how to ensure some go to at all times on.

And so, I feel our AIOps portfolio there actually benefits us, and I consider we’re in a novel place as a result of we assist our purchasers in an surroundings throughout a number of public clouds and on-premise and with their personal clouds in that house. If I take into consideration knowledge and AI, our give attention to knowledge cloth and permitting our purchasers to leverage the information wherever it’s, not at all times shifting it however permitting them to catalog it, leveraging AI deep inside our merchandise is one other instance of the place we’ve got a novel functionality. And third, if I take a look at cyber, we focus rather a lot on menace administration. And if we take into consideration how we are able to leverage the inputs from all types of sources in as of late and persons are actually anxious about all the threats coming, whether or not from nation-states or from simply unhealthy actors, then it permits them to leverage that portfolio higher.

Consequently, we will stay fairly targeted on these areas. It is best to count on each natural and inorganic funding. And David, I can not assist however say, we’re giving our purchasers the power to deploy these capabilities on a number of public clouds, in addition to on-premise. And I consider that does benefit them as a result of it offers them much more flexibility and freedom than they may have from another distributors.

Jim KavanaughSenior Vice President and Chief Monetary Officer

Sure. I might simply construct on that, Arvind. I imply, Software program guide of enterprise right now, it is an integral a part of our hybrid cloud platform thesis. It’s the basis.

We eclipsed $25 billion for the primary time ever right here in 2022, so over 40% of IBM’s income and two-thirds of our EBITDA. So, whenever you take a look at it, we’re a hybrid cloud AI platform-centric firm total, and Software program is true at that course. So, why that recurring income stream and the enhancements we have been seeing all through 2022? And as Arvind answered earlier, getting that again to a rising contribution not solely helps the competitiveness and market share of our high line, however I feel all of you perceive the marginal greenback of that guide of enterprise is within the 90-plus % vary as we transfer ahead. So, David, I feel you additionally requested a query about clarification.

Free money movement development, $10.5 billion about, up $1.2 billion yr to yr, above our mannequin of $750 million. That shall be pushed primarily based on the basic enhancements of our underlying income development and working leverage and money PTI, however there may even be, sure, a working capital effectivity contribution to our money technology subsequent yr, actually simply the quantity dynamics of what performed out within the fourth quarter. We’ll get that again.

Patricia MurphyVice President, Investor Relations

Thanks, David. We’re previous the highest of the hour, however let’s take another query.


Our final query will come from Kyle McNealy with Jefferies. Your line is open.

Kyle McNealyJefferies — Analyst

Thanks very a lot for squeezing it in. And this one is macro-related as effectively, but it surely’s fairly fast. It looks like among the slowing macro’s implied in your 2023 steerage, however I do not assume you talked particularly about whether or not you are seeing something particularly slowing. It sounded usually constructive for you guys, regardless that there is a little bit of a slowdown implied within the steerage.

Microsoft and F5 talked a few divergence between new enterprise and new purposes, seeing some development versus renewal enterprise, capability expansions, cross-selling, and issues like that. Are you seeing an identical factor when it comes to new purposes slowing a bit and among the form of recurring and cross-selling capability expansions holding up? How a lot of both of these is driving your decrease finish of mid-single-digit development steerage for 2023? And form of break it down when you can. Thanks.

Arvind KrishnaChairman and Chief Government Officer

OK. Look, I feel that first — and I will handle your level on new software versus present fairly immediately. The purpose concerning the decrease finish of the mid-single digit is basically from the truth that Infrastructure phase shall be a headwind going into 2023, whereas it was a tailwind in ’22. I would not learn something greater than that into our low finish versus the center of the vary.

Now, for us, I do not actually see that. I see that our purchasers do need to do new improvement. Now from our perspective, if anyone is doing an expanded Salesforce deployment, I name {that a} new software. If anyone is doing a brand new software on Azure or if they’re shifting, effectively, they by no means actually immediately transfer.

They at all times speak about refactoring, placing in new operate, integrating with different purposes they may have of their store or that they purchase as SaaS properties, we take into account all that new improvement. And so, for us, our consulting groups are largely doing that new improvement for our purchasers. And in that course of, they have an inclination to make use of OpenShift from Purple Hat. They have a tendency to make use of Purple Hat Linux.

They have a tendency to make use of our AI automation. Our AI automation then surrounds all these issues to make them rather more resilient, rather more sturdy, rather more safe, and people are the capabilities we convey. So, we’re not actually seeing that divergence, I’ll inform you straightforwardly, however there may be doubtless a spotlight that in that new software, is it serving to automate issues extra. Is it serving to make issues, I will name it, straight via versus with loads of guide intervention? That’s most likely an even bigger focus.

Perhaps we do not see it as a result of we form of name that play in late ’21 as a result of we form of noticed these issues coming and changing into extra vital. And we determined to put money into them, each in know-how and in consulting. Patricia, with that being the final query, let me now make a few very fast feedback to wrap up the decision. 2022 was an vital yr for us.

As Jim mentioned, it was the primary full yr of the brand new IBM. The outcomes we delivered reinforce our confidence in our technique and our mannequin. Whereas there may be at all times extra to do, we’re happy with our place as we enter 2023, and I look ahead to persevering with this dialogue as we transfer via the yr.

Patricia MurphyVice President, Investor Relations

Thanks, Arvind. Sheila, let me flip it again to you to shut out the decision.


[Operator signoff]

Period: 0 minutes

Name individuals:

Patricia MurphyVice President, Investor Relations

Arvind KrishnaChairman and Chief Government Officer

Jim KavanaughSenior Vice President and Chief Monetary Officer

Amit DaryananiEvercore ISI — Analyst

Wamsi MohanFinancial institution of America Merrill Lynch — Analyst

Toni SacconaghiAllianceBernstein — Analyst

Shannon CrossCredit score Suisse — Analyst

Erik WoodringMorgan Stanley — Analyst

Lisa EllisMoffettNathanson — Analyst

David GrossmanStifel Monetary Corp. — Analyst

Kyle McNealyJefferies — Analyst

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