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3,100 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Mike Stepniak: Up 3% to 6% or down 1% to up 2% ex-prior year Bombardier agreement impact. Earnings per share in the second quarter is anticipated to be in the range of $2.60 and $2.70, up 4% to up 8% year over year. I will provide additional details for full-year EPS in a few minutes. Free cash flow for the year is still expected to be $5.4 billion to $5.8 billion, down 2% to up 5% ex-Bombardier and roughly in line with earnings growth. You can reference the 2025 free cash flow bridge in the appendix. Beyond our CapEx and dividend commitment, we plan to continue to deploy capital diligently over the course of the year, funding both attractive time-sensitive acquisitions such as Sundyne, as well as being opportunistic on the repurchase of our shares. Year to date, we have already bought back $3 billion worth of our stock, including $1 billion in April, putting us on the path to reduce our net share count for the year by 2%, far exceeding our 1% annual commitment. In summary, we're taking a clear-eyed look at the remainder of 2025 to set appropriate expectations for our business given all the information available to us today. We are also not pausing the investment needed to fuel the future of innovation growth. I'll now turn to slide nine to spend a few minutes on our outlook by business. This discussing high-level expectations by segment with additional details by SBU covered in the commentary portion of the slide. Aerospace Technologies, we are holding our 2025 full-year outlook for organic sales growth in the high single-digit range or mid-single-digit to high single-digit when excluding the impact of last year's Bombardier agreement. Aero is expected to maintain its position as the growth leader for Honeywell International Inc., driven by ongoing ramp in flight activity and global defense spending. For the second quarter, organic sales are expected to be up in the mid-single-digit to high single-digit range. By strengthening our commercial aftermarket business as the supply chain outlook continues to support |
3,101 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | high single-digit range. By strengthening our commercial aftermarket business as the supply chain outlook continues to support our out Margins for the quarter and the year should be roughly 26% as case integration headwinds temporarily bring the segment below the run rate levels. We are lowering the 2025 sales outlook for industrial automation to down mid-single digits year over year. As the trajectory of short-cycle orders and customer CapEx decisions become increasingly uncertain in the current environment. We expect IA margins to be up modestly versus the prior year as we work to mitigate a potentially weaker demand environment and incremental cost. Related to tariffs, we additional commercial excellence and productivity actions. We also anticipate second-quarter sales to be down mid-single digits year over year as strong end-market talents in sensing, and continued growth in warehouse automation offset by muted demand growth in productivity solutions services and personal protective equipment. Industrial automation margin is expected to expand as the PPE exit, commercial excellence, and productivity more than offset volume, deleverage, and cost inflation. For building automation, we are raising our 2025 sales outlook to mid-single-digit growth given standout performance in both long and short-cycle businesses in the first quarter. Our sales outlook for the remainder of the year remains largely unchanged momentum from new product innovation and robust demand in high-growth regions is partially tempered by global uncertainty, for our business segment with the most international exposure. In the second quarter, we expect sales to be up low mid-single digits with sequential and year-over-year growth in both solutions and products. Margins for the quarter and for the year should expand as volume leverage, accretion from access solutions, and productivity actions more than offset cost inflation. In energy and sustainability solutions, we expect 2025 organic sales growth to remain in our previously guided low |
3,102 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | inflation. In energy and sustainability solutions, we expect 2025 organic sales growth to remain in our previously guided low single-digit range year over year. Led by strength in EOP and ongoing momentum in SDS. We continue to build on our robust pipeline from sustained global demand in projects despite ongoing macroeconomic uncertainty. We anticipate ESS margin to remain flat as cost inflation is offset by productivity actions and the full-year benefit from the LNG acquisition. For the second quarter, organic sales should be up sequentially |
3,103 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Vimal Kapur: With |
3,104 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Mike Stepniak: Plus to up year-over-year growth as backlog conversion is partially offset by the final quarter of difficult foreign comps for the year. Margin is expected to contract from the prior year as a result of timing impacts but remain in line with the first quarter. Now let's turn to Slide ten to go over our 2025 EPS bridge. Walking from 2024 adjusted EPS in expound on year to the midpoint of our 2025 EPS guidance range involves a few moving pieces. We see organic segment profit growth adding $0.13 per share to 2025 earnings down from our prior guide. The first quarter surpassed our outlook, but that will be more than offset by our more prudent posture towards guidance for the remainder of the year, driven by geopolitical changes seen over the past few weeks and their impossible impact on customer demand, particularly in the back half of the year. Contributions from our 2024 acquisitions are still expected to add approximately $0.33 per share to 2025 EPS. Notably, expectations for these businesses have shown stability at levels ahead of our initial plans at the time of purchase. Again, I remind everyone that the Sundyne acquisition is not yet included in guidance for the year. The sale of our PPE business, for which we now model an early May close, will drag down earnings by $0.07 for the year. So it will prove beneficial to segment margin and organic sales growth. Foreign exchange movements since February have modestly reduced the expected currency headwind to earnings for the year to $0.05 per share. Please see the appendix of this presentation for a bridge with the sales impact of FX. Below the line items, the difference between segment profit and income before tax remains the largest headwind to year-over-year earnings growth at $0.52 per share. Pension income for the year is still expected to be $550 million, $50 million less than 2024 because of a one-time item in Europe. The related transaction ended up closing early in the second quarter rather than the first quarter as anticipated previously, |
3,105 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | The related transaction ended up closing early in the second quarter rather than the first quarter as anticipated previously, which shifted the negative income effect. Repositioning expenses are now expected to be $125 million to $225 million as roughly half of the lower first-quarter spending assumed to occur later in the year. Lastly, other below-the-line expenses are anticipated to be modestly higher at $1.35 billion to $1.4 billion, increasing from 2024 on account of higher interest expense from last year's acquisitions and the first quarter's accelerating share repurchase. Full-year tax rate expectations have not changed, though we anticipate a lower rate in the second quarter offset by a higher third-quarter rate. Finally, our full-year average share count expectation has been reduced by twelve million shares, increasing the tailwind to EPS to $0.19. Now I'll turn the call back over to Vimal. |
3,106 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Vimal Kapur: Thanks, Mike. In closing, our performance in the first quarter exceeded all our communicated targets on the strength of our business model and the dedication of our more than one hundred thousand future shapers around the globe. Our VAS installed base continues to provide stable demand for our solutions in this time of uncertainty. Simultaneously, we are investing substantial resources to expand further into high-growth verticals, to develop innovative new products and services, and to grow our supply capabilities to fulfill our record backlog even as we maintain promised levels of profitability. In updating our 2025 outlook, we sought to prudently balance the strength of our first-quarter results with the unfolding economic uncertainty in the global economy. Taking both into account, we are raising the midpoint of our 2025 EPS guidance. The work to separate Honeywell International Inc. into three standalone public companies has begun in earnest, and the value creation opportunity from greater strategic focus, financial flexibility, and tailored capital priorities for each of the businesses are becoming clearer each day. Our separation teams kicked off the process with the preparatory spins to lay out clearly the road ahead and the large obstacles to overcome. Such planning will allow us to move both quickly and effectively in the months ahead while ensuring our businesses do not miss a beat. In this way, we'll be certain to deliver our commitment to our shareholders, customers, and our employees. One way in which we can further maximize our value as we work through our spin-off transaction is to continue to selectively utilize our strong balance sheet and cash flow generation for accretive bolt-on acquisitions. In lieu of the availability of such deals, we'll believe our shares offer tremendous value at recent levels. With that, Sean, let's take questions. |
3,107 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Sean Meakim: Thank you, Vimal. Vimal and Mike are now available to answer your questions. We ask that you please be mindful of others in the queue by only asking one question and one related follow-up. Operator, please open the line for Q&A.
Operator: Before pressing the star key. Our first question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.
Nigel Coe: Thanks. Good morning, everyone. Thanks for the question. Maybe just a bit more details on the tariff impact, the way that flows through. Obviously, $500 million. I just want to confirm that's the sec I'm assuming that's second half the annualized would be closer to a billion dollars. But just maybe just talk about kind of the offset strategies there. Any price versus supply chain measures, anything there would be helpful.
Vimal Kapur: Hey, Nigel. So first of all, I would say if you see the chart in our deck, you know, our local-for-local strategy is a foundation for, you know, counting them back up the tariffs. We are largely localized in each region in the United States and Europe and so on. So our impact that way is, you know, informed by that local footprint. Now to your question, the countermeasures are going to be some pricing. We are going to do pricing where we have the opportunity. At the same time, we have substantial direct material productivity options available this year. And with a combination of the two, we are going to offset the impact of this $500 million of tariff. I do believe that, you know, if we look at our business mix, it's largely, you know, a large part of it is aftermarket, which gives us the resilience to allow pricing, you know, execution there. At the same time, we operate in very rational markets. You know, most of our competition are public companies, which are, you know, projecting very similar strategies. So confidence to execute, you know, mitigating this $500 million tariff is very high. |
3,108 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Sean Meakim: Just a clarifying point on that, the billion-dollar estimate as you put. Keep in mind, tariffs in the first half are not zero. So I think as you annualize, a full-year impact could be something a bit lower than what you suggested, but not too far off.
Nigel Coe: Okay. Thanks, Jonas. That's helpful. And then, Mike, you mentioned contingency in the guide Luke's macro. So I'm curious, you know, is that more of a top-down, you know, reading all the stuff in the press that we are all reading? Is that more of a top-down contingency or are you starting to see unusual behavior or anything to kind of inform a weaker second half?
Mike Stepniak: That's correct. That's more a top-down view. If we look at our first-quarter orders, very strong April, strengthening orders also continued, so we feel good about that. That said, they're just looking at our end market, especially in industrial automation, our exposure to China there, we took a little bit of more, I would say, prudent view in terms of what contingency we want to have just to make sure we protect our total year. So yes, this is demand contingency for the second half. I don't have any data that would suggest that demand is falling out, but we'll continue to take a prudent stance on our guide. I want to make sure that the guide I give you, I have a high level of confidence that you can deliver on it.
Nigel Coe: Okay. Thank you.
Operator: Thank you. Our next question comes from the line of Steve Tusa with J.P. Morgan. Please proceed with your question.
Steve Tusa: Hi, good morning. Can you guys just parse out what your volume assumption is? I think coming into this year, you've talked about like three points of price. Maybe what's the volume assumption just in the context of this contingency? Just trying to kind of gauge what's kind of in the base case and what's just a hedge on that front. |
3,109 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Mike Stepniak: Sure. So just to clarify one more time, our total year framework is unchanged. Everything holds. If you look at now price volume going to the year, we're assuming about, I think, 2% price. That's what we communicated.
Sean Meakim: Excluding Bombardier. Excluding Bombardier.
Mike Stepniak: And then the volume was minus one to two percent. Up. In this current guide, I'm assuming about 3% of price. And I'm assuming about minus 2% of volume to 1% of volume. So that's the conservatism is there.
Sean Meakim: Whether you include Bombardier or not, either way, one more point of price, one less of volume. Yep. Align to the same guide. Yep.
Steve Tusa: Yep. That makes a ton of sense. And then just related to the tariffs, can you maybe talk about how much is roughly coming from China? And I know this may be kind of old news at this stage, but any other than MEC, other kind of hot spots that, you know, we should be watching when it comes to other regions, or is this mostly, like, a China thing, the $500 million?
Vimal Kapur: So, Steve, you know, if you fill out our tariffs, I would say that going into China, exports from the US into China is a big part of the impact. As we've always shared, we are net exporters to China for many years. Aerospace and ESS business, UOP, we ship it from the US. Clearly, a part of our tariff impact is channel-related tariffs. On the incoming side into the US, the impact is not big. Because we're largely localized, but at the same time, there's an impact of some products coming from impacted by reciprocal tariffs. Because we do impact far from all over the world. And then there is a tail-off impact from China both in, you know, specifically in the industrial automation business. So that's the construct of it. And as we said before, we have factored all known tariff rates, which are known today, both coming into the US and coming into China. |
3,110 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Mike Stepniak: And, Steve, I would just add, so for China, it's about 60% to 70% of our overall tariff exposure. The rest of it is reciprocal. Mexico is 100% offset.
Vimal Kapur: Yeah.
Steve Tusa: 100% what? Sorry.
Sean Meakim: Yeah. Mexico, it's not material to us.
Steve Tusa: Oh, it is material? Yep. Got it. Yeah. 100% covered. Okay. Got it. Great. Thanks a lot.
Mike Stepniak: Thank you.
Operator: Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Please proceed with your question.
Julian Mitchell: Hi, good morning. Maybe just wanted to start with the Industrial Automation segment. So maybe help us understand, you know, you have that big drop-off in the PSS top line in the first quarter. Kind of how you're thinking about that playing out for the balance of the year?
Vimal Kapur: Anything odd going on sort of share-wise? And on the margin front, I suppose those IA margins were down in the first quarter. I think they guided to be up slightly for the year. So maybe any help around the sort of cadence of that margin swinging from down to up as we go through the year. |
3,111 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Vimal Kapur: Yeah. So, Julian, the PSS quarter one was, you know, roughly flattish if you take out the royalty we get from Zebra, that was the last quarter we had the comps. So it was a flattish revenue. We did extremely well in North America, Europe. There was some pressure. I think it's too early for us to see any related to competition. So I think as our competition will declare results, we'll observe if there are any specific quotes and takes to share. I would say, in our guide, when we talked about contingency, there are two drivers of that contingency from the future demand. If I can use the word unknown, one is definitely China. Mike talked about uncertainty. We see there. We have a business exposure. Then the second part is the uncertainty around our businesses, which touches the retail markets. So PSS being one of them. Cannot tell you an absolute number because we are not trying to drill down a number business by business. We have taken an overall, you know, broader view. So we do expect some pressure to a certain degree on PSS business in our assumption. For the rest of the year. On the margins in the first quarter, the large part of the margin contraction in IA was receivables write-off. We had some past receivable write-off, and based upon the progress of that, we wrote them off. You know, the year as we progress, we don't have the similar event for the rest of the year. Also, as the PPE business retires from our portfolio, that gives us favorable tailwinds. So, fundamentally, I think all those factors play out help us margin expansion. For the rest of the year.
Julian Mitchell: I would add PPE is obviously
Mike Stepniak: Accretive to our segment margin and accretive to our organic
Julian Mitchell: Right. The PPE is that. Yeah. Yep. |
3,112 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Mike Stepniak: Accretive to our segment margin and accretive to our organic
Julian Mitchell: Right. The PPE is that. Yeah. Yep.
Vimal Kapur: Growth. That's helpful. Thank you. And then just my follow-up on the capital deployment. Last year, you had under $2 billion of buyback and close to $9 billion committed to M&A. This year, year to date. You know, you're running a sort of $3 billion buyback and a couple of billion dollars of M&A. Any way you could frame for us sort of the buyback scope for the year? And I understand it depends on share price action and other uses of cash potentially. But, you know, just trying to gauge sort of how aggressive or large could that buyback be assuming the share price stays around current levels?
Mike Stepniak: Julian, I would just say at this stage that we will continue to be opportunistic. We obviously view our share price as very attractive as a stage for buybacks, but at the same time, we want to balance our couple deployment with M&A, and we always say M&A machine has been now in play for us for a couple of years. So if deals, there are specific deals that we've been working for a while and then attractive to us, we will not pass them on.
Vimal Kapur: Yeah. So it'll be a balanced approach, Julian. I mean, we do expect an opportunistic approach on share buyback to continue. But at the same time, if there's a time-bound M&A deal, we haven't worked working for a couple of years. We also don't want to miss the window. You know, at this point in time. So it'll be a balanced approach.
Julian Mitchell: Perfect. Thank you.
Vimal Kapur: Thank you.
Operator: Thank you. Our next question comes from the line of Scott Davis with Melius Research. Please proceed with your question.
Scott Davis: Hey, good morning, Vimal, Mike, and Sean.
Sean Meakim: Mark,
Mike Stepniak: Hey. I hate to beat the dead horse, but, still on tariffs. |
3,113 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Sean Meakim: Mark,
Mike Stepniak: Hey. I hate to beat the dead horse, but, still on tariffs.
Scott Davis: I just wanted to clarify kind of the cadence of, you know, you got the cost side of tariffs and you have price. I imagine they don't match up kind of perfectly unless you're doing surcharges, I suppose. But is the intent to match up price and mitigation efforts with tariffs by, say, the end of the year and have it be neutral by then? Or do you think you can do it sooner than that?
Mike Stepniak: Oh, I would say it will be much sooner than that. I mean, we have a we stood up a large team of people that can understand tariffs by HTS code and know it essentially to a dollar. And the teams have been quite active in terms of understanding how to offset it and what are the mitigation options. I would say it's not 100% price. I mean, like Vimal said earlier, we have other options and our direct material productivity has been really good. So we're trying to manage, I would say, demand with cost and demand destruction vis-a-vis price. So we feel very confident that by the second, we'll be, I would say, on par and definitely by the fourth quarter, we'll be in a stable operating mode, assuming things don't change materially for us here.
Scott Davis: Yeah. That's good color. Hey. And not asking for specific numbers, but let's just say that it's $800 million ballpark of total tariff impacts. If there was a way to kind of rank it by segment, or give us a little color by segment of where the bigger impacts are, just be helpful if you want to give numbers, that would be great. But I don't expect it. Yep. |
3,114 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Mike Stepniak: So Vimal mentioned earlier, but our largest exposure on tariffs is in industrial automation. Just because of the supply chain there and also in aerospace, which aerospace exporter to China. So those are two largest segments they have exposure. Building automation is largely protected. They're almost 100% local for local in their geographies. And then ESS, we don't see a lot of tariff exposure, maybe a little bit of a demand risk in China given they sell to China as well. But that's something that I think is all of it is contained in our guide, and I feel at this stage is derisked assuming things stay the way they are.
Scott Davis: Okay. Good color. I appreciate it. Thank you, guys. I'll pass it on.
Vimal Kapur: Thank you, Scott. Thank you.
Operator: Thank you. Our next question comes from the line of Andrew Obin with Bank of America. Please proceed with your question.
Andrew Obin: Yes. Good morning.
Vimal Kapur: Good morning, Andrew. Good morning.
Andrew Obin: So looking at aerospace, I think on
Vimal Kapur: Aero OE, you know, I think we were sort of indicating that Aero OE
Andrew Obin: Gonna be better than I think what happened. And then on the aftermarket, I think it came in quite a bit stronger. And I appreciate that your numbers seem to be in line with what other folks are reporting in aerospace. But can you give us more color as to what's happening on the OE? What's happening on the aftermarket? Is there a destock going on? Would be greatly appreciated. Thank you. Yeah. |
3,115 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Vimal Kapur: So, Andrew, at the first of the outset, I would say, you know, the aero volume manufacturing volumes are growing. Why you don't see that showing up in the OE revenue is there are two drivers for that. The first is the mix of our products. We have, you know, when we ship specifically mechanical products, we have cost over sell. So even though we are shipping more volume due to cost over sell, our revenue growth actually goes towards the opposite direction, goes negative. Due to that. So when you have a higher mix of cost over sell products, in a given quarter, that has its impact. And the second driver is the timing when we recognize we ship the revenue and customer recognizes the revenue. That does also have a driver on our, you know, overall revenue recognition process. So the combination of the two really drives the OE growth numbers what you see. As the year progresses, we do expect these numbers to improve. And overall, as we reconfirm the aerospace guidance for the year, we continue to remain very bullish. I think these are the percentage in the business with more than $2 billion of backlog. And we remain very confident in delivering. Space. |
3,116 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Andrew Obin: Excellent. And just a follow-up, I mean, I guess there are a lot of headlines out there about all this traffic, all this shipping traffic out of China collapsing over the next four to six weeks. How should we think about it? You know, I would imagine is that, you know, in parts of IA, the supply chain is exposed to China. Just can you just tell us because you're so diversified, you've been in China for a long, long time, like, how is that gonna play out? Because there's this doom and gloom scenario, how everything is gonna come. To grind and halt in about four to six weeks. It doesn't seem we see that in your guidance. Appreciate different manufacturing footprint, longer cycle exposure. As I said, I would greatly appreciate any color you can give us how you guys gonna deal with sort of, you know, effectively trade embargo between the US and China. Thank you.
Vimal Kapur: So I would say, the products coming into from China into the US, the biggest impact that of is in the industrial automation business. So to that degree, there will be a tariff pressure, which is already to our guide. It's already factored in. And on the opposite side, when we ship products from the US into China, that's primarily a driver in aerospace and in ESS business. So, again, the impact of those tariffs is again factored into our guide. And then overall, we also have factored the demand destruction on either side of the fence due to the known facts what we know today. So and that's how we have guided at this point in time. If any of you for us, sir, I would say we are really looking at potential reduction in volume in our short cycle, in our automation business, or reduction of demand of catalyst for UOP. Those are the kind of assumptions we have made. But it should be seen if they really play out depending on how the economic situation plays out. |
3,117 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Andrew Obin: But it's actually it's demand destruction. It's not the ability to access the actual components and parts. Right? Because I think the headlines indicate, like, this massive shortage of parts, but it seems for you, it's under control.
Vimal Kapur: Yes. I don't see. We don't foresee any shortage of parts. I think it's just the tariffs coming in and the business demand destruction. Yep. I haven't seen or heard any lack of product availability for Honeywell International Inc. so far.
Andrew Obin: Appreciate it. Thanks so much.
Scott Davis: Thank you.
Operator: Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Good morning, guys, and thank you. Maybe two more on aerospace. First, if I could just follow up on Andrew's comments on aftermarket 15% commercial aftermarket growth. Versus the guidance of mid to high single digits. How was price a contributor and how do you think about overall price in Aero versus the 3% for the total company and any color regionally you could provide on aftermarket behavior? |
3,118 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Mike Stepniak: Sheila, I would say on the aftermarket, as Vimal mentioned, we still have over $2 billion of past due backlog. So whenever our, I would say, our shops have capacity, we ship to whoever we can to satisfy that demand. So our, I would say, results for the next couple of quarters will still be, I would say, lumpy. In terms of OE aftermarket mix. Generally, our price is in line with what we guided at the beginning of the year. There's no change there. For aftermarket, and know what the hours I would say, flight hours moderated a little bit here going to second year, but we still see good hours, four plus percent hours. And as you know, we have exposure to ATR and business aviation, and those business aviation hours are more and more stable. And in defense, also has an aftermarket in there, and defense is growing extremely strong, especially in the aftermarket. So I would say overall, I know it's a little bit lumpy, but I would say our construct for the year is not changing vis-a-vis what's happening in commercial aviation.
Operator: Okay. And maybe if commercial at least still set to outperform aftermarket for the year and any color on commercial OE production rates you could provide?
Mike Stepniak: So commercial OE will normalize in the second half. Right now, what I see is we have a little bit mix within the mix issue. It's not been an issue, just a reality of how our OEMs take product between mechanical and electronics. That said, like Vimal said, our supply chain output, our factory output for the quarter again was double-digit. Double-digit. So we're really, really confident that this OE demand is continuing to stay with us for the remainder of the year going to next year. And within that $2 billion we owe you is about a billion dollars of past backlog, if not more.
Sheila Kahyaoglu: Okay.
Operator: Thank you.
Mike Stepniak: Thank you.
Operator: Thank you. Our next question comes from the line of Amit Mehrotra with UBS. Please proceed with your question. |
3,119 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Operator: Thank you. Our next question comes from the line of Amit Mehrotra with UBS. Please proceed with your question.
Amit Mehrotra: Okay. Thanks. Congrats on the quarter. Just maybe a couple of quick ones. One, can you just update us on the timing of the spin if you think it could happen sooner than what you noted earlier, and then if aerospace margins, I get the case and there's some mixed solution, is there an but, you know, but is there an opportunity to kind of build on the one q margin as we progress through just given the higher revenue or do we think the first quarter is kind of the right run rate for the next rest of the year? |
3,120 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Vimal Kapur: So timing of the spin, Amit, as we've indicated, for advanced materials, it's Q4 this year slash Q1 of next year. I think we're far along the way. And as we'll come to the Q2 earnings call, we'll be able to provide you a specific date. I think we have some external elements which are not entirely out of control. So because that's the only variable. If you ask me, our own execution, that is progressing extremely well. You know, we are on schedule to execute all the tasks, but I cannot control anything which is not in Honeywell International Inc.'s control, specifically regulatory approvals. We cannot control the timing of that. And aerospace spend dates, I think, are the early days. We started work just about two months back. But we are working to, you know, make it on schedule. As the schedule progresses, we'll provide you more specific color on what will be the specific date. Because right now, I fully appreciate the date is a bit wide, H2. And our goal is to refine the date and provide a more specific outcome on that. On aerospace margins, as we had provided the guide during the start of the year, I think there are two specific drivers for the aero margins for 2025. One is the mix of, you know, mix or mix within the mix of the products we are shipping. And the second is the case acquisition integration is gonna be part of the P&L. There's integration-related cost. The business also gets onboarded with a lower margin. Which on a longer term is good news because we can expand those margins. But the combination of those two contracts the aero margin, I would say that the aero margins will remain on a similar pace as you've seen in Q1. We don't expect any substantial shift. But on an overall year basis, I think the guidance what we provided at the start of the year, that will still hold good. |
3,121 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Amit Mehrotra: Okay. That's helpful. And just as a follow-up, you know, building automation, we've now had two straight quarters of high single-digit growth. I know last quarter, you didn't necessarily want to extrapolate the goodness into this year, but now we've had another quarter of high single-digit growth. As we think about the guidance, over I mean, comps get a little bit more difficult, so maybe that explains it. But is the guidance still reflective of kind of not extrapolating what we've been seeing over the last couple of quarters? Or do you think now kind of more realistic based on the trend?
Mike Stepniak: So as you saw in our guide, we raised the building automation guidance from low single digits to mid-single digits to mid-single digits. And then part of our demand contingency, we think in the second half is related to us just taking a prudent stance on potential demand destruction in the second half. Building automation projects, I would say, are continue to be strong. We're just watching our short cycle short cycle demand, product demand, and if building automation continues on this pace, I think they have a chance to be dead, but we're just being prudent as far as the second quarter the rest of the second quarter and the free quarter, given everything going on in the market. |
3,122 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Vimal Kapur: I think the overall strategy in building automation is really, you know, playing out. You know, we focus on pivoting our business to higher growth verticals, like data center, like hospitality, and those segments are growing regardless of, you know, the current conditions. Certainly, that's helping. Also at the same time, the business has the largest global footprint exposure. This business is, like, literally one third in the US, one third in Europe. One third in Asia. So given the uncertainty in the global trade environment, we are therefore, being cautious of the fact that it can hit on the headwinds on the economic side. Economic uncertainty. So we have factored that. But if you ask me, on the strategy side, the business is executing extremely well. And if things don't change, the business will continue to deliver the numbers you've seen over the last few quarters.
Amit Mehrotra: Wonderful. Okay. Thank you very much.
Scott Davis: Thank you. Thank you.
Operator: Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Proceed with your question.
Joe Ritchie: Hey, good morning, guys.
Scott Davis: Maybe just following up on that
Steve Tusa: On that last point and just relating it to the demand contingency that you've baked into the guide, so is it fair to say then you've got some good visibility on your long-cycle business businesses, but
Scott Davis: It's really just on the short cycle side, maybe an IA, maybe a BA that you're most concerned and you're building in as contingency? Just any color that you can kind of parse out for what's baked into that demand contingency number.
Sean Meakim: Sure. |
3,123 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Sean Meakim: Sure.
Mike Stepniak: Sure. So I would say we have very good line of sight to long cycle for the year. With respect to short cycle, if we look at industrial automation, that's the business that's the most exposure. Exposure to China. We're watching that especially the products part of the business. And then building automation, I mean, building automation has been doing extremely well for the last three quarters and continues. We have really no reason to worry at this stage, but like I said, we're just taking a prudent approach to the second half. So I'm feeling confident about the second half, but like I said at the beginning, we want to continue to make sure that we give a guide that we have a high level of confidence we can deliver.
Joe Ritchie: That's helpful. And then just my quick follow-up, helpful to get some color on the separation. I'm just wondering has there been any update on either the one-time costs or the stranded costs that you can give us any more information on either of those two options?
Vimal Kapur: So I think the one-time cost we had indicated between the band of $1.5 to $2 billion, we are on plan to stay in the same range. Given the large part of that one-time cost related to aerospace and we are early innings, of execution of that. It's, therefore, it's hard to refine that number at this point in time. Stranded cost, we already started doing the work to look at stranded cost starting with the advanced for deal that's been happening end of the year. Our confidence that stranded cost will be eliminated between 18 to 24 months time is very high. Post spin. So working on that front, and we will make sure that we execute on the same.
Joe Ritchie: Okay. Thank you.
Operator: Thank you. Our next question comes from the line of Chris Snyder with Morgan Stanley. Please proceed with your question. |
3,124 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Chris Snyder: Thank you. Maybe for my first one, just on Q2 margins, you know, guided flat quarter on quarter despite, you know, volumes going higher and the PPE divestiture, which should have some level of margin tailwinds. I guess, is kind of saying that there's some margin pressure in Q2 on the tariff and then as we go into the back half, we'll get neutral per some of the earlier comments. Thank you.
Mike Stepniak: I don't see any, I would say, large impression right now incremental to everything that we saw in the first quarter. Second quarter to me looks benign in terms of any new information. It feels more like the first quarter. And, you know, the $2.60, $2.70 that we guided, we feel it's appropriate given everything that's going on and our mix holds, our price is holding. So I don't see any structural issues. Only item model-wise. Rate.
Vimal Kapur: One item I'll add to Mike's point is, I think quarter to quarter, if you really want to look at quarter to quarter differences, ESS margins, per substantially up in Q1. That won't be the case in Q2. It's just the mix of shipments of catalyst shipment by product by product. Some are high margin. Some are moderate margin. So depending on Q2 has a different shipment levels, or shipment mix compared to Q1, but that doesn't concern us at all. I think it's just a very normal course of this event. And overall, the guidance, what we did for the ESS margin, that still holds very good.
Chris Snyder: Oh, no. Yeah. Thank you. I appreciate that. And then maybe, Vimal, just, you know, maybe a bigger picture question on the industrial automation portfolio. The business has leading positions in process, building, and warehouse. You know, there's not much of a discrete presence for sales into, you know, a factory. You talked earlier about willingness to do M&A. So I guess my question
Vimal Kapur: My question is, do you think it's important for Honeywell International Inc. automation's
Chris Snyder: Standalone entity to have discrete exposure in the portfolio? Thank you. |
3,125 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Chris Snyder: Standalone entity to have discrete exposure in the portfolio? Thank you.
Vimal Kapur: Chris, you know, as we're looking at the equity story of Honeywell International Inc. Automation, the way we are looking at it is our exposure to the end markets. We want to build a portfolio which is exposed to high-growth end verticals. So examples of that would be LNG. Example of that will be data center. Example of that will be semiconductor. So rather than looking at the business with a lens of process and hybrid and discrete, we are looking at the business with the lens of end markets and how much exposure you can have. And we'll share more with you when we are ready. We are there nothing for or against discrete automation. It's not that we like or don't like it. I think it's a factor of our exposure in that segment is low. That's a fact. But if it's any attractive opportunity, which is exposed to higher growth markets, as we have demonstrated in our acquisition profile. We'll absolutely execute that. We are looking for an acquisition which is accretive to our growth rates. And if possible, also accretive to our margin rates. We don't want to build onboard something which then we are, you know, being defensive on our growth profile. So more to come there. We remain active in our M&A portfolio and continue to outlook for good opportunities.
Chris Snyder: Appreciate that. Thank you.
Sean Meakim: Listen, we'll take one more question.
Operator: Thank you. Our final question this morning will come from the line of Andy Kaplowitz with Citigroup. Please proceed with your question. Hey, good morning, everyone. Thanks for filling me in.
Sean Meakim: You mentioned that HPS is expected to lead
Andy Kaplowitz: Industrial Automation's growth in 2025, I think, in the presentation, but it didn't lead growth in Q1. I think, where else automation did. So can you talk about the visibility customers, are you seeing any hints of CapEx delays or project deferrals and when end markets or regions are driving HBS's growth? |
3,126 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Vimal Kapur: Yes. So HPS number, Andy, if you see on a reported basis, as we've said in our prepared comments, we saw strength in our aftermarket services. That certainly drove a lot. There are other businesses which are reported as part of HPS, thermal solutions, and smart energy. They saw a minor, you know, pressure. So net-net, the whole segment was reported as flat. But if you look at the projects and services in HPS, they are performing on expected line. To your question, are we seeing any pressure on projects? I think with the combination of the lens we have both on the UOP side of the projects and HPS side, I certainly see some push out on projects which were sustainability-related. I think customers' willingness to spend money on sustainability-related investment, energy companies are becoming more cautious. And, certainly, we expect that factor to persist. On the other side, we see very strong trends on growth in gas processing and LNG. So kind of one offsets the other and that's why we have a portfolio which is very diversified. We cover all these end markets. So net-net, we do believe that, you know, we will have a normal year for HPS in 2025.
Andy Kaplowitz: Helpful. And just back to ARO and defense and space, you have difficult comps essentially all year defense, but you delivered double-digit growth in Q1. Are you seeing more strength in international defense now or is it growth relatively balanced and then it doesn't seem like you have or expect to see any impact from Dilig, but maybe you can elaborate on that.
Mike Stepniak: Yeah. So I think, first, maybe just answer to Doge question, don't see an impact. Majority of our programs are funded or have been funded, and those are multi-year programs. So don't see an issue there. Like I said earlier, international defense is continuing to show strength and low demand and interest out there. So I don't think the team will have any issue in terms of managing the comps on the defense and space side this year.
Andy Kaplowitz: Thanks, guys. |
3,127 | HON | 1 | 2,025 | 2025-04-29 08:30:00 | Honeywell International Inc. | 1,340,740 | Andy Kaplowitz: Thanks, guys.
Vimal Kapur: Thank you, Andy.
Operator: Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Kapur for any final comments.
Mike Stepniak: I want to express my sincere appreciation to our shareholders
Vimal Kapur: Our future shapers, and our customers for the unwavering support during this transformational time for Honeywell International Inc. Our future is bright, and we're excited to share more with you as we make progress in delivering with our commitments. Thank you very much for listening, and please stay safe and healthy. Thank you. This concludes today's conference call. You may disconnect your lines
Operator: At this time. Thank you for your participation. |
3,128 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | Operator: Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Olympia McNerney, IBM's Global Head of Investor Relations. Olympia, you may begin.
Olympia McNerney: Thank you. I'd like to welcome you to IBM's fourth quarter 2024 earnings presentation. I'm Olympia McNerney, and I'm here today with Arvind Krishna, IBM's Chairman, President and Chief Executive Officer; and Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. We'll post today's prepared remarks on the IBM website within a couple of hours, and a replay will be available by this time tomorrow. To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation, which is posted to our investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filings. So with that, I'll turn the call over to Arvind. |
3,129 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Thank you for joining us today. Let me start by reflecting on our strong close to 2024 and performance over the mid-term model, then get into more detail on the execution of our strategy. We are pleased with the progress we made in 2024, delivering revenue growth of 3% and $12.7 billion of free cash flow. We saw continued acceleration in Software and our highest level of cash flow generation in many years. As we close out the mid-term model we laid out at the end of '21, I am proud of our achievements. We met or exceeded our target metrics for revenue growth, profitability, and free cash flow growth. We set out a plan for mid-single-digit growth and we delivered on it, growing our revenue by a 6% CAGR over this period. All of our segments delivered revenue growth in line with our model over the last three years. Software grew ahead of our goal of mid-single-digits, and this momentum continued with 9% growth in 2024. We committed to accelerate the growth of Red Hat and we delivered double-digits for the year. Infrastructure performed in line with our model as we invested in innovation and transformed the business model. Consulting met the model for high-single-digit growth, although we acknowledge 2024 was below model. We are confident that our investment in partnerships and skills as well as our early leadership in GenAI positioned us to accelerate Consulting growth as we move forward. Overall, our technology momentum and Consulting signings bolster our confidence in our future performance. Before getting deeper into our execution, I'll make a few comments on the macroeconomic environment. As we look at the broader environment, IBM's mission to help businesses leverage technology to both scale revenue and grow profitably is more critical than ever. Geopolitical tensions, interest-rate volatility, supply-chain vulnerabilities, demographic shifts, evolving cyber threats are creating headwinds for businesses worldwide. In this context, technology is key to drive sustainable growth. IBM's combination |
3,130 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | creating headwinds for businesses worldwide. In this context, technology is key to drive sustainable growth. IBM's combination of advanced technology and deep consulting expertise positions us to uniquely deliver end-to-end business transformations. We entered the year intent on enhancing our portfolio. Software is now about 45% of our business with more than $15 billion of ARR, growing at double-digits. We delivered strong and accelerating revenue growth of 11% in the fourth quarter, which includes 8 points of organic growth and strength across the portfolio. This growth was led by Red Hat, up 17% in the quarter. Our early leadership in generative AI and the Consulting Advantage platform have positioned us well in today's evolving market. In infrastructure, z16 is our most successful program in history, highlighting customer adoption and continued reliance on the mainframe. We see more opportunities ahead as our Infrastructure solutions play a crucial role in helping clients bring AI workloads closer to their data and we will launch z17 in the middle of 2025. Let me now address our progress in generative AI. We continue to gain momentum with our GenAI book of business growing to over $5 billion inception-to-date, up by about $2 billion quarter-over-quarter. Approximately one-fifth of this book of business comes from software and the remaining four-fifths is Consulting. Our AI portfolio is tailored to meet the diverse needs of enterprise clients, enabling them to leverage a mix of models, IBMs, their own, open models from Hugging Face, Meta and Mistral. IBM's Granite models designed for specific purposes are 90% more cost-efficient than larger alternatives. Additionally, RHEL AI and OpenShift AI provide clients with a consistent and scalable AI foundation built on open-source technology. This quarter, we saw strong traction in our watsonx middleware solutions and AI assistance, including, watsonx.gov, watsonx code assistant for Z, watsonx Orchestrate, as well as products embedding AI such as Concert, and |
3,131 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | watsonx.gov, watsonx code assistant for Z, watsonx Orchestrate, as well as products embedding AI such as Concert, and consulting remains key to designing and implementing AI use cases driving watsonx deployment. Through the year, we introduced key innovations that are resonating with clients. This quarter, we launched OpenShift Virtualization Engine to meet growing virtualization demand. In Infrastructure, the Telum II processor enhances IBM Z's AI capabilities and performance. We just announced RISE with SAP on IBM Power Virtual Server, offering the fastest and easiest migration from on-premises to cloud for the 10,000 plus clients who use SAP on IBM Power. The Consulting Advantage platform is integrating our technology and industry expertise to drive business transformation. With more than 75 quantum systems deployed worldwide, our focus on emerging innovation is clear. This quarter, we announced a collaboration with the State of Illinois to establish the National Quantum Algorithm Center in Chicago. M&A remains a key enabler of our strategy. The acquisition of Neural Magic strengthens our AI solutions with advanced model optimization. Clients worldwide trust IBM to lead transformations. Notable examples this quarter include NatWest and Lockheed Martin, leveraging our Granite models for advanced AI applications. L'Oreal is partnering with IBM to use our AI, consulting, and research capabilities to develop foundation models for cosmetics formulation. We also collaborated with UFC and Ferrari, helping them tap into IBM's AI and consulting expertise to drive operational efficiency. Announced earlier this month, IBM and the U.K. Home Office will partner on the Emergency Services Network, supporting more than 300,000 emergency responders in Great Britain. Our ecosystem continues to expand as we strengthen our partnerships with leading technology providers, including AMD, Palo Alto Networks, SAP, Amazon, Microsoft, and CoreWeave. These partnerships allow us to co-innovate and deliver greater value to clients. Before |
3,132 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | SAP, Amazon, Microsoft, and CoreWeave. These partnerships allow us to co-innovate and deliver greater value to clients. Before I conclude, let me touch on our outlook. We see continued momentum in our business, driven by our focused strategy, enhanced portfolio and culture of innovation. For 2025, we expect revenue growth inflecting higher to 5% plus and about $13.5 billion of free cash flow. I look forward to sharing more details at our upcoming Investor Day on February 4. I will now hand over to Jim to walk you through the details of the quarter. Jim, over to you. |
3,133 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | James Kavanaugh: Thanks, Arvind. For the full year, we delivered about $63 billion in revenue, $11.2 billion of operating pre-tax income and operating earnings per share of $10.33. And we generated $12.7 billion of free cash flow, our strongest level of free cash flow generation in many years and our highest reported free cash flow margin in history. Revenue growth combined with 120 basis points of operating pre-tax margin expansion drove 9% operating pre-tax profit growth, 14% free cash flow growth, and 7% operating diluted earnings per share growth. We are pleased with these results, delivering durable revenue growth in our repositioned business and exceeding our expectations on profitability, free cash flow, and earnings per share. Revenue performance for the year was led by Software, up 9%, with strength across our portfolio. We achieved Rule of 40, driven by the combination of accelerating growth and margin expansion throughout the year. Consulting revenue was up 1% and continued to be impacted by a dynamic market environment as clients reprioritized spending. While infrastructure was down 3%, reflecting product cycle dynamics, we delivered more than 120% program-to-program growth for z16, our most successful program in history. Our portfolio mix, operating leverage, and yield from productivity initiatives generated strong operating gross margin and operating profit performance. For the full year, we expanded operating gross profit margin by 130 basis points. Our operating pre-tax margin expanded by 120 basis points, ahead of our expectations and well above our model. These results represent our highest level of operating gross margin and operating pre-tax margin in many years. Now turning to a deeper dive on the quarter, we generated $17.6 billion of revenue, up over 2% at constant currency and ahead of our expectation. Software growth accelerated to 11% with strength across our key categories of Red Hat, Automation, Data & AI, and Transaction Processing. Consulting was down 1%. This quarter, we achieved |
3,134 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | key categories of Red Hat, Automation, Data & AI, and Transaction Processing. Consulting was down 1%. This quarter, we achieved record levels of signings and strong sequential growth in our generative AI book of business, reflecting our early leadership in the areas our clients are prioritizing. Infrastructure was down 6%, reflecting product cycle dynamics in our 11th quarter of z16. Looking at our profit metrics, in the fourth quarter, we expanded operating gross margin by 50 basis points and operating pre-tax margin by 40 basis points. We are pleased with this strong performance driven by our portfolio mix, operating leverage, and ongoing productivity initiatives, similar to the full year. This allowed for continued investments to drive innovation in our portfolio, which you can see in our higher R&D expense, up 13%. Our operating tax rate was 14%, which is flat versus last year. And our operating earnings per share of $3.92 was up 1%. For the full year, we generated $12.7 billion of free cash flow, up $1.5 billion and growing 14%. The largest driver of this growth comes from adjusted EBITDA, up about $900 million year-over-year. We realized $500 million in proceeds from the Palo Alto QRadar transaction, which was a small contribution to free cash flow given the payout of structural actions and foregone profit. We also delivered sustainable lower cash requirements through changes in our retirement plans. As we close out the mid-term model we introduced in 2021, we've grown free cash flow faster than revenue in each of the last three years, have exited 2024 with our highest free cash flow margin in reported history and our free cash flow run rate is above our mid-term model. In terms of cash uses for the year, we invested over $3 billion on acquisitions and we returned just over $6 billion to shareholders in the form of dividends. Looking at the balance sheet, we ended the year with a strong liquidity position with cash of $14.8 billion, which is up $1.3 billion year-over-year. Our debt balance ended the year |
3,135 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | strong liquidity position with cash of $14.8 billion, which is up $1.3 billion year-over-year. Our debt balance ended the year down $1.6 billion at $55 billion, including approximately $12 billion of debt associated with our financing business. Turning to the segments. Software revenue growth accelerated to 11% in the fourth quarter, driven by strength across the portfolio, with growth of 17% for Red Hat, 16% for Automation, 11% for Transaction Processing, and 5% for both Data & AI and Security. We are pleased with how we finished the year, exceeding the Rule of 40 and the growth driver expectations we set back in January. Let me dive in a little deeper on each of these growth drivers. We continue to see momentum in Red Hat with fourth quarter revenue growth of 17%, fueled by six consecutive quarters of double-digit bookings growth. This performance reflects the continued demand for our hybrid cloud solutions as clients are prioritizing application modernization on OpenShift containers and Ansible automation to optimize their IT spend and reduce operational complexity. OpenShift is now $1.4 billion ARR business, growing about 25%, and we continue to see increased volume in OpenShift Virtualization engagements. In addition to the strength in subscriptions, we saw a recovery in the consumption-based services business. Looking forward, Red Hat's six-month revenue under contract, a reflection of the strong bookings performance mentioned, continues to grow in the mid-teens. We delivered strong results in our recurring revenue base and are seeing momentum from innovation across our portfolio. Our Hybrid Platform & Solutions ARR was $15.3 billion, up 11%. Transaction Processing delivered another strong quarter, driven by growing capacity demands, solid renewal rates, and increasing contribution from our generative AI product watsonx Code Assistant for Z. We continue to introduce new products, which are making a meaningful impact on Software's results. We have confidence in our portfolio with our market-leading |
3,136 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | which are making a meaningful impact on Software's results. We have confidence in our portfolio with our market-leading businesses centered around hybrid cloud, automation, data, and transaction processing. In the quarter, about 8 points of our growth was organic, led by demand for our generative AI products like Concert and our AI assistants. We launched new products such as next generation of watsonx Code Assistant that provides coding support for multiple languages and Guardium Quantum Safe that helps organization monitor and manage their cryptographic security to fix vulnerabilities. And these investments in generative AI are paying off with the Software AI book of business reaching about $1 billion inception-to-date in the fourth quarter. Our performance continues to benefit from our recent acquisitions. We are seeing growing contribution from the StreamSets and webMethods assets acquired in the second quarter. And at the end of 2024, we closed the acquisition of Neural Magic, which strengthens our AI capabilities in performance engineering and model optimization. And we are looking forward to the opportunities that the pending HashiCorp acquisition will bring. Looking at Software profit for the quarter, gross margin expanded and segment profit was up over 220 basis points year-to-year, reflecting operating leverage driven by our revenue performance. In Consulting, revenue was down 1%. Throughout the year, we have operated in a dynamic macroeconomic environment. We continue to see clients reprioritizing their IT spending towards digital transformation and AI initiatives for cost optimization and operational efficiency as we wrap on a strong above-market performance in 2023. Our focus remains on rapidly evolving our offerings and enhancing investments in skills and capabilities to align with these priorities. Our ability to address client demands drove signings growth of 23% in the quarter, our highest fourth quarter signings in recent history. Generative AI contributed about $1.5 billion of new bookings in |
3,137 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | quarter, our highest fourth quarter signings in recent history. Generative AI contributed about $1.5 billion of new bookings in the quarter as clients see the value our extensive industry and enterprise AI expertise can bring to accelerating their digital transformations. The strong signings performance takes our book-to-bill ratio up to 1.21% over the last 12 months. Our overall backlog remains healthy, up 8% year-over-year, and our backlog erosion levels remain stable. Our Red Hat practice delivered another record-breaking quarter of signings and double-digit revenue growth and we now have an annual revenue of nearly $3 billion. In the quarter, strategic partnerships were a growth contributor, both in signings and revenue with solid performance from partnerships with AWS and Azure. We are actively investing to enhance our skills and capabilities to address our clients' top priorities with acquisitions like Accelalpha, a global Oracle services provider, which closed in the fourth quarter. And earlier this month, we announced our intent to acquire Applications Technology Software, a consultancy known for driving business transformation with Oracle cloud applications. Turning to our lines of business, Business Transformation revenue grew 2%, driven by continued strength in transformational projects for data, finance, and supply chain. Both Technology Consulting and Application Operations declined in the quarter. Similar to last quarter, there was strength in cloud-based application services across modernization, development, and management. But we continue to see clients reprioritize spending away from on-prem customized services. Looking at Consulting profit, we delivered segment profit margin of nearly 12%, a sequential expansion of almost 1 point, as we continue to realize the benefits of our productivity actions. Moving to the Infrastructure segment, revenue was down 6%, reflecting product cycle dynamics. Hybrid Infrastructure was down 8% and Infrastructure Support was flat. Within Hybrid Infrastructure, IBM |
3,138 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | cycle dynamics. Hybrid Infrastructure was down 8% and Infrastructure Support was flat. Within Hybrid Infrastructure, IBM Z revenue is down 20% in the quarter. This is the 11th quarter of z16 availability and the combination of resiliency, reliability, and security continues to resonate with clients. Nearly three years in, this product cycle has outpaced prior cycles and program-to-date installed MIPS have increased over 30% as clients' capacity needs continue to grow. IBM Z remains an enduring platform for mission-critical workloads, driving not just hardware adoption, but also the related software, storage, and services. Distributed Infrastructure revenue grew 2%. This performance was fueled by double-digit growth in storage as we introduced new innovation in quarter designed to give clients the ability to scale storage capacity to meet growing data demands to support the next-generation of AI workloads and projects. For Infrastructure profit, we expanded gross profit margin nearly 2 points sequentially. Our segment profit margin was down 320 basis points in the quarter, reflecting where we are in the product cycle and continued investments in innovation. For the full year, our segment profit margin was 17.5%. Now let me bring it back up to the IBM level to wrap up. As Arvind mentioned, we met or exceeded our mid-term model target metrics for revenue growth, profitability, and free cash flow growth. And we have fundamentally repositioned our business to a software-led integrated platform. Let me now turn to 2025 guidance on our two key measures of success, revenue growth and free cash flow. We expect constant currency revenue growth inflecting higher to 5% plus, and we expect to grow free cash flow faster than revenue growth with about $13.5 billion of free cash flow. Given the continued strengthening of the dollar, we expect currency to be about a 2-point headwind to revenue growth for the year. Our revenue expectations are underpinned by accelerating growth across our businesses. In Software, given the |
3,139 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | for the year. Our revenue expectations are underpinned by accelerating growth across our businesses. In Software, given the strength of our portfolio, investment in innovation and the contribution from acquisitions, we expect revenue growth approaching double-digits. We continue to see the strength in Red Hat with mid-teens growth for the year. In Consulting, the combination of our backlog levels, record signings in the fourth quarter, and our book of business in GenAI support an acceleration in growth to low-single-digits. And with our new mainframe launch in mid-2025, we expect Infrastructure to be about a point contribution to IBM's overall revenue growth. For the full year, we expect IBM's operating pre-tax margin to expand by over 0.5 point. Portfolio mix and ongoing productivity initiatives continue to drive margin expansion, mitigated by the impact of dilution from acquisitions. Our tax rate for the year should be in the mid-teens, and as always, the timing of discrete items can cause the rate to vary within the year. For free cash flow, we expect to generate about $13.5 billion in 2025. Given the strong fundamentals of our business, we expect double-digit adjusted EBITDA growth, which is the primary driver of our free cash flow. This will be offset by cash tax headwinds and higher CapEx. Our productivity initiatives have enabled investments in innovation, skills, and go-to-market capabilities, including our ecosystem. We have accomplished this while simultaneously growing our operating profit margin and free cash flow, which in turn has increased our financial flexibility. This remains our playbook going forward, having executed on $3.5 billion of annual run rate savings exiting 2024, supporting our strong free cash flow growing in excess of revenue. Looking to the first quarter, I expect our constant currency revenue growth rate to be similar to the fourth quarter. We expect workforce rebalancing fairly consistent with prior year. We are also ramping on the $241 million gain from the divestiture of The |
3,140 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | rebalancing fairly consistent with prior year. We are also ramping on the $241 million gain from the divestiture of The Weather Company. Excluding the year-over-year impact of the gain, we expect about 50 basis points of operating pre-tax margin expansion. It is hard to predict discrete events. But our best view is that the first quarter tax rate could be a few points lower than the full year rate, but still a headwind over last year. In summary, we have delivered durable growth over the mid-term model and expect to drive an upwards inflection. We have repositioned our business and are excited about 2025 and beyond. We look forward to discussing more details at our upcoming Investor Day on February 4. Arvind and I are now happy to take your questions. Olympia, let's get started. |
3,141 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Thank you, Jim. Before we begin the Q&A, I'd like to mention a couple of items. First, supplemental information is provided at the end of the presentation. And then second, as always, I'd ask you to refrain from multipart questions. Operator, let's please open up for questions.
Operator: [Operator Instructions] And our first question comes from Amit Daryanani with Evercore ISI. Please state your question.
Amit Daryanani: Thanks for taking my question. Good afternoon, everyone. I was hoping if you could just talk a little bit about when I think about the calendar '25 guide you folks just provided, if you could just provide some context around linearity and how that could play out, maybe you can talk about H1 versus H2 perspective, given I think some of the consulting and mainframe tailwinds could be a bit more back-half heavy. So if you could just touch on kind of first half versus second half or anything on the linearity that would be helpful as you think about '25? |
3,142 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | James Kavanaugh: Yes, Amit, thank you very much and appreciate the question overall. Obviously, we're very pleased, as we talked about in the prepared remarks, about how we finished on a strong note of over-delivering on revenue profitability, earnings per share, free cash flow. That gives us the conviction and the confidence as we guided in 2025 with above Street revenue growth at 5% plus at constant currency and a very strong free cash flow engine of $13.5 billion of growing nicely and continuing to grow that free cash flow margin. But if you look underneath it, linearity, when you get to that point, yes, first half, I would tell you, you got to answer this by segment. We've got a very strong portfolio, which is executing extremely well on Software. We see a pretty normal history as we move through a first half, second half. Obviously, you do have seasonality between a 1Q and a 2Q versus a third quarter and fourth, but that is -- we got a very hot hand and we're going to continue to invest in innovation. Second, on Consulting, we feel pretty good about how we concluded the year with our highest recorded ever signings quarter, up 23%. We entered the year with a backlog of plus 8%, a strong book-to-bill at 1.21. We're still dealing with a very dynamic environment around client prioritizing spend. And I think it's prudent for us right now, although we call low-single-digit for the year to see that accelerate as we move through the year. So I would see more of a second half play than a first half play. And then you get to Infrastructure. We did extremely well at the end of a three-year cycle. Our most promising program in mainframe, I think ever overall, delivering 122%. Yes, first quarter, we expect about, again, about a similar point impact to IBM's growth. But second quarter on, we're back to growth above our model through the year, and that's what gives us confidence in the guide that we called for the year. So a little bit of a mix shift, definitely strengthened Software, which is going to drive this business |
3,143 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | we called for the year. So a little bit of a mix shift, definitely strengthened Software, which is going to drive this business being 45% IBM. But when you bring it all together, maybe it's a point less first half on revenue versus history versus second half. But from a free cash flow perspective, we're pretty similar to history overall. |
3,144 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Great. Operator, let's take the next question.
Operator: Your next question comes from Wamsi Mohan with Bank of America. Please state your question.
Wamsi Mohan: Yes, thank you so much and congrats on the really strong free cash flow performance. Arvind, would love to get your thoughts around M&A, particularly as we maybe enter a period of relatively low regulatory overhang. At the same time, you are delivering record cash flows. And if I could, would love to get some of your thoughts on DeepSeek and any implications that you see either for the industry broadly or for IBM in particular? Thank you. |
3,145 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Thanks, Wamsi. Look, we are looking forward to a regulatory environment that is a bit more rational and a bit more pro-competition. So I think what that implies for us is that we think reasonable deals have a very good chance of getting through in a reasonable amount of time and not being held up for years. So with that context, that means, obviously, we are going to lean in more, which is reasonable. If you look at our free cash flow and you look at what we are setting out for the year, that could leave as much as $7 billion or a bit more than that during the year after accounting for the dividend. We always look at a three-year flexibility. I think that's the best way of looking at it, Wamsi. So if you look at a three-year flexibility, you can kind of borrow ahead, but we do kind of want to live within sort of what we can afford. And if we find targets that meet our criteria, we are going to lean in and get things done. I'm going to just finish that by saying Hashi has been waiting out there for almost a year. We certainly hope that with a friendlier environment, that gets done soon and that then begins to open up the aperture for getting more deals done. So I think hopefully that address both the cash flows and the regulations around M&A. Look, DeepSeek, I think, was a point of validation. We have been very vocal for about a year that smaller models and more reasonable training times are going to be essential for enterprise deployment of large language models. We have been down that journey ourselves for more than a year. We see as much as 30 times reduction in inference costs using these approaches. As other people begin to follow that route, we think that this is incredibly good for our enterprise clients. And we will certainly take advantage of that in our business, but I believe that others will also follow that route.
Olympia McNerney: Great. Operator, let's take the next question.
Operator: Your next question comes from Jim Schneider with Goldman Sachs. Please state your question. |
3,146 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | Operator: Your next question comes from Jim Schneider with Goldman Sachs. Please state your question.
Jim Schneider: Thanks, and good afternoon. Thanks for taking my question. I was wondering if you maybe highlight two topics, one on Consulting and one on the AI Software side. On the Consulting side of things, it's good to see the bookings that you're seeing. But can you maybe give us historically, the context is IBM tends to lag the Consulting business relative to some of your peers, but what is the level of confidence you have in the revenue yield and revenue recovery you talked about for the back half of the year and how do you feel about the sort of revenue yield today versus, say, a year ago? And then secondly, on the AI Software side, you mentioned the $1 billion book of business purely within Software, that's pretty substantial. And while there's been some moving parts in terms of which products have gotten traction, which are the products of the ones you mentioned that you think are really going to be sort of standouts in the next couple of years from a Software performance perspective? Thank you. |
3,147 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | James Kavanaugh: Thank you, Jim. I'll take the first one and then Arvind can handle the second one around the products and Software overall. We take a look at it from a Consulting perspective, we've been talking about, we have been operating along with every other consulting company in a very dynamic macroeconomic environment. As with any technological shift, there are going to be reprioritization of spending that is occurring. Clients, similar to IBM, we are cutting back on discretionary-based spend, so we can fuel investment into digital transformation and GenAI overall. We've been seeing that play out throughout 2024. By the way, on top of above-market performance and gaining significant share over the last six quarters starting in 2023. Now, why have we been so maniacally focused on the GenAI ramp and our greater than $4 billion book of business right now coming out six quarters in, which we believe, by the way, we're in a very early leadership position around that. We're so maniacally focused because enterprise clients are making their strategic provider of choice decisions. And we are feeling very good about that greater than $4 billion book of business, which, by the way, is already north of 5% of our total backlog, which, is as I told Amit in the first question, is up 8% coming into 2025. Why is that important? Because that is going to be a long-term future vector of growth for Consulting for us to win that has a multiplier effect that will drag our Software component of our business going forward. So we feel pretty good. While right now, early in the cycle, it has less yield, it has higher durations, but we think the TAM opportunity and that multiplier effect are going to grow into each other. And that's one of a couple of components on why we have conviction of inflecting back to growth in 2025 with Consulting overall. |
3,148 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Thanks, Jim. So let me take the question, Jim, on the thoughts about the Software products, which I think will be standout. I got to begin with our watsonx family. Our watsonx family encapsulates our primary products that incorporate LLMs and AI technology. Our watsonx Code Assistant on how we help our clients modernize their COBOL infrastructures, our code assistance on how people leverage it for Java, for Ansible have been absolute standouts and have been in market for almost a year. The rest of the watsonx family also, whether it's about deploying models using AI or getting the data ready and governance, have also been very strong drivers. And the piece that most people have not been paying attention to, I want to point out, is in the Red Hat family, both Red Hat for getting models deployed on a single server with GPUs as well as what we are now going to be doing with our Neural Magic acquisition on how do you optimize and get the most effective use of the hardware using Red Hat. And then when you have large deployments leveraging OpenShift for AI deployment are the final rounding out of the products. Look, to be candid, LLMs will infuse many, many other things, but the products that are called out are the ones where we count it as direct AI products and directly driving the business, and that's what is counted in the numbers that Jim laid out.
Olympia McNerney: Operator, next question.
Operator: Your next question comes from Ben Reitzes with Melius Research. Please state your question. |
3,149 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | Operator: Your next question comes from Ben Reitzes with Melius Research. Please state your question.
Ben Reitzes: Yes. Thanks a lot. A lot of the -- couple of the questions were asked. So I'm going to ask about Infrastructure, and I also wanted to congratulate you guys your mix shift towards Software is really resonating. But I'm going to ask about Infrastructure and two aspects, one is tied to it within Software is TPP. It's super profitable and growing 11%. Just I wanted to see where that fit in, in terms of your guidance for the year and how sustainable that is. And I think that the AI assistant is having a big impact on that and so changing the way we may be thinking on that. And then with regard to Infrastructure, which is a little bit tied to that segment, maybe I'm wrong. In terms of the mainframe and the delta in growth, if you could just be a little more prescriptive there and talk about why you have confidence that this will be a well-received cycle. Really appreciate it. Thank you. |
3,150 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | James Kavanaugh: Okay. Thanks, Ben. This is Jim. I'll take this. First of all, thank you for the compliments. Team has worked extremely hard. We laid out a very ambitious three-year roadmap a few years ago when we spun off Kyndryl to reposition IBM. And as we talked about in prepared remarks, team has executed and met or exceeded every single one of those targets that we put out to the Street. So a lot of hard work here, but the beauty is we got a lot more to go, which we're extremely excited about, and we'll talk about that next week at Investor Day. But let's talk about TPP. First of all, you can't talk about TPP to the heart of your question without talking about the absolute tremendous execution of what's been happening with our mainframe cycle. This has been one of the longest programs and most consistent in terms of revenue growth that we've ever seen. And I think it's an instantiation of the value of our enduring platform in a hybrid cloud and AI area -- era overall. 120% plus prior program, 70% of the clients on mainframe are growing MIPS. That is a very different profile than where we were 10 years ago. And the installed MIPS are up 3x over the last few cycles. Now why is that important? We run mainframe, yes, mission-critical workloads for, what, 97% of the mission-critical transactional processing around all of -- many of the different industries, banking, retail, airlines, you name it, but we run it as a stack economic platform play. TPP is a mission-critical software on top of that. It's a key growth contributor capitalizing on those mainframe stack economics, high source of revenue, high source of profit to fuel investment flexibility of us continuing this engine of innovation in Software. And it also provides a solid incumbency base for the multiplier effect. We grew our Transaction Processing 10% in 2024, exiting at 11%. The underlying dynamics of that, I would say about 4 points of that growth is due to the capitalization of the underlying workloads that are driving mainframe. About 3 points of |
3,151 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | 4 points of that growth is due to the capitalization of the underlying workloads that are driving mainframe. About 3 points of that is the investment in the new innovation that we've been bringing to the mainframe platform, call that watsonx Code Assistant for Z and how we're monetizing value of GenAI and then about 3 points of that is back to historical price optimization. If you look at 2025, our guidance, where we called software continuing to accelerate, approaching double-digit, I would say prudently right now between Arvind and I, a consistent mid-single-digit growth in TPP, and we'll see how that plays out with the new cycle of mainframe in '25. |
3,152 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Operator, let's take the next question.
Operator: Your next question comes from Brent Thill with Jefferies. Please state your question.
Bo Yin: Thanks. This is Bo on for Brent. Arvind, it would be great to get your view of the business climate more specifically on the Software side, but also more generally across business segments. What are you hearing from customers and how are they thinking about their software budgets in 2025? |
3,153 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Thanks. Look, I've been quite public and quite vocal around this topic. So let's acknowledge many of the things that occupy media headlines and then as a consequence, they do occupy business leaders' heads. Geopolitical tensions may be on a better track right now, but certainly not solved. Interest rates, inflation, demographics, lack of skilled labor, supply chain, I think these issues all carry over into 2025. That said, and I did spend last week in Davos where you get to meet a few hundred of your colleagues from around the world. I would tell you there is more optimism in the business climate and there is more optimism on the growth that is possible in '25 compared to '24. And we know all the reasons for that. Is it pro-innovation, is it pro-growth? Is it pro-regulation, reducing friction? All those things I believe are going to result in a better environment in 2025. That then translates into how our company is going to grow. To a person, everybody believes technology is now essential for helping them grow. How can you service customers better? How can you market better? How can you reach people more? How can you get things done in minutes instead of hours? So software is the basis for all of those capabilities. I think to a person, the budget that they will touch last, if there is ever an issue, is their software budget. So that is what is giving us confidence also, as Jim talked about approaching double-digits in Software is that software is essential to how people are going to achieve their business goals. And if you can get ahead in this year, it will probably keep you ahead. So it becomes kind of a gift that keeps repeating for our clients.
Olympia McNerney: Operator, let's take the next question.
Operator: Your next question comes from Erik Woodring with Morgan Stanley. Please state your question. |
3,154 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | Operator: Your next question comes from Erik Woodring with Morgan Stanley. Please state your question.
Erik Woodring: Hi, guys, thank you so much for taking my questions, and congrats on the really strong free cash flow performance and guide. One clarification quickly was just -- Jim, just want to make sure when we think about the 2025 outlook, is that inclusive or excluding HashiCorp? And then my broader question again for you, Jim, is just if you could walk through and quantify a bit more detail some of the free cash flow puts and takes as we go into 2025, just between the cash taxes, the CapEx, the EBITDA growth, any more detail would be super helpful just as we think about our model. Thanks so much. |
3,155 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | James Kavanaugh: Thanks, Erik. And again, thanks for the compliments to the team here collectively around the world. It means a lot. Yes, short answer on Hashi, as always, we guide all in. So we fully expect to close the Hashi transaction in a relatively soon period of time as we saw in the K that was issued by HashiCorp overall. We fully expect that in this new administration environment. So all in, revenue growth, profit margin guidance that we gave and free cash flow, which, by the way, is growing faster than revenue. When you take a look underneath, we're extremely pleased on how we finished the last couple of years overall, highest free cash flow margin in the history of our great company for 115 years. And oh, by the way, we exited 2024 with a free cash flow run rate above our mid-term model of what we laid out three years ago, consistently growing free cash flow well in excess of revenue overall. So that's what gives us the confidence and the conviction that all of the tough work on our portfolio optimization that has shifted much more to a software-centric-led hybrid cloud platform company, the productivity, which, by the way, executing north of $3.5 billion exit run rate, we got out in front of that. I would call that discipline. I would call that execution of a company gives us the conviction and confidence in our guide in 2025 that takes into account that dilution effect. Hashi, in and of itself, is probably about a point of revenue growth to IBM in the year and it's probably many of you have done the math, $300 million, $0.30 give or take of dilution. By the way, still a very attractive financial model coupled with the strategic fit and synergy because we do believe adjusted EBITDA, we're well on our path of a -- within 12 months accretive and free cash flow within two years accretive overall, if you've been following Harshi's results. But the underlying dynamics of our free cash flow drive, over 100% of it's going to be delivered by high-quality sustainable adjusted EBITDA growth. That is driving |
3,156 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | cash flow drive, over 100% of it's going to be delivered by high-quality sustainable adjusted EBITDA growth. That is driving this company to a sustainable durable mid-single-digit growth, now 5-plus-percent. The underlying operating leverage we continue to generate in this business will drive double-digit adjusted EBITDA growth in 2025. That -- just to put some dollar amounts around it, that's probably over $1.5 billion in and of itself. Now mitigating some of that, one, we are going to continue to invest in this business and that CapEx number is going to go up a couple of hundred million dollars as we invest in our Software, our GenAI, our next-generation mainframe, et cetera, quantum, by the way, we continue to invest in. Two, with that incremental profit dollar, we're going to pay more cash tax. That's a couple of hundred million more there. And three, to the heart of your question, the net interest opportunity loss overall will probably be another a couple of hundred million dollars overall. So when you put those pieces together, the way I would kind of qualify it, high quality, sustainable free cash flow generation engine that's going to deliver faster in revenue growth. |
3,157 | IBM | 4 | 2,024 | 2025-01-29 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Operator, next question please. Operator, can we have the next question? Operator, can we take the next question? Operator, can we have the next question, please? Brian Essex, can you ask your question, please? All right, just please bear with us. We're having an issue with our operator. We'll be back in a minute. All right. Apologies. We're having a technical issue with our operator. So apologies that we can't finish our Q&A. We look forward to taking more questions-and-answers at our upcoming Investor Day on February 4. Let me turn it to Arvind for closing.
Arvind Krishna: Thanks, Olympia. Look, we do apologize from all of us. We are looking forward to your questions, but we will get multiple hours with the team, as Olympia said, on February the 4. So I do hope that those of you who couldn't get your questions in will come that day and ask your questions. Look, just to wrap up, as we have wrapped on our midterm model, and Jim explained some of this, we executed on our strategy to deliver sustained revenue growth and cash. The changes we have made to our business over the last couple of years and our performance reinforced my confidence in this next chapter of our growth. I look forward to continuing this dialogue and through the year. |
3,158 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Operator: Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Olympia McNerney, IBM’s Global Head of Investor Relations. Olympia, you may begin.
Olympia McNerney: Thank you. I'd like to welcome you to IBM's Third Quarter 2024 Earnings Presentation. I'm Olympia McNerney. and I'm here today with Arvind Krishna, IBM's Chairman, President and Chief Executive Officer; and Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. We'll post today's prepared remarks on the IBM investor website within a couple of hours, and a replay will be available by this time tomorrow. To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation, which is posted to our investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filings. So with that, I'll turn the call over to Arvind. |
3,159 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Thank you for joining us today. Let me start by discussing the quarter before I get into more detail on the execution of our strategy. We delivered double-digit revenue growth in software with the reacceleration in Red Hat and continued strength in transaction processing. Infrastructure reflects product cycle dynamics with z16 well ahead of prior cycles, highlighting customer adoption and continued reliance on the mainframe. In consulting, we continue to navigate an uncertain macro environment with results at the lower end of our expectations. We generated strong operating profitability and the highest levels of first-nine months cash generation in many years, while overall revenue performance was mixed. We continue to reposition our portfolio towards a higher growth, higher margin business that is well positioned to address client needs around hybrid cloud and artificial intelligence. I'll start with a few thoughts on the macroeconomic environment. Technology spending remains strong. Businesses view technology as a source of competitive advantage allowing them to scale operations, improve productivity and drive growth. However, a pause in discretionary spending is impacting our consulting business. This is due to economic uncertainty which stems from several temporary factors, including geopolitical issues, upcoming elections and the changing landscape of interest rates and inflation levels. The consulting market remains dynamic with significant opportunity as clients prepare for AI. Overall, we are confident in our business and our ability to capture these opportunities. Now turning to our performance. Software is nearly 45% of our total revenue, up from the high-20s in 2018, a testament to our focus on organic innovation and repositioning our portfolio. You can see this in our quarterly results as we delivered strong and accelerating software revenue growth of 10%, including Red Hat at 14%, 7 points of organic growth and strength across our key platforms. Software segment profit margin was |
3,160 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | including Red Hat at 14%, 7 points of organic growth and strength across our key platforms. Software segment profit margin was about 30%. Our recurring revenue base, which is about 80% of annual software revenue, continues to deliver strong growth. ARR for hybrid platform and solutions now stands at $14.9 billion, up 11% year-over-year. This quarter marks the five year anniversary of our acquisition of Red Hat and I am proud of our accomplishments together. Since IBM announced the acquisition, Red Hat revenue has grown to approximately $6.5 billion, doubling in size and delivering a mid-teens CAGR. OpenShift scaled from about $100 million in ARR to $1.3 billion, expanding more than 10 times. Red Hat has also continued to diversify its global footprint expanding into many new countries since acquisition. We continue to drive innovation, announcing new capabilities, including Ansible 2.5, RHEL.ai and OpenShift AI. Red Hat was also named a leader for the second consecutive year in the 2024 Gartner Magic Quadrant for Container Management. We continue to gain traction in enterprise AI. Our book of business related to generative AI is now over $3 billion inception to date, up more than $1 billion quarter-over-quarter. The mix is roughly one-fifth software and four-fifth consulting signings. This performance has placed us in an early leadership position, which is crucial at the onset of any technology shift. The AI portfolio we have built is designed to give clients a comprehensive set of tools to deploy AI within their enterprise. RHEL.ai and OpenShift AI allow clients to build a consistent AI foundation based on open source technology, while watsonx provides an AI middleware platform. Our assistants are designed to help clients become more productive using AI across a variety of business processes from code to HR, customer service and more. Consulting is helping clients design and execute AI strategies. We also continue to see our infrastructure segment play a larger role as clients bring AI to their data. Choosing |
3,161 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | strategies. We also continue to see our infrastructure segment play a larger role as clients bring AI to their data. Choosing the right AI model is top of mind for our clients. IBM's Granite family of AI models are fit for purpose. Earlier this year, we released code models with 8 billion to 34 billion parameters. This month, we updated Granite models, making them approximately 90% more cost efficient than larger models. These models can be trained in weeks instead of months and are easier to fine-tune for specific tasks. Granite models are available on watsonx and Red Hat and are also integrated into offerings from partners like AWS, Salesforce, Qualcomm and SAP. Globally, clients are turning to IBM to transform their operations with technology. This quarter, we announced new collaborations with NatWest, Telefonica, Samsung SDS, Toyota Systems and many others. At the U.S. Open, IBM delivered AI-generated match report summaries and we are collaborating with ESPN to enhance the sports coverage through advanced AI insights. We also continue to deepen our relationships with key technology partners, including Dell, Intel, Microsoft, Oracle, Salesforce, SAP and ServiceNow. We remain focused on delivering innovations to the market. For example, this quarter, we announced Telum II, IBM's next-generation processor for Z and the Spyre Accelerator, which will significantly enhance IBM Z's AI capabilities and processing power for enterprise scale applications. Investment in emerging technologies also remains a focus for IBM. Earlier this month, we opened Europe's first IBM Quantum Data Center. This is the second IBM Quantum data center deployed globally, which will greatly advance our goal of expanding access to the world's most performant quantum computers. Before I conclude, let me touch on our outlook. The momentum in our software strategy can be seen in our year-to-date results. Our revenue guidance for the fourth quarter reflects this progress, balanced by macro dynamics in Consulting and Infrastructure product cycle |
3,162 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | for the fourth quarter reflects this progress, balanced by macro dynamics in Consulting and Infrastructure product cycle dynamics. We remain confident in our free cash flow guidance which we raised in July, driven by continued strength in our operating margin performance. Overall, our portfolio is well positioned to deliver an upward inflection in growth in 2025. I'm excited about the opportunities ahead of us and will share more details with you in January. I will now hand over to Jim to walk you through the details of the quarter. Jim, over to you. |
3,163 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | James Kavanaugh: Thanks, Arvind. In the third quarter, we delivered $15 billion in revenue, $3.8 billion of adjusted EBITDA, $2.5 billion of operating pretax income, and $2.30 operating diluted earnings per share. And through the first-nine months, we generated $6.6 billion of free cash flow. We are pleased with the solid operating profitability and free cash flow generation of the business. Revenue growth, combined with 100 basis points of operating pretax margin expansion drove 8% operating pretax profit growth, and 5% operating diluted earnings per share growth. Our revenue growth for the quarter was up 2% at constant currency. Software growth accelerated to 10%, with strength across our key platforms of Red Hat, automation, data and AI and transaction processing. Consulting was flat and continue to be impacted by a dynamic market environment as clients reprioritized spending and infrastructure was down 7%, reflecting product cycle dynamics. Our portfolio mix, operating leverage and yield from productivity initiatives generated strong gross margin, operating profit and free cash flow performance. These results represent our highest third quarter levels of gross margin and free cash flow in many years. We expanded operating gross margin by 210 basis points and operating pretax margin by 100 basis points over last year. Year-to-date, operating pretax margin is up 150 basis points, well ahead of our guidance provided in July of over 50 basis points of improvement in 2024. In September, we closed on the Palo Alto QRadar transaction, generating a pretax gain of about $350 million in the quarter. As we previously discussed, this was substantially offset by the charges we took to address stranded costs and accelerate our productivity initiatives. These productivity initiatives allowed for continued investment to drive innovation, which you can see in our higher R&D expense up 10% year-to-date. Year-to-date, we generated $6.6 billion of free cash flow, up $1.5 billion year-over-year. The largest driver of this |
3,164 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Year-to-date, we generated $6.6 billion of free cash flow, up $1.5 billion year-over-year. The largest driver of this year-to-date growth comes from adjusted EBITDA, up about $800 million year-over-year. This quarter, we realized $500 million in proceeds from the Palo Alto QRadar transaction. As I mentioned last quarter, for the full year, we expect only a modest contribution of free cash flow given payouts from structural actions we have taken and foregone profit from the QRadar business. Through the first-nine months of the year, excluding the impact of the QRadar transaction, we are several points ahead of our two year average attainment levels. In terms of cash uses, year-to-date we returned $4.6 billion to shareholders in the form of dividends. From a balance sheet perspective, we have a strong liquidity position with cash of about $14 billion. Our debt balance at the end of the third quarter was flat with year-end 2023 at $56.6 billion, including $10.4 billion from our financing business. Turning to the segments. Software revenue growth accelerated to 10%, with broad-based growth across the portfolio. This reflects the repositioning of software around key growth platforms: Hybrid cloud, automation, data and transaction processing, where we deliver a differentiated value proposition to address clients' most pressing needs. Growth this quarter was fueled by the same performance drivers we've highlighted throughout the year. Red Hat accelerated, contributing about 3.5 points of growth to software. The combination of innovation and recurring revenue contributed about 3.5 points to growth. And our focused M&A strategy contributed about 3 points of growth. Let me take you through some more details on each of these. Red Hat revenue growth accelerated to 14%, up 6 points sequentially. We gained market share across each of our key solutions, with OpenShift and Ansible growing more than 20% and RHEL growing in the double-digits. This strength reflects the demand for our hybrid cloud solutions as clients continue to |
3,165 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | and RHEL growing in the double-digits. This strength reflects the demand for our hybrid cloud solutions as clients continue to prioritize application modernization on OpenShift containers and Ansible automation to optimize their IT spend and reduce operational complexity. We saw strong acceleration in Red Hat's subscription business, while the consumption-based services business stabilized as we expected. Looking at our revenue under contract over the next six months, this metric continues to grow in the mid-teens as our annual bookings grew double-digits in the third quarter. We are excited about the opportunities ahead of us, including generative AI, early client interest in our virtualization solution and after the deal completion, potential synergies with HashiCorp. We delivered strong growth in our recurring revenue base and are seeing momentum from innovation across our software portfolio. Hybrid platform and solutions ARR was $14.9 billion, up 11% year-over-year, driven by strength across automation, data and AI and Red Hat. Transaction processing grew 9% in the quarter, growing capacity, solid renewal rates and continued customer interest in our new generative AI product, watsonx Code Assistant for Z contributed to growth. We continue to invest in bringing innovation to market, launching new offerings like RHEL.ai, Ansible 2.5 and updated capabilities to our family of assistance including the recently announced watsonx Code Assistant with advanced features for enterprise Java applications. Red Hat also announced a partnership with Dell that makes RHEL.ai the preferred platform for AI deployments on Dell PowerEdge servers. This innovation is driving organic growth acceleration with increasing contribution from our core watsonx Middleware in data and AI, watsonx Orchestrate and IBM concert in automation and our AI embed strategy across our software portfolio Revenue performance this quarter also benefited from recent software acquisitions. August marked the one year anniversary of the Apptio acquisition, |
3,166 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | quarter also benefited from recent software acquisitions. August marked the one year anniversary of the Apptio acquisition, and we're seeing strong synergies with our automation capabilities and broader software portfolio, driving continued acceleration in bookings and ARR growth since close. Additionally, the stream sets of web methods assets are now part of the software business. And we continue to expect the HashiCorp acquisition to close by the end of this year. Moving to software profit. We expanded gross margin and segment profit was up over 120 basis points from last year, as we continue to deliver operating leverage driven by our revenue performance. Consulting revenue was flat, which was at the lower end of our expectations. As we discussed throughout this year, we are operating in a challenging macroeconomic environment and see no change in client buying behavior. At the same time, clients are reprioritizing their IT budgets to prepare for generative AI. While demand for large digital transformations remain solid, our overall signings declined for the second consecutive quarter as we wrapped on record third quarter signings from last year. Despite the weak current demand environment, we are well positioned to capture growth from generative AI. We continue to build a solid generative AI book of business with about $1 billion of new bookings in the quarter, as we partner with our clients to design and scale AI solutions and develop new ways of working. This early momentum is important. Engaging with clients as they architect their AI strategies is establishing IBM Consulting as a strategic partner of choice. In the third quarter, our Red Hat practice, which helps clients optimize how they build, deploy and manage applications for a hybrid cloud environment continue to grow at a double-digit rate, with this quarter being the largest single quarter of signings since the acquisition of Red Hat. Additionally, within our strategic partnerships, both our AWS and Azure practices continue to contribute robust |
3,167 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | of Red Hat. Additionally, within our strategic partnerships, both our AWS and Azure practices continue to contribute robust revenue growth. Turning to our lines of business. Business Transformation revenue grew 2%, driven by strength in transformation projects for data, finance and supply chain. Both technology consulting and application operations declined in the quarter. While there was strength in cloud-based application services across modernization, development and management, we continue to see clients reprioritizing spending away from on-prem customized services. Looking at Consulting profit, we expanded gross profit margin almost 1 point and delivered segment profit margin of 11%, a sequential improvement of 2 points, reflecting yield from our productivity actions. Moving to the Infrastructure segment. revenue was down 7%, reflecting product cycle dynamics. Hybrid Infrastructure was down 9%, and infrastructure support declined 3%. Within hybrid infrastructure, IBM Z revenue declined 19% in what is now the tenth quarter of z16 availability. The z16 program continues to exceed prior cycles, delivering revenue growth in eight of the last 10 quarters and program to date installed MIPS are up over 30%. Our clients continue to face increasing demands for workloads given rapid business expansion, complex regulatory environments and increasing cybersecurity threats and attacks. IBM Z remains uniquely positioned to address these demands with the technologies that our latest program offers, embedded AI at scale, quantum safe security and cloud-native development for hybrid cloud. Distributed infrastructure revenue was down 3%, with product cycle dynamics impacting our Power business, while we saw solid growth in storage, which continues to take share. For Infrastructure profit, we expanded gross profit margin 120 basis points across the portfolio this quarter. At the same time, segment profit margin was down 110 basis points, driven by continued investments in innovation for our next generation of products. Now, |
3,168 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | margin was down 110 basis points, driven by continued investments in innovation for our next generation of products. Now, let me bring it back to the IBM level to wrap up. Through the first-nine months of the year, we have grown revenue by 3%, expanded our operating pretax margin by 150 basis points and grown free cash flow by $1.5 billion. We have made solid progress in transitioning our portfolio to a higher growth, higher margin business that is well positioned as we head into next year. With nine months of the year behind us, let me now focus on the fourth quarter. We expect revenue growth in the fourth quarter to be consistent with the third quarter levels. Software revenue growth has accelerated throughout the year, and this should continue. We expect low double-digit fourth quarter revenue growth for software, led by Red Hat growth in the mid-teens and continued strength in transaction processing. This now represents strong high-single digit growth for the year. Consulting revenue is up 1% year-to-date, impacted by challenging macroeconomic environment. We expect fourth quarter revenue performance to be similar to the third quarter. This represents the weaker end of our prior expectations of low-single digit revenue growth for the year. And given we are at the end of a multiyear product cycle, we now expect the infrastructure to be about a 1 point impact to IBM for the full year. On currency, given the strengthening of the dollar, we now expect currency to be about a 0.5 point headwind to revenue growth in the quarter and about 1 point impact of revenue growth for the year. Now turning to profitability. For the full year, we are raising our expectation for operating pretax margin expansion to about 1 point year-to-year well above our model. The strength of this performance is driven by our revenue scale, portfolio mix and productivity initiatives, enabling operating leverage, while providing investment flexibility. Actions taken in the third quarter helped accelerate our productivity initiatives, and we |
3,169 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | providing investment flexibility. Actions taken in the third quarter helped accelerate our productivity initiatives, and we now believe we can achieve approximately $3.5 billion in annual run rate savings by the end of 2024, up from $3 billion. Drilling down on segment margins. We expect Software segment profit margin to expand by well over 1 point for the year. Consulting segment profit margin is now expected to be flat, and we continue to see Infrastructure segment profit margin in the mid to high-teens. Consistent with last year, we are maintaining our full year view of operating tax rate in the mid-teens range. For free cash flow, given the strength of our performance year-to-date, we remain confident in delivering greater than $12 billion of free cash flow for the year, driven primarily by growth in adjusted EBITDA. We are on track to grow revenue, expand operating profit and grow free cash flow as we close out 2024. This positions us well as we look forward to 2025. We are confident in our portfolio and growth trajectory as we head into 2025, given the acceleration in software, the opportunities ahead of us in Red Hat, our new mainframe cycle and associated hardware and software stack, our generative AI positioning and contribution from acquisitions. Arvind and I are now happy to take your questions. Olympia, let’s get started. |
3,170 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Thank you, Jim. Before we begin the Q&A, I'd like to mention a couple of items. First, supplemental information is provided at the end of the presentation. And then second, as always, I'd ask you to refrain from multipart questions. Operator, let's please open it up for questions.
Operator: Thank you. At this time, we will begin the question-and-answer session of the conference. [Operator Instructions] Our first question comes from Amit Daryanani with Evercore ISI. Please state your question.
Amit Daryanani: Good afternoon, everyone. Thanks for taking my question. I guess, Arvind you talked towards the end of your comments about how IBM portfolio is delivering [Technical Difficulty] organically in '25, I assume. And if I think about the segments, I think the interest on your side is somewhat easy to see with the Z17 cycle, but I'd love to hear your thoughts on how does that inflection pan out on soft print consulting especially consulting after a few quarters of muted growth? Thank you. |
3,171 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Hey. Thanks, Amit. First, thank you very much for picking up on that comment on upward inflection for '25. That is something which we have worked really hard to achieve and that I'm really proud of what the whole team has gotten there. To be specific on the parts that you just touched on, what about the upward inflection on Software and on Consulting. So if we look at Software, first of all, with Red Hat having just delivered 14%, us expecting similar performance for the next quarter. And given that we get at least six months to nine months’ worth of a look ahead based on the CRPO of Red Hat, we expect that to carry on to next year, that could easily then provide a significant amount of lift to software, perhaps about 3 points of growth for Software overall. Two, we've got very good traction, both in our Gen AI products as well as in our automation suite. And we can look at our pipelines and expect that those will be maintained. Given we have also seen a lot of mainframe deployment, the MIPS underlying capacity there will power ahead the mainframe or the TPS software. You put that together with already announced M&A of HashiCorp and then planned M&A that we will have over the year, and that gives us a lot of confidence on software being at or likely above the model that we had laid out a few years ago. So I think that gives you the pieces in Software. Now on Consulting, I acknowledged in the call that there is some macro issues that will impact discretionary labor. So that is the piece that is there. But that is kind of baked in now to what we have been doing. But as we look forward, our bill-to-book ratio at 1.14 tells us that there is a lot of pent-up demand. As we see this Gen AI pipeline turn from signings into revenue, then we expect to see growth there. And we have a very healthy book of business with the hyperscalers and with our ISV partners, as Jim had talked about. We put all of that together, and we expect to see positive upticks on Consulting. You’ll note, I’m not trying to quantify |
3,172 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | We put all of that together, and we expect to see positive upticks on Consulting. You’ll note, I’m not trying to quantify that as deeply as I did in Software, but it will be upwards. Put that together with what we’ll see in infrastructure where we expect to see significant upticks starting likely around the end of the first half, and that gives us the confidence in 2025. |
3,173 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Operator, let’s take the next question.
Operator: Our next question comes from Toni Sacconaghi with Bernstein. Please state your question
Toni Sacconaghi: Thank you for the question. I just wanted to follow up largely along those lines, Arvind. IBM is a portfolio of many different things. And some years, things go really well, like TPP this year and other things don't go very well like Consulting this year. But if I look back at the last four years, and maybe that's not the right timeframe, you may correct me, growth this year will be 3% or less, and growth has been 3% in three of the last four years. And so I understand that the setup for 2025 is good because of the mainframe cycle and acquisition. But why is -- why should that not be viewed as a one-off just like this year, maybe as a one-off and being below your 4% to 6% model of less than 3% growth? And specifically, for next year, do you think Consulting signings will inflect positively in Q4? Because they've been negative the last two quarters. So if they don't start to pick up, then the leading indicator for consulting actually does not point to growth necessarily for 2025? So if you can address those questions, that would be great. Thank you. |
3,174 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Toni, look, let me build on the comments I made in response to Amit's question and then address some of the points you made, Toni. So I'm not sure I would acknowledge that 3% of growth only, while that has been true in many of these years, 2022 was definitely far above that. But let me acknowledge that will also perhaps a one-off with the [indiscernible] revenue now being recognized as intercompany as opposed to intracompany. Now, despite that, we actually had higher revenue than that despite what we explicitly modeled out for the [indiscernible] piece. So -- but let me acknowledge at least in two of the last four years, it was around 3%. So what gives us confidence? So as I began to Amit's question, we've been really hard at work rebuilding our portfolio to be both sustainable and have a lot more value for our clients in terms of the innovation we are delivering them as well as our ability to manage the cost and complexity that they have, as they're all leveraging technology to drive a much larger part of their own businesses. That's kind of the macro. And under that, the fact that 7% of our Software growth this year was organic in this last quarter, not at all acquisitive, gives us confidence about how well that software is being used. 80% of our software is actually now on a recurring revenue basis, that is up significantly over the last few years. Those all tell us real demand in that part of the portfolio. If I turn around and say, it's 80% there, and it generated 10%, that gives us confidence on the organic base of software even going into next year. And as far as we can see, the mainframe software will maintain perhaps mid-single digit growth, not maybe high-single digit growth going into next year. But that gives us really good tailwinds for what we're trying to do there. And while I called out HashiCorp, which has sort of already been announced, we do expect, as we get through that deal, to do a lot more M&A even going into next year. And since our cash flows have gone up from four years |
3,175 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | we get through that deal, to do a lot more M&A even going into next year. And since our cash flows have gone up from four years ago, that gives us more ability to do M&A without any other actions to speak of. On your Consulting side, while the last year and if I go more than four years ago, have been flat or negative, the confidence we're getting there is from the quality of the signings and from the yields that we expect. The overall signings this year have been lower than last year. But if the signings didn't yield, then they don't mean very much. So it's the yields we worry about. And the backlog that we get that we worry about and we are seeing those begin to turn. Note, I'm muting the word begin to turn. I don't expect consulting to inflect like software and go into double-digits, but I do expect it to turn into a tailwind for us in terms of being positive growth as we are going. And that's why I believe this may be a tale of two halves. The Consulting may be very modest in the first half, but much better in the second half based on what we can see in terms of the signings, the offerings and as the Gen AI book of business turns into real revenue across all of our clients. I hope that, that gives you a sense. And I know we don't talk on Infrastructure and you acknowledge the mainframe cycle. But I also want to call out credit. Inside the Infrastructure business, there is also a recurring revenue business, which is our hardware maintenance business. And that is also a piece that has gone from being a headwind to potentially close to flat next year. So just in year-to-year, that could well be a 4, 5 point tailwind on that part of the business. |
3,176 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Operator, next question.
Operator: Thank you. Our next question comes from Wamsi Mohan with Bank of America. Please state your question
Wamsi Mohan: Yes. Thank you so much. Jim, in your comments, you noted no change in client buying behavior and consulting. But if we look at what happened with your AI book of business, which is up meaningfully a meaningful part of that being in services, it would indicate that the underlying Consulting business ex, that kind of deteriorated. So I was wondering if you could reconcile that comment with what's happening in Consulting? And secondarily, you noted year-to-date PTI margin performance of 150 bps improvement, but the fiscal year has guided to about 100 basis points, but you also noted sort of realizing $3.5 million of annual run rate savings. So can you just talk about some of the profit dynamics in the fourth quarter? How we should think about some of the puts and takes over there? Thank you so much. |
3,177 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | James Kavanaugh: Sure, Wamsi. Thank you for the question overall. As Arvind and I said in the prepared remarks, we're obviously operating in a very dynamic, uncertain macroeconomic environment around the entire Consulting market overall. Yes, we posted flat revenue growth overall, by the way, up 1% year-to-date, so a slight deterioration. Underpinning that, I think there is multiple dynamics that are playing out. And let me try to unpack some of these. First, to your question about the opportunity statement. And yes, Gen AI, albeit we're very early in the cycle right now, we are very focused on ensuring we get an enterprise lead position in establishing Consulting as a strategic provider of choice. And we're building that book. If you look at our book of business right now, we exited 90 days ago, IBM above $2 billion, that was about 75% Consulting. Now we're north of $3 billion and about 80% Consulting. So underneath that, we are actually seeing the last two quarters about $1 billion book of business each quarter being generated. Now within that, those are mid to long-term digital transformation Gen AI-based deals. By definition, higher duration, lower revenue yield and I think we spent time last quarter talking about it, about 3 to 4 points less yield than traditional book of business overall. But it's important because it's building that backlog growth that Arvind just answered Toni's question on overall because we believe, albeit we're early, this is a long-term growth vector with a multiplier effect across our platforms, our software, our infrastructure that is an integral part of the integrated value thesis of Consulting here. Now mitigating some of that growth is the high yielding revenue short-term discretionary projects. Those yields are about 4 to 5 points above what we're seeing in Gen AI right now. So I think you're seeing the early cycle dynamics that will put pressure and has put pressure on our top line consulting revenue, but -- and that's why we guided fourth quarter consistent, but more |
3,178 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | and has put pressure on our top line consulting revenue, but -- and that's why we guided fourth quarter consistent, but more importantly, I would look at the glass half full, we are becoming the strategic provider of choice, we're winning in the Gen AI space around consulting, and that's going to fuel a growth vector around fueling 2025. Now with regards to profit equation. We're very pleased with our fundamentals of our business and the underpinnings of that. We drive operating leverage in this business three different ways. One, high-value portfolio mix, that's why Software is an integral part of our model, approaching 45% of revenue, that growing 10% is a strong profit contributor overall. Two is, we get the high value leverage of a recurring revenue stream overall and productivity. And three, we get that $3.5 billion that we are looking for coming out. We're well ahead of that year-to-date, as you said. I think we're being very prudent on how we're guiding fourth quarter right now. And we'll talk 90 days from now, and we fully expect, by the way, that all drops to the quality in sustainability of free cash flow, we're going to be up well over $1 billion with north of $12 billion this year and will be set up very nicely for 2025. |
3,179 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Operator, let’s take the next question.
Operator: Our next question comes from Ben Reitzes with Melius Research. Please state your question
Benjamin Reitzes: Yeah. Hey, thanks, guys. Jim, we previously spoken about high-single digit growth potential for free cash flow at this company. I was wondering, you've made a lot of comments about 2025, do you think that's possible still in 2025 given the Hashi acquisition? And I want to also see if you can address it. If Consulting were to remain flat, does the mix shift still support that. Thanks a lot. |
3,180 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | James Kavanaugh: Yes, Ben. Thanks very much for the question. A lot of interest, as you know quite well from our investors on this particular question of our model. I'm not going to get into the specifics as you would probably not expect me to about actual quantification. I think Arvind and I have both said, we feel very confident about our strategy, our portfolio and our growth opportunities heading forward into 2025. But let's take a step back, right? Three years ago, when we laid out our midterm model, Arvind transitioned this company from a no-growth company to a mid-single digit company, a company that was roughly about 10 points of pretax margin to a company that's going to exit this year in the high-teens, growing 700 to 800 basis points over three years and a company that was stagnant to declining free cash flow, and we'll probably grow free cash flow, by the way, exiting 2024, pretty much on top of the absolute number we set in 2022. So I think we made a lot of progress. Now when you talk about going forward, we talk about upward growth inflection. All of you understand the portfolio mix composition in this business, the productivity mindset of what we drive in this company and the competitive business model positioning which I would argue we still have a lot of headroom to continue to grow. Our model has always been to drive operating leverage that enables us to drive free cash flow faster than revenue. And I would fully expect that even with the Hashi dilution that we all acknowledge. We are very excited. We're hoping to close that still by the end of the year, but that transaction stands on its own, strategic value, the attractive financial model and the synergistic value we get across our portfolio of Software and Consulting. And we've got that embedded in our model, and we still feel very confident growing free cash flow faster than revenue.
Olympia McNerney: Operator, let’s take the next question.
Operator: Our next question comes from Jim Schneider with Goldman Sachs. Please state your question |
3,181 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Operator: Our next question comes from Jim Schneider with Goldman Sachs. Please state your question
James Schneider: Thanks for taking my question. I was wondering, if you could maybe comment on the rate at which you're seeing consulting work and the consulting signings you do have translate into revenue and sort of the time to commence then. Is that what's giving you a bit of increased confidence on the inflection in Consulting or the slow improvement in Consulting going to next year? And then maybe just kind of separately, talk about, if you could, the types of M&A targets you're thinking about in Software and how that might be different than what you've done in the past? Are you thinking of things that are in any way different from the sort of open source in Infrastructure and DevOps type of deals that you've done in the past and how that might be changing? Thank you. |
3,182 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | James Kavanaugh: Great, Jim. Thank you. I'll take the first part of your question, and Arvind can handle the second part about the targeted areas around M&A. As we stated, we feel very good about the strong start in our Gen AI book of business around Consulting. Let's just put some numbers to it, right? IBM north of $3 billion, growing over $1 billion quarter-to-quarter, The Consulting book of business is approaching $2.5 billion. You put that in perspective against the last technological shift that we can see within our business, that being hybrid cloud and Red Hat, and we're about 2x that run rate, because we did about $1 billion in the first 12 months. So we're seeing a very nice acceleration, and we've talked enough about this being very early in the cycle. But that $2.5 billion book of business, that's up almost $1 billion quarter-to-quarter, and it's growing 35% plus. Now when you look at it, the underpinnings, as I said earlier, these are mid to long-term strategic digital transformation Gen AI deals, higher duration. Durations are probably approaching high 40 months overall compared to an average duration in Consulting, that's in the low 20s, point number one. Point number two, I talked about revenue yield being lower, about 3 to 4 points lower. Revenue yields kind of hovering around mid to high-single digit revenue yield. And again, that's about 3 to 4 points less than traditional. But I can't stress enough. I think these curves will inflect as we move into 2025, and -- because as we start wrapping around the short-term discretionary pullback that's impacting that traditional near-term revenue, we're going to start seeing this long-term growth vector pick up as we go forward, which then has multiplier effects of our software and our hardware going forward. |
3,183 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Thanks, Jim. So Jim, let me address the second part of your question. I've been very clear about our M&A strategy. It has to fit our existing strategy. And in this case, for Software, which you asked about, then the three areas would be what are we doing around hybrid cloud. I would say, Hashi's a great example or something in there. What are we doing around automation? Apptio was probably a great example there, but so were some others like Turbonomic and Instana. And then what are we doing around data and AI? Where I would tell you that portions of Software AG fell into that camp. The reason that I want to stick to the lanes we are in is because we get a massive amount of go-to-market synergy and distribution synergy with IBM, which is the second element of the strategy. There has to be synergy with IBM that the target could not have realized on their own. Otherwise, there isn't an economic return for our investors. So those two pieces are essential right now. Now, when we did Red Hat five years ago, and I think that, that was implicit in your question, we did open up a new lane of a big open source play and we have stuck to that through the Red Hat discipline and with that brand name. But not everything needs to be open source. So let me be clear on that. Apptio was not open source. Turbonomic was not open source. When we do find an open source property, that fits all our criteria, we would certainly look at it. But that is not our lens or our filter on looking at things. The filter and lens are looking at things for the three areas that I mentioned as being our strategic fit. Now, Jim made a comment about two questions ago about there being headroom. We see a lot of headroom on these topics and helping people manage their infrastructure better, take cost out, reduce the labor complexity, leverage your data are better, do AI at more cost-efficient methods than everything that we see today. As we go through all of this, once we begin to run out of headroom then we might add some areas, but I |
3,184 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | that we see today. As we go through all of this, once we begin to run out of headroom then we might add some areas, but I don’t see that happening for some years at this point. |
3,185 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Operator, let’s take the next question.
Operator: Our next question comes from Brent Thill with Jefferies. Please state your question
Brent Thill: Thanks, Jim. Really good margin on software 30%, well above past Q3s. How sustainable is this 30% margin and any way to frame that going forward? Thanks.
James Kavanaugh: Yeah, Brent. Thank you very much for the question. We're obviously very pleased with our software performance. Its core to our strategy overall. Software being about 45% of IBM's revenue composition, and two-thirds of our profit. And most importantly, to Arvind's last question here that he just answered, integral to our hybrid cloud and AI platform centric model. It's all built around software overall. By the way, you probably noticed, we did hit the Rule of 40 here in the third quarter. We feel confident that we continue to strategically reposition our business. And by the way, the margin inflection we've seen over the last three years in software has been both a combination of that revenue inflection and getting into more end markets with the strategic focus both organically and inorganically, that Arvind talked about, hybrid cloud, automation, data and by the way, the inflection of transaction processing, which I'll remind all of you, is a high margin, high profit contribution overall. So that, coupled with the productivity initiatives are enabling us with the financial flexibility to continue to invest in innovation while still generating margin and operating leverage going forward. So we feel pretty confident about that continuing. Similar to how I answered the earlier question, we see a lot of headroom in front of us on operating margin continuing both for IBM and for software.
Olympia McNerney: Operator, let’s take the next question.
Operator: Our next question comes from Erik Woodring with Morgan Stanley. Please state your question |
3,186 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Operator: Our next question comes from Erik Woodring with Morgan Stanley. Please state your question
Erik Woodring: Great. Thank you very much for taking my question. Jim, I wanted to maybe ask the Consulting AI question maybe a different way, which was last quarter, you had noted that Consulting AI projects were largely cannibalizing other areas of Consulting spend. And I'm just curious at what stage do you think these long duration signings turn into recognized revenue and some materiality that, that could really impact the trajectory of the consulting business? And then second, in what situation or environment would we see AI consulting projects turn from cannibal, -- cannibalizing the traditional business to becoming incremental to traditional Consulting? Thanks so much. |
3,187 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | James Kavanaugh: Yeah. Great. And thanks, Erik, for the question overall. As we talked about, maturity of Gen AI were very early in the cycle. The key for us is to win this early leadership position to be the Gen AI strategic provider of choice. And I think we are carrying our own to say the least right now, given the $2.5 billion book of business. Now with that, higher duration, lower revenue yield, there is revenue yield in the quarter. I don't want to leave anyone without the impression. It's just about 3 to 4 points below what our traditional are because of the longer duration. If I just do some of the mathematics around it, very quick. First, we're going to start wrapping on the pullback when we started talking about the short-term pause in discretionary spending as clients are looking at cost productivity to fuel investment into Gen AI projects that have longer duration. We'll start wrapping on that as we kind of get through the first half of next year, that's point number one. Point number two, that inflection curve, when we just look at what we experienced historically with the Red Hat generation, because in every technological shift human capital and consulting-based business, you're always going to see reprioritization. We've seen it with cloud technology shift. We've seen it with the Internet. We've seen it with globalization. And we've seen it when we went through the hybrid cloud side on Red Hat. That kind of puts it in as Arvind and I have been talking here while we feel very confident in that upward growth inflection in ‘25. Consulting is going to be more of a second half '25 play as we move forward. And by the way, with that upward inflection, the key is backlog. We got to get the volume and demand here in the fourth quarter to Toni's question, and we got to still continue building that volume and demand in the first half because then that will build a multiplier effect that will be a nice, healthy consulting growth orientation like we were at about a year ago. |
3,188 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Operator, let’s take one last question.
Operator: Thank you. And the next question comes from Matt Swanson with RBC Capital. Please state your question
Matthew Swanson: Yeah. Thanks for taking my question. Arvind, you talked about the latest addition of the Granite models being 90% more cost efficient, may be trained in weeks. You've taken a really pragmatic kind of ROI focused approach to Gen AI. Could you just talk a little bit about what you're hearing from enterprises and customers that are kind of supporting that direction of development? |
3,189 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Certainly, Matt, and thank you for that question, and for picking up on the Granite models. Look, as I started talking to customers on this topic about 1.5 years ago, there was a lot of excitement around Gen AI deployment inside the enterprise. But you could see some people beginning to do the math and say, hang on, if I really use this at full scale for all of the transactions that happen inside our enterprise, then the bill could easily become tens of millions a day, which very quickly becomes multiple billions a year and while that was advantageous to do it, they didn't see that kind of cost being affordable. So we sat back and said, how big do these models need to be, because the size of the model determines or did determine previously performance as well as the cost. And so the question became, could we do a model that had tens of billions of parameters and was as good, but for a more constrained set of tasks. I kind of be a little facetious. Look, if you're running a big consumer model and you have no idea, is the person going to ask you to summarize a document or a piece of X, which they do, or they're going to ask you to write a poem or a haiku or translate finish to French. Okay, You got to have a model that does all those things. But if we need a model that can summarize the business document, but at much higher quality, that allows us to bring a model with about in this case, to be precise, 8 billion to 30 billion parameters. That is as good as the biggest model for those tasks, but doesn't do all those other things. But for the enterprise, that does 100% of their use case and literally, in this case, could run with 97% more efficiency. Then giving it to people with the indemnity with the licensing that they can actually refine it and they don't owe the refinements or any improvements in the model back to us, we think is a winning hand as enterprises deploy more and more of generative AI. So with that, let me now wrap up the call. In the third quarter of '24, we accelerated our |
3,190 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | more and more of generative AI. So with that, let me now wrap up the call. In the third quarter of '24, we accelerated our Software performance, including Red Hat. We are excited about the positioning of our portfolio and our growth prospects for 2025, and we look forward to sharing our progress with you as we close out the year. Thank you. |
3,191 | IBM | 3 | 2,024 | 2024-10-23 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Thank you, Arvind. Operator, let me turn it back to you to close out the call.
Operator: Thank you for participating on today's call. The conference has now ended. You may disconnect at this time. |
3,192 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Operator: Welcome and thank you for standing-by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Olympia McNerney, IBM's Global Head of Investor Relations. Olympia, you may begin.
Olympia McNerney: Thank you. I'd like to welcome you to IBM's Second Quarter 2024 Earnings Presentation. I'm Olympia McNerney and I'm here today with Arvind Krishna, IBM's Chairman and Chief Executive Officer and Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. We'll post today's prepared remarks on the IBM investor website within a couple of hours and a replay will be available by this time tomorrow. To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation, which is posted to our investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filings. So with that, I'll turn the call over to Arvind. |
3,193 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Thank you for joining us today to discuss IBM's Second Quarter Earnings. We delivered a strong quarter, exceeding our expectations, driven by solid revenue growth, profitability, and cash-flow generation. We had strong performance in software and infrastructure above our model as investment in innovation is yielding organic growth, while consulting remained below model. Our results underscore the continued success of our hybrid cloud and AI strategy and the strength of our diversified business. Let me start with a few comments on the macroeconomic environment. Technology spending remains robust as it continues to serve as a key competitive advantage, allowing businesses to scale, drive efficiencies and fuel growth. As we stated last quarter, factors such as interest rates and inflation impacted timing of decision making and discretionary spend in consulting. Overall, we remain confident in the positive macro outlook for technology spending, but acknowledge this impact. It has been a year since we introduced watsonx and our generative AI strategy to the market. We have infused AI across the business from the tools clients use to manage and optimize their hybrid cloud environments to our platform products across.ai,.data and.gov to infrastructure and consulting, you can find AI innovation in all of our segments. For example, in software, our broad suite of automation products like Apptio and watsonx Orchestrate are leveraging AI and we expect to do the same with HashiCorp once the acquisition is complete. Red Hat is bringing AI to OpenShift AI and rhel.ai. In transaction processing, we are seeing early momentum in watsonx Code Assistant for Z. In infrastructure, IBM Z is equipped with real-time AI inferencing capabilities. In consulting, our experts are helping clients design and implement AI strategies. Our enterprise AI strategy is resonating as we evolve to meet client needs. Let me start by discussing IBM models. Choosing the right AI model is crucial for success in scaling AI. While large |
3,194 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | needs. Let me start by discussing IBM models. Choosing the right AI model is crucial for success in scaling AI. While large general-purpose models are great for starting on AI use cases, clients are finding that smaller models are essential for cost-effective AI strategies. Smaller models are also much easier to customize and tune. IBM's Granite models ranging from 3 billion to 34 billion parameters and trained on 116 programming languages consistently achieved top performance for a variety of coding tasks. To put costs in perspective, these fit-for-purpose models can be approximately 90% less expensive than large models. Hybrid cloud remains a top priority for clients as flexibility of deployment of AI models across multiple environments and data sovereignty remain a key focus. We believe in the power of open innovation and recently announced at IBM Think that we open-sourced IBM's Granite family of models now available under Apache 2.0 licenses on both Hugging Face and GitHub. We see parallel to Linux becoming dominant in the enterprise server space, thanks to the speed and innovation offered by open-source. We are confident that the same dynamic will play out with AI as we benefit from developer mindshare and community innovation. We also recently launched InstructLab, a tool for more rapid model tuning through synthetic data generation, allowing our clients to more efficiently customize models using their own data and expertise. The last 12 months of AI pilots has made it clear that sustained value from AI requires truly leveraging enterprise data. In summary, our AI strategy is a comprehensive platform play. Rhel.ai and OpenShift AI are the foundation of our enterprise AI platform. They combine open-source IBM Granite's LLMs and InstructLab model alignment tools with full stack optimization, enterprise-grade security and support and model indemnification. On top of that, we have an enterprise AI middleware platform with watsonx and an embed strategy with our AI assistance infused through our software |
3,195 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | an enterprise AI middleware platform with watsonx and an embed strategy with our AI assistance infused through our software portfolio and those of our ecosystem partners. In addition, our consulting services are critical in helping clients build their AI strategies from the ground-up. We also continue to see our infrastructure segment play a larger role as clients leverage their hardware investments in their AI strategies. Our book of business related to generative AI now stands at greater than $2 billion inception-to-date. The mix is roughly one quarter software and three quarters consulting signings. We believe these strong results highlight our momentum and traction with clients. Our early leadership positions us for long-term success and this transformational technology, which is still in the initial stages of adoption. As clients build our AI strategies, the IT landscape is becoming increasingly complex. Labor demographic shifts further emphasize the importance of optimizing IT spend and automating business processes. We continue to innovate and invest and have created a leading automation portfolio to capture this opportunity, which you can see in our results. This includes Apptio for cost management, capability for observability and resource management and with announced acquisition of HashiCorp, the automation of cloud infrastructure. The powerful combination of Red Hat Ansible and Terraform will simplify provisioning and configuration of applications across hybrid cloud environments. The latest addition to this portfolio is IBM Concert, also announced at Think, a Gen AI-powered tool, which helped clients get end-to-end visibility across business applications. We also recently completed the acquisition of the StreamSets and webMethods assets from Software AG. This acquisition brings together leading capabilities in integration, API management and data ingestion. Let me now spend a minute on the continued strength we are seeing in infrastructure. IBM Z, our mainframe solution is an integral part of our |
3,196 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | a minute on the continued strength we are seeing in infrastructure. IBM Z, our mainframe solution is an integral part of our clients' hybrid cloud environments, driving their most secure and mission-critical workloads. Our latest cycle z16 is uniquely tailored to offer clients security, scalability and resilience, which help clients address both cybersecurity threats and complex regulatory requirements. z16's Telum processor is a unique differentiator driving real-time, in-line AI inferencing at unprecedented speed and scale for applications like real-time fraud detection. Our storage offerings are also benefiting from generative AI as clients address data readiness and need high-speed access to massive volumes of unstructured data. We continue to invest in innovation and make great progress in emerging technology like quantum computing. This quarter, we expanded Qiskit, IBM's quantum computing software into a comprehensive stack aimed at optimizing performance on the utility-scale quantum hardware. These updates aim to enhance the stability, efficiency and usability of Qiskit, supporting advanced quantum algorithm development and fostering broader adoption across various industries. This strong momentum and innovation across the portfolio manifests itself in client adoption. In virtually all industries and geographies, clients leverage IBM solutions to help them transform their operations and create better experiences for end users. Names like Virgin Money, Credit Mutuel and Panasonic all turned to IBM in the quarter. We also continued to strengthen our ecosystem. At our Think event, we announced a series of new AI partnerships with industry leaders like Adobe, AWS, Microsoft, Meta, Mistral, Salesforce and SAP. In May, IBM and Palo Alto Networks announced a partnership to deliver AI-powered security solutions using What's the Next. As part of this, Palo Alto is acquiring IBM's QRadar SaaS assets and we are partnering to offer seamless migration for QRadar customers to XM. IBM will train over 1,000 security |
3,197 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | SaaS assets and we are partnering to offer seamless migration for QRadar customers to XM. IBM will train over 1,000 security consultants on Palo Alto Network products to drive a significant book of business with them. In summary, we are excited to continue delivering strong results. Given our first-half performance, we are raising our expectations for free cash flow to greater than $12 billion for the year. I will now hand over to Jim to walk you through the details of the quarter. Jim, over to you. |
3,198 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Jim Kavanaugh: Thanks, Arvind. In the second quarter, we delivered $15.8 billion in revenue, $2.8 billion of operating pre-tax income, and $2.43 operating diluted earnings per share. Our 4% revenue growth at constant currency combined with greater than 200 basis points of operating pre-tax margin expansion drove 17% operating pre-tax income growth and 11% operating diluted earnings per share growth, highlighting our strong execution. And through the first-half, we generated $4.5 billion of free cash flow. Our free cash flow generation is the strongest first half level we have reported in many years. We are pleased with these results, exceeding our expectations for revenue, profitability, free cash flow, and earnings per share. Revenue growth was led by software and infrastructure. It is clear that our investments in innovation are yielding results and driving strong organic growth across these segments. Software grew by 8% with solid growth across hybrid platform and solutions and transaction processing and strong transactional performance. Infrastructure had great performance, up 3%, delivering growth across IBM Z and distributed infrastructure. Consulting was up 2% and continued to be impacted by a pullback in discretionary spending. Looking at our profit metrics, we expanded operating gross margin by 190 basis points and operating pre-tax margin by 220 basis points over the last year, inclusive of about a 30 basis-point currency headwind to pre-tax margin. Margin expansion was driven by our operating leverage, product mix and ongoing productivity initiatives. Driving productivity is core to our operating and financial model. This includes enabling a higher-value workforce through automation and AI, streamlining our supply-chain, aligning our teams by workflow and reducing our real-estate footprint. These actions allow for continued investment in innovation with R&D up 9% in the first-half. This includes investments in both AI and hybrid cloud as well as infrastructure ahead of our Nexi program in 2025, which |
3,199 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | This includes investments in both AI and hybrid cloud as well as infrastructure ahead of our Nexi program in 2025, which we expect to accelerate our organic growth profile over time. Our results this quarter reflect broad-based growth and the strength in the fundamentals of our business with revenue up about $300 million, operating pre-tax income up about $400 million, adjusted EBITDA up more than $350 million and free cash flow up about $500 million. For the first-half, we generated $4.5 billion of free cash flow, up $1.1 billion year-over-year. The largest driver of this first-half growth comes from adjusted EBITDA, up about $550 million year-over-year and timing of CapEx. We are a few points ahead of our two-year average attainment levels through the first-half. In terms of cash uses, we returned $3.1 billion to shareholders in the first half in the form of dividends. From a balance sheet perspective, we have a very strong liquidity position with cash of $16 billion, up $2.5 billion since year-end 2023. Our debt balance at the end of the second-quarter was flat with year-end 2023 at $56.5 billion, including $11.1 billion from our financing business. Putting this all together, our business fundamentals remain solid with continued revenue growth, margin expansion, cash generation, and a strong balance sheet with financial flexibility to support our business. Turning to the segments. Software revenue growth accelerated to 8% this quarter. Both hybrid platform and solutions and transaction processing grew as clients leverage the capabilities of our AI and hybrid cloud platforms. This performance reflects the investments we've been making in software, both organically, which drove more than 6 points of the growth as well as acquisitions. As mentioned in January, the software revenue growth drivers for the year include Red Hat growth, the combination of innovation, recurring revenue, and transaction processing, as well as acquisitions. Let me spend a minute on each of these elements. In Red Hat, annual bookings |
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