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3,200 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | transaction processing, as well as acquisitions. Let me spend a minute on each of these elements. In Red Hat, annual bookings growth accelerated to over 20% this quarter. Within that performance, OpenShift annual bookings were up over 40% and RHEL and Ansible growth was double digit. The strength reflects the demand for our hybrid cloud solutions, including app modernization, management automation, generative AI and virtualization. In a subscription-based business, the majority of revenue is under contract for the next two quarters. Think of it as our CRPO for the next six months. This metric is growing in the mid-teens and accelerating more than 5 points versus the first-half of the year. We continue to bring new innovation to our portfolio and it's contributing nicely to our software performance. Our new innovation includes generative AI offerings like watsonx, our AI middleware, watsonx Assistants, the recently-announced IBM Concert and others, which contributed about $0.5 billion to our AI book of business inception to-date. And we delivered good growth across our recurring revenue base, which is about 80% of the annual software revenue. This is evident in hybrid platform and solutions, where our ARR is now $14.1 billion and up 9% since last year. Transaction processing delivered 13% revenue growth. This performance demonstrates the innovation and value of our mission-critical hardware stack across IBM Z, power and storage. The combination of growing demand for capacity, good client renewals, and strong large deal performance fueled our results. And notably, our new generative AI portfolio innovation, watsonx Code Assistant for Z is resonating well with clients. Together, these dynamics contributed to both recurring and transactional software revenue growth again this quarter. Revenue performance this quarter also benefited from our focused M&A strategy, including synergies realized across the portfolio. This included the recent Apptio acquisition. Less than 12 months since closing, we have accelerated |
3,201 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | across the portfolio. This included the recent Apptio acquisition. Less than 12 months since closing, we have accelerated annual bookings and are seeing an uptick in ARR growth already in the mid-teens. The synergy between Apptio's FinOps offerings and our broader automation portfolio helps clients manage, optimize and automate technology spending decisions. Earlier this month, we completed the acquisition of StreamSets and webMethods from Software AG and expect the HashiCorp acquisition to close by year end. Looking at software profit, gross profit margin expanded and segment profit was up over 350 basis points year-to-year, with the latter reflecting operating leverage driven by our revenue scale and mix this quarter. Our consulting revenue was up 2%, consistent with last quarter and largely reflecting organic growth. In April, we discussed that we were seeing solid demand for our large transformational offerings as clients continue to prioritize driving productivity with AI and analytics. At the same time, we saw a pullback on discretionary projects as clients prioritize their spending. The second quarter buying behavior played out much in the same way. Signings for the quarter were $5.7 billion, driven by solid demand for large engagements across finance and supply-chain transformation, cloud modernization, and application development. This contributed to backlog growth of 5% year-over-year and our trailing 12-month book-to-bill remaining over 1.15. Meanwhile, continued discretionary spending constraints impacted our small engagement performance and backlog realization in the quarter. As Arvind mentioned, our book of business in generative AI inception-to-date is greater than $2 billion and about three quarters of it represents consulting signings with strong quarter-over-quarter momentum. Our extensive industry and domain expertise has placed us in an early leadership role, which is crucial at the onset of a technology shift. IBM has both technology and consulting, which is a unique and powerful combination |
3,202 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | crucial at the onset of a technology shift. IBM has both technology and consulting, which is a unique and powerful combination to help clients navigate this technology transition. Similar to previous technology shifts such as the advent of the Internet, globalization, and cloud computing, generative AI is driving the next wave of growth. In a human capital-based business, signings represents clients reprioritizing spend on this technology transition, while there is some potential for lift as the total addressable market expands. We are delivering value in two ways. First, partnering with our clients to design and scale AI solutions, whether that be leveraging AI capabilities of IBM, our partners or a combination. Second, we are developing new ways of working, driving productivity and improving delivery, all with our Consulting Advantage platform. In summary, GenAI is acting as a catalyst for companies to grow revenues, cut costs and change the ways they work, creating a significant opportunity for us. We are seeing this already as IBM is the strategic partner of choice for clients using this technology, including WPP, Elevance Health, and the UK's Department of Work and Pensions. Turning to our lines of business. Business transformation revenue grew 6%, led by finance and supply-chain transformations. Data transformation also contributed to growth. In Technology Consulting, revenue was up 1%. Growth was driven by application modernization services. Application operations revenue declined, reflecting weakness in on-prem custom application management, partially offset by strength in cloud-based application management offerings. Looking at consulting profit, we expanded gross profit margins by 40 basis points, driven by productivity and pricing actions we have taken. Segment profit margin was modestly down, reflecting continued labor inflation and currency. Moving to infrastructure, revenue was up 3%. We're capitalizing on the strong and broad-based demand for our hardware platforms, especially IBM Z. Within hybrid |
3,203 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | was up 3%. We're capitalizing on the strong and broad-based demand for our hardware platforms, especially IBM Z. Within hybrid infrastructure, IBM Z revenue was up 8% this quarter. We're now more than two years into the z16 cycle and the revenue performance continues to outperform prior cycles. Our clients are facing increasing demands for workloads given rapid business expansion, the complex regulatory environment and increasing cybersecurity threats and attacks. IBM Z addresses these needs with a combination of cloud-native development for hybrid cloud, embedded AI at scale, quantum-safe security, energy efficiency, and strong reliability and scalability. Increasing workloads translates to more Z capacity or MIPS, which are up about threefold over the last few cycles. IBM Z remains an enduring platform for mission-critical workloads, driving both hardware and related software, storage and services adoption. In distributed infrastructure, revenue grew 5%, driven by strength in both power and storage. Power growth was fueled by demand for data-intensive workloads on Power10 led by SAP HANA. Storage delivered growth again this quarter, including growth in high-end storage tied to the z16 cycle and solutions tailored to protect, manage, and access data for scaling generative AI. Looking at infrastructure profit, we delivered solid gross profit margin expansion and segment profit accelerated quarter-to-quarter to the high-teens. Segment profit margin was down 230 basis points in the quarter, reflecting key investments we're making in the business across areas like AI, hybrid cloud and quantum, and almost a point of impact due to currency. Now, let me bring it back to the IBM level to wrap up. We feel good about our performance in the first half with revenue growth reflecting the investments we've been making both organically as well as acquisitions. Our focus on execution and the strength in the fundamentals of our business resulted in strong performance in the quarter across revenue, margin expansion, and growth |
3,204 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | in the fundamentals of our business resulted in strong performance in the quarter across revenue, margin expansion, and growth in profitability and earnings. Looking to the full-year 2024, we are holding our view on revenue. We see full-year constant-currency revenue growth in line with our mid-single-digit model, still prudently at the low end. For free cash flow, given the strength in our performance in the first half, we feel confident in raising our expectations to greater than $12 billion, driven primarily by growth in adjusted EBITDA. This also includes a modest contribution resulting from the Palo Alto QRadar transaction, largely offset by related structural actions to address stranded costs. We continue to expect the QRadar transaction to close by the end of the third quarter. On the segments, in Software, we had solid first-half performance, up more than 7%. This performance reflects strength in our recurring revenue base and early traction in GenAI. With this performance, we are raising our view of growth in software to high-single-digits for the year. And given ongoing productivity initiatives and operating leverage, we now expect software segment profit margin to expand by over a point. In Consulting, given the continued pressure we have seen on spending related to discretionary projects, we now expect low-single-digit growth for the year and segment profit margin to expand by about half a point. And given the strength in infrastructure in the first-half, we now expect it to be about neutral for the year with segment profit margin in the mid-teens to high-teens. With these segment dynamics, we are raising our expectations of operating pre-tax margin expansion to over a half a point year to year. And we are maintaining our view of operating tax rate in the mid-teens range, consistent with last year. On currency, given the strengthening of the dollar, we now expect a 100 basis-point to 200 basis-point impact to revenue growth for the year. For the third quarter, we see revenue growth consistent with |
3,205 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | to 200 basis-point impact to revenue growth for the year. For the third quarter, we see revenue growth consistent with the full-year. For profit, we expect our net income SKU through the third quarter to remain a couple of points ahead of the prior year, driven by the strength of our business. And again, we expect the gain of the Palo Alto QRadar transaction will be offset by related structural actions to address stranded costs. In closing, we are pleased with our performance this quarter and for the first-half, driving confidence in our updated expectations. We are positioned to grow revenue, expand operating profit and grow free cash flow for the year. Arvind and I are now happy to take your questions. Olympia, let's get started. |
3,206 | IBM | 2 | 2,024 | 2024-07-24 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 multi-part questions. Operator, let's please open it up for questions.
Operator: Thank you. At this time, we'll begin the question-and-answer session of the conference. [Operator Instructions] And our first question comes from Wamsi Mohan with Bank of America. Please state your question.
Wamsi Mohan: Yes, thank you so much. Your long-term model on transaction processing is low-single-digit and you just posted a very strong quarter with 13% growth in the quarter. How should we think about the trajectory of that in 2024 and maybe in 2025? I know, Jim, you noted a few different things, including solid client renewals and some strong large deal performance. Was there anything very episodic or unusually large within that mix as well? Thank you so much. |
3,207 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Jim Kavanaugh: Thanks, Wamsi. I appreciate the question overall. Very important. You know, if you take a step back, you know, we continue to be very pleased with our transaction processing performance overall. You know, if you dial back to when we laid out our mid-term model, we said we converted this to a growth vector, low-single-digit overall. And if you look at the last couple of years, we've been averaging mid-single-digit or better overall. We shifted this now to a growth contributor. And why is that important? One, high source of profit and cash, the fund investment flexibility; and two, it provides a very solid incumbency base for the IBM or multiplier effect. But if you take a look at it, we are capitalizing on the strength that we've seen over the last three programs of our mainframe cycle. It's really instantiating the enduring value of that platform. Our MIPS over the last few programs are up three times from an installed perspective and over 80% of our clients are growing MIPS on the mainframe. I think that was a very different picture when you dial back five, seven years ago already. So, we've taken that portfolio. We've invested now significantly, which I'll come to around watsonx Code Assistant for Z, but we've taken that from a down mid-single-digit portfolio to now capitalizing on the stack economics of our mainframe, execution and move that to low-single-digit. Now for the year, as you heard, we are taking up our guidance just given the strength of first half to mid-single-digit. You know, when you get into 2025, we'll talk about our guidance going forward, but we feel very confident that we can continue growing this and that's why we're investing in bringing out new capabilities like watsonx Code Assistant for Z, which is resonating extremely well.
Olympia McNerney: Operator, let's take the next question.
Operator: Our next question comes from Toni Sacconaghi with Bernstein. |
3,208 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Operator: Our next question comes from Toni Sacconaghi with Bernstein.
Toni Sacconaghi: Yes, thank you for taking the question. I'm wondering maybe you can discuss how you think about AI signings and whether you believe they're really incremental or just a shift in client spending? And part of the reason I asked the question is, if I -- you know, it looks like your AI book of business was up about $1 billion sequentially. You're saying three quarters of that is Consulting, so it's $700-plus million in Consulting signings in the quarter. If I take that out, your book-to-bill and the rest of your business is actually down. And despite the strong signings, you're lowering your Consulting expectations for the year. So, I'm just wondering, do you think AI investments in Consulting are a shift in spending? Or do you think they're accretive? Or do you actually think they could even be cannibalistic to Consulting spend and more broadly IT spend?
Arvind Krishna: Yes. So Toni, let me start and then Jim will add more color on this topic. First, it's a great question and you laid out some of the dynamics that were going on in there. If we just step back and just look at our comments on the macroeconomic environment, we kind of stated that there is discretionary spend pressure in Consulting. When you do have that pressure, but there is a demand for AI, I would look you in the eye and say, probably the bulk of that demand, not all but the bulk is indeed a shift from other areas of Consulting. We don't actually believe it's cannibalistic to the point you're pointing out. Now, as time goes on and as people move from early experimentation and proving out the value to wanting to scale and really get the full benefits of generative AI, we do actually believe at that point, even for consulting, these will turn into accretive and additive, but we are still some time away from when that will happen. So, that is just to give you some color and acknowledging that the bulk, but not all is a shift. Jim? |
3,209 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Jim Kavanaugh: Yes. Thanks Toni for the question. Just building on what Arvind said. I mean, first of all, we're very pleased with the early momentum that we've gotten with our book of business around GenAI, both on the technology side with our watsonx platform and now with our open innovation strategy around RHEL AI, OpenShift Granite model's InstructLab, etc. But let's just deep -- dive a little deeper into your question about Consulting, because I think when you look at Consulting, first of all, why is it so important right now in a early part of a cycle? It's important because it's got to establish IBM Consulting as the strategic provider of choice for enterprises as they're going through what we'd like to call digital transformation 2.0 with GenAI. Everyone is looking for who is going to be their strategic provider and partner. And I think $1.5 billion over $1.5 billion book of business in the first 12 months, which by the way is in excess of the ramp we saw play out with hybrid cloud and Red Hat, we're off to a pretty good start. Now, to Arvind's point, you know, in every technology shift, very different dynamics between a Human Capital based business and a product IP business. Human Capital based business, we do see and we expected clients will shift and reprioritize spending. They're doing that now as they're driving large enterprise transformation projects, which is what our portfolio has been able to capture, and that's why you see nice acceleration in growth in our backlog up healthy at 5%. But to Arvind's point, we do think once you get through the early cycle, this is an incremental expansion of TAM that drives a long-tail growth vector over time that has multiplier opportunities for us. So when you look at our consulting book of business, let's dive into the sub-segments, you see business transformation services, which a lot of the GenAI plays out too early right now. That is how do you transform the way you operate HR, finance, supply-chain. We've doubled and accelerated our growth |
3,210 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | right now. That is how do you transform the way you operate HR, finance, supply-chain. We've doubled and accelerated our growth quarter-to-quarter. What you're seeing is a reprioritization and dynamic spending decisions by clients because our AO, where we have a lot of short-term discretionary staff augmentation work, there's a lot of trade-offs between those two. So, it's important for us strategically with our client base, but I think you see how it plays out. Now, just to wrap up the full picture, Software, I think is fundamentally different. Our software book of business now $0.5 billion through the first 12 months. I think inception-to-date right now, we're about two-thirds of subscription, SaaS, one-third perpetual. I think that's contributing nicely about a point of growth. And by the way, that's one of the two components of why we took our software up for the year. So, I think that's predominantly all lift. |
3,211 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Operator, let's take the next question.
Operator: Our next question comes from Amit Daryanani with Evercore ISI.
Amit Daryanani: Thanks for taking my question. I guess, you know, my question is really on the Consulting side. And when I think about this business growing low-single-digits for '24, if I take out some of the M&A contribution, also some of the revenues from the AI book of bill -- book of business that you have at $1.5 billion, is it fair to think that maybe the non-AI Consulting piece actually gets worse in H2 versus H1 for you? If you just talk about the puts and takes on the back half consulting expectations versus front half, that would be really helpful. And then, you know, I'm curious, if you talk to your customers, what is your sense on the duration of this weakness in Consulting and when do you think it has to come back? Thank you. |
3,212 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Hi. So Amit, let me just start and maybe address the second part of your question first and then. I actually do not believe there's any secular macro trend around weakness. I think that this is temporal based on a number of factors we have. The geopolitical uncertainty has gone longer than most people expected and that weighs into people's heads about what that might happen. And specifically, the war in Europe as well as the war in the Middle-East. Second, inflation has gone longer than people expected, which has the unfortunate consequence of higher interest rates and that begins to bear on people. If I look at those two altogether and that then at the moment you have higher interest rates and inflation, you have wage inflation, which does impact the bottom-line of our clients. You put all of that into perspective and is this going to go on for another six months? Likely. Is it going to go on for another year? I'm not so sure, but we got to get through the second half to be able to go there. So, that is why we are optimistic about the medium-term and long-term vector on Consulting. And as Jim answered in the prior question, we do see that this is going to become a tailwind over time, at least for us. Now, in the short-term for the next six months, we do think it holds up a little bit. In terms of answering the specifics and sort of decomposing some of the numbers that you laid out in the first part of your question, I'm going to turn that over to Jim. |
3,213 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Jim Kavanaugh: Yes. Thanks Arvind and thanks Amit for the question overall. You know, let's put this in perspective, right? You go back 90 days ago, how did we see the year kind of playing out with Consulting? We said at that point in time, we had backlog growing nicely mid-single-digit, albeit we did talk about durations going up because large scale transformations were really where the spend was moving to. But we had a solid book-to-bill trailing 12 months over 1.15. We had GenAI momentum that was going to continue throughout the year early in the cycle. We had strategic partnerships, Red Hat growth profile, and we had future acquisitions as we're going to continue to be opportunistic around our M&A criteria and the synergistic value of how consulting plays to our portfolio. If you look right now, 90 days later, as we look to the second-half, many of those are still playing out. You got GenAI, which arguably were above our own expectations, right now doubling, by the way, in Consulting, our GenAI book of business quarter-to-quarter, strategic partnerships, especially hyperscalers, Red Hat still growing nicely. What you're seeing, you know, at the end of the day, those are large scale transformations, lower yield, that's why Arvind and I are saying these are longer-term growth vectors and tails that will play out into '25, '26 and beyond as we get that strategic provider of choice. But in the interim, what you're seeing is that spending reprioritization around short-term discretionary that I think, you know, everyone in the industry is talking about. We're all dealing with this. The key is we have to win that strategic provider of choice in GenAI. And I would argue we're off to a great start. You look at competitor numbers overall, we got $1.5 billion over $1.5 billion book of business doubling quarter-to-quarter right now. I think we're in pretty good shape. That's what we're focused on because that will provide the future revenue multiplier effect as we move forward. |
3,214 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Operator, let's take the next question.
Operator: Our next question comes from Jim Schneider with Goldman Sachs.
Jim Schneider: Thanks for taking my question. Maybe if I could just ask on different topic for a second. Can you maybe talk about the environment you see right now for M&A and your intention to continue to drive through acquisitions? And do you believe you have sufficient scale in open-source and DevOps software in particular? And can you maybe comment on the attractiveness of multiples in the public market today relative to the private market?
Arvind Krishna: Hey, Jim, great question and thank you for asking this. Look, on overall M&A, I just want to begin with that our strategy has not changed. We are -- we are disciplined and we are focused. By focused, I mean we stick to the areas that we are investing in hybrid cloud and artificial intelligence. And by discipline, I mean it has to be not just aligned to our strategy, but we expect synergy from the acquisition, especially the multiples are higher as you pointed out and it has to be accretive to free cash flow if it's larger, definitely within two years at the outer end of the range. So having said that, if I look at it right now, we have HashiCorp out there. So, we got to get through that. We expect that to happen in the second-half of this year. We just finished StreamSets and webMethods and we've done a couple of smaller ones in the Consulting space and in other technology tuck-ins.
Jim Schneider: All right. |
3,215 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: What do we see going into this space? Our valuations rich, they're reasonably rich. They're not outrageous, I would say, like they had become in parts of late 2020 and 2021. So, I would say that they are more reasonable than then, but they're richer than they were about 18 months ago. There are different dynamics in both the public and the private markets. Public markets are quite variable. I mean, as we can see, some of the multiples and if you look at multiple to revenue, which is not a great metric, let me just acknowledge that, but it is one that's out there. If you look at six, seven, eight, maybe nine or 10 times, we can see our way there for a large deal as long as we have sufficient synergy. Now, for very small deals, that's not even a fair multiple. Very small deals are all about technology and people. In the private markets, we were very pleased with what we got done on StreamSets and webMethods. I would call that a private market deal, not a public market deal. And there, I think it all depends upon what's the property, what is its growth profile, what is the attractiveness of it to the seller versus the buyer, in this case us, all of that play into those multiples. I do expect that on the private side, valuations will be slightly less, but then the risk of going public or some other exit is also taken away. And in some sense, you get a discount for taking that risk off the table. For people who are venture-backed, that's different. They are looking at IPO versus a strategic exit and those are different multiples. But putting all of that together, we remain in the market and M&A is an important part of our growth methodology. We maintain a strong balance sheet for that purpose and we've kind of been clear of that. All that said, this year, we got a big one coming. So, we want to wait and get that done because part of the discipline is also making sure that we kind of digest them at the right rate and pace and put them into our global go-to-market distribution engine. |
3,216 | IBM | 2 | 2,024 | 2024-07-24 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.
Ben Reitzes: Yes. Hey, thank you. Appreciate it. Jim, I wanted to -- and Arvind, I wanted to see, you know, if the -- it sounds like the margin progress is sustainable for the year. So while I appreciate that you guide to free cash flow and you've raised it a little bit, do you anticipate us being able to flow through the $0.25 of upside on the EPS line? And you know, can -- does that mean earnings is sustainable in the back half? And then I was just wondering if you have any more info on HashiCorp, yes, in terms of the revenue contribution, Street was looking for about $750 million in revenue next year. And on the dilution, there's -- there should be a loss of around $0.30 in interest income. So, just wondering if you have any further views on the net effect to 2025 on that deal. Thanks so much, guys. |
3,217 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Jim Kavanaugh: Hey, Ben, thank you. Appreciate it. Very good question overall. But let's take a step back on your first part of the question around free cash flow. Yes, we're very pleased with the start of the year. Free cash flow of $4.5 billion, up $1.1 billion year-to-year, 4 points above historical attainment. It's our largest first half free cash flow generation as far back as I can go and count. So, we're off to a pretty good start and that gives us the confidence overall of how we're positioning second-half. But the second half and why we took the guidance up is entirely driven by the strength of the fundamentals of our business and flowing through the adjusted EBITDA overachievement. So, read that, although we don't guide on EPS, the strong overachievement of the $0.25 of EPS, we're flowing that through to adjusted EBITDA and that flows through to our guide take-up on free cash flow. The rest of the free cash flow dynamics we've been talking about all year long around, yes, we got benefits of change in retirement plans and cash tax that's going to be a headwind and other balance sheet items, none of that changes. One thing I will bring up and we said in the prepared remarks, but just so there's absolute clarity, we do expect to close the Palo Alto transaction here in the third quarter around certain assets of our QRadar business that will obviously generate a gain. We're excited about the new strategic relationship between our two great companies overall, but we will take structural actions to offset that gain to address stranded cost. And oh, by the way, to your second part of your question, to accelerate our productivity initiatives in 2025, so you get the HashiCorp. First of all, the strategic transaction stands on its -- on its own. Arvind went through our M&A criteria. I think there's a very compelling strategic fit around an end-to-end leadership hybrid cloud platform. There's a lot of synergistic value both on product technology and go-to-market, but there's a very attractive financial profile |
3,218 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | There's a lot of synergistic value both on product technology and go-to-market, but there's a very attractive financial profile that we talked about 90 days ago, higher revenue growth profile, adjusted EBITDA accretive in 12 months, free cash flow accretive to Arvind's point by two years. And we do see potential significant near-term cost in operating synergies that lead to about a 30% to 40% free cash flow margin business over a handful of years. Now, when you look at dilution, we understand dilution. I mean, M&A has been an integral part of our financial model for decades. So, underneath that, we understand the purchase growth of those transactions, the synergies of those transactions, the balance sheet capital structure implications of those. And with all that said, our model is to grow mid-single-digit revenue and grow operating leverage so we grow free cash flow quicker than revenue. We don't see that changing in 2025. We see growth profiles around revenue, around operating leverage and around free cash flow overall. And that speaks to the diversity or diversification, I should say, of our business model around productivity. We entered the year, raised it to $3 billion. We're getting out ahead of that again and you see that play out in our margins through the first-half, what, up 180 basis points on pre-tax. So, we've got many levers to deal with this overall. We know how to handle it. |
3,219 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Operator, let's take the next question.
Operator: The next question comes from Erik Woodring with Morgan Stanley.
Erik Woodring: Hey guys, thanks so much for taking my question. Arvind or Jim, I'd love if you could just dig into the Red Hat business a bit more. You know, over the last few quarters, you've talked about some very healthy bookings growth numbers ranging anywhere between, call it, 15% and 20%. But we did see growth obviously decelerate by about a point this quarter despite, you know, expectations that it would be flat to maybe increasing for the rest of the year. So, can you just kind of double click on exactly what you're seeing with the Red Hat business today? What's kind of the offset to the strong bookings numbers? And how should we think about Red Hat growth now in constant currency for 2024? Thanks so much. |
3,220 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Great question, Erik. So, let's just look at the Red Hat business in terms of how the dynamics function between our clients and ourselves. So, clients come in and create demand, we fulfill that. That shows up as bookings, not as revenue because the Red Hat business model is a pure consumption business model. Clients pay for what they're consuming and so the bookings then play out. Now, those bookings are a signal of further demand and typically they're anywhere from one-year to three-year worth of revenue that the client is pre-committing to. So, when we enter a year, about half the revenue, we can look at the bookings of the previous year and say that that gives us. The other half has to come over the quarter. Now that we have a year, not longer, but a year of the double-digit demand that you're talking about, if I remember right, it was 14%, 17%, 14%, 20% in terms of those demands. Now that full-year is there, that points to that for the portion that we can see, and as we get into a quarter, it climbs up from that 50% to 60% to 70% to 80% and Jim mentioned in his prepared remarks, what he called CRPO or the revenue performance obligations, we see those sitting around mid-teens for the second half of the year to answer your question. Now, if that's about 80% and that will translate into low double digit is what we can look at and feel quite comfortable on. By the way, we see these early signs of the demand continue into this quarter and likely the half, which means that we expect to continue now in the low double digits going forward. So, I hope that that gives you a sense. But I'm also excited by the underlying product capabilities. We see OpenShift, which is extremely important. It plays into containerization, it plays into virtualization. It's an important element of how our clients exercise hybrid. It has been growing and the demand there grew again at about 40% this past quarter. But we also saw acceleration in Linux and enhanceable where both of those demand vectors grown to the low |
3,221 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | this past quarter. But we also saw acceleration in Linux and enhanceable where both of those demand vectors grown to the low double-digits. That given the size of the Linux business is very good news for us going forward. So, I hope that that gives you some color on those pieces. And a vector that we have not talked about that will play, but probably into '25 and '26, we are very excited by our two open-source AI projects inside the Red Ad business, our RHEL AI as well as OpenShift AI. And as people begin to deploy at scale, but not only on public cloud, but also on-premise, leveraging their hybrid environment, we expect that both of those will also contribute into the Red Hat business, but that will take more time. |
3,222 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Operator, let's take one last question.
Operator: Thank you. Our next question comes from Matt Swanson with RBC Capital Markets.
Matt Swanson: Thank you. Yes. Arvind, if we could pick up right where you left off there. Can you just give us a little more color on the decision to open up the Granite models and the code base? And then really kind of what you're seeing in the market that makes you feel like taking maybe a more developer-focused approach to those? I think as you put it, fit-for-purpose models, is the right long-term strategy? |
3,223 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: So Matt, thank you for asking that question. And there was actually a question on developers before also. So, I'm sorry we didn't get to it fully. We'll get to it now in this question. Look, the whole question comes down to, there was a thesis out there about a year and a half ago that maybe one, maybe two extremely large models are going to run away with the bulk of the market share. We always felt that was both technically and economically infeasible. And I'll describe why. If you run an extremely large model on public clouds, the model by its nature is going to be expensive because a very large model needs a lot more compute, a lot more network, a lot more storage, a lot more memory, and we can see some of those dynamics play out. If you can drop the model size, you can drop all of that by 90%. I would actually tell you 99% reduction in the compute and memory and network costs, but let's call it 90% just for the sake of argument. So if you are running a -- like one of our clients was describing to me, they run a couple of billion transactions through their internal systems each day. If they had to go service those out to a large public cloud, the bill per day would have come back to be a couple of $100 million. You multiply that by 250, that's kind of an infeasible cost. If you can drop it by 90%, you're now bringing it down to the $10 million to $20 million a day. If you can actually run it using some of our Red Hat technologies on-premise, you can drop it by another 50%. You're not talking 5% to 10%. For what it can do, that is a very attractive proposition. So, now getting back to the models. If you have no idea what you're going to do, if you have no idea what you might be looking for, you go to a very large model because it contains all the possible elements. If you have a sense of what you need to do, I need to summarize emails. You need an English-language model if you're sitting here in the United States. If you are going to go change your Java or C++ or Python programmers to be more |
3,224 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | if you're sitting here in the United States. If you are going to go change your Java or C++ or Python programmers to be more productive, you don't need a model that can write poetry and draw images. You need a model that understands programming languages. So, we are very, very proud of what our team has done. We can produce models that can do these things. So, these are two distinct models, one for programming, one for business language. They are one-tenth or less than that of the size of the extremely large models. But you can look on the leader boards, they perform quite as well as the largest models. So, that is kind of what our strategy is. However, if our clients want other models, we are also happy to work with other models and we have had that perspective. So, why open-source since that is part of your question? Why open-source is because often we find that clients want to increase the model's efficacy by adding their own unique language. People might want to write emails in a certain way. They might want to program in a certain way. They like comments in a certain style. I call that refining the model. We have a technique called InstructLab, but then clients get concerned. Wait, if I add my data, I don't want to give that away and back into a more public format. Can I keep that to myself? So, open sourcing our models under the Apache license gives our clients the freedom that what they add onto our underlying open model, they can keep to themselves. Now, to the developer point, putting all of that machinery into Red Hat Linux now gives us an avenue to open it up to developers as they can go experiment and play. By the way, I will turn around and tell you that for a developer who's not running production, who's just playing with things like all people do it. On a MacBook, you can begin to play around with models that are in the low tens of billions of parameters. That's a massive market that opens up. They get the freedom and flexibility that they don't have to give it back to us unless they want to. I am |
3,225 | IBM | 2 | 2,024 | 2024-07-24 17:00:00 | International Business Machines Corporation | 112,350 | market that opens up. They get the freedom and flexibility that they don't have to give it back to us unless they want to. I am not actually concerned about this gives away the IP, as we have found through whether it's Red Hat Linux or whether other people have found through Mongo or other people have found through Hadoop, enterprises do look for and the last few days have certainly shown us, people look for patching, people look for security, people look for backward compatibility. There's a lot of enterprise reasons why people will still do business with us. But the open-source nature of what you asked, I'm so glad you did, allows us to expand that market into the millions of developers who do run Linux on their own machines or their corporate machines or their laptops and they can go experiment, add their innovation and either give it back to the community or actually reserve it for their enterprise. So, that's how we kind of tap into the whole developer ecosystem. So, let me now wrap up the call. In the second quarter of 2024, we executed on our strategy to deliver revenue growth and cash generation. We saw strong performance across our portfolio. We are excited about our early traction in generative AI. We look forward to sharing our progress with you as we move through the rest of the year. Thank you all. |
3,226 | IBM | 2 | 2,024 | 2024-07-24 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. |
3,227 | IBM | 1 | 2,024 | 2024-04-24 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 First 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.
Arvind Krishna: Thank you for joining us. In the first quarter, we had solid performance across revenue and cash flow. These results are further proof of the quality of our portfolio and our hybrid cloud and AI strategy. We had good performance in Software, at the high end of our model; continued strength in Infrastructure, above our model; while Consulting was below model. On a relative basis, Consulting outperformed the market. |
3,228 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Our cash flow generation is the strongest first quarter level we have reported in many years. This performance speaks to the strength of our diversified business model.
Before we get into more detail on the quarter, let me address the announcement of our agreement to acquire HashiCorp, a company we have partnered with for a long time and believe is a tremendous strategic fit with IBM. Enterprise clients are wrestling with an unprecedented expansion in infrastructure applications across public and private cloud as well as on-prem environments, making this the ideal time to pursue this acquisition.
As generative AI deployment accelerates alongside traditional workloads, developers are working with increasingly heterogeneous, dynamic and complex infrastructure strategies. HashiCorp has a proven track record of helping clients manage the complexity of today's infrastructure by automating, orchestrating and securing hybrid and multi-cloud environments. HashiCorp is a great strategic addition to our portfolio, extending Red Hat's hybrid cloud capabilities to provide end-to-end automated infrastructure and security life cycle management.
HashiCorp's technology is foundational to enabling the transition to hybrid and multi-cloud, and Terraform is the industry standard for infrastructure automation for these environments. With security top of mind for every enterprise, Vault is a powerful secrets management offering to automate identity security across applications. The combination will also bolster our leading IT automation platform to address the sprawling complexity of AI-driven application and infrastructure growth.
HashiCorp's products have wide-scale adoption in the developer community, highlighting the pervasive nature of their technology used by over 85% of the Fortune 500 and downloaded over 0.5 billion times. The acquisition of HashiCorp builds on IBM's commitment to industry collaboration, the developer community and open source hybrid cloud and AI innovation. |
3,229 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Today's acquisition is consistent with our M&A strategy. We have taken a disciplined approach to M&A, and HashiCorp aligns well across all our key criteria to continue to focus and strengthen our portfolio, on hybrid cloud and AI, deliver synergies with the rest of IBM and be near-term accretive to free cash flow.
I will now turn it to Jim to discuss the financial implications.
James Kavanaugh: Thank you, Arvind. Let me start with the details of the transaction. We have agreed to acquire HashiCorp for $6.4 billion in enterprise value to be funded by cash on hand. The transaction was approved by HashiCorp's Board of Directors. Closing is anticipated by the end of 2024, subject to approval by HashiCorp's shareholders, regulatory approvals and other customary closing conditions.
We have been executing a disciplined capital allocation strategy, and the acquisition of HashiCorp meets all of our criteria, including strategic fit, as Arvind just walked through, synergies across IBM and financial accretion.
Let me start by addressing synergies. We see multiple drivers of product synergies within IBM and accelerating growth for HashiCorp. Product synergies span across multiple strategic growth areas for IBM, including Red Hat, watsonx, data security, IT automation and consulting. For example, the powerful combination of Red Hat's Ansible automation platforms configuration management and Terraform's automation will simplify provisioning and configuration of applications across hybrid cloud environments.
We are well positioned to drive growth for HashiCorp by leveraging IBM's enterprise incumbency and global reach. With 70% of the revenue today coming from the U.S., the opportunity to scale HashiCorp across IBM's operations in 175 countries is significant. |
3,230 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | We also believe we can accelerate HashiCorp's adoption with IBM clients. To put this in perspective, only about 20% of the Forbes Global 2000 are HashiCorp customers and just 25% of HashiCorp customers result in more than $100,000 annual recurring revenue, underscoring the opportunity to better monetize and upsell their products.
Bringing it all together, the acquisition allows us to deliver a more comprehensive hybrid cloud offering to enterprise clients, enhancing IBM's ability to capture global cloud opportunity. This will drive a higher growth profile over time.
Finally, we expect to realize operating efficiencies and expect the transaction to be accretive to adjusted EBITDA within the first full year post close and to free cash flow in year 2. Significant near-term cost synergies underpin the financial profile of the transaction, while product synergies represent further upside. We are very comfortable with our strong balance sheet, liquidity profile and solid investment-grade rating and remain committed to our dividend policy.
I'll now turn it back to Arvind.
Arvind Krishna: Now turning back to the quarter. Let me start with a few comments on the macroeconomic environment.
We expect the global economy to behave similarly to last year, albeit with some uncertainty due to persistently high interest rates. There are reasons to believe technology will be even more important in 2024 as clients focus on productivity improvements and customer experience. AI-driven productivity, in particular, continues to be a top priority for businesses for both cost reductions and new revenue opportunities.
I will now provide some details on the execution of our strategy around hybrid cloud and AI.
Enterprise AI continues to gain traction. This year, we anticipate more clients moving from experimenting to deploying AI at scale to unlock productivity. We are pleased with the solid progress of our AI offerings. Each quarter, we are winning more clients, expanding partnerships and introducing new innovations. |
3,231 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Inception to date, our book of business related to watsonx and generative AI is greater than $1 billion with sequential quarter-over-quarter growth. Similar to last quarter, this remains weighted towards Consulting.
We believe our comprehensive AI strategy is well positioned to help clients scale AI. We developed our watsonx platform for clients to build their AI solutions, spanning from foundation model training to data preparation and governance. This includes both IBM/Red Hat models and third-party models, giving our clients variety as well as efficiency and focus on enterprise domains that IBM brings.
We have leveraged watsonx to build AI assistance through our software portfolio. Our consultants are helping clients navigate the AI landscape. And finally, we are seeing our infrastructure segment play a larger role as clients leverage their hardware investments in their AI strategies. Let me touch on these infrastructure dynamics briefly.
As AI becomes widely adopted, IBM Z is uniquely advantaged. We believe a lot of AI inferencing will happen where the data is for security, efficiency and latency reasons. Our full-stack focus, from on-chip AI processing to AI accelerator cards, to watsonx platform support, allows models to be built and trained on any platform and easily deployed on IBM Z.
The Telum chip is a unique differentiator, enabling real-time AI inferencing. Generative AI is also driving lift for our storage offerings where industry-leading performance and scalability is utilized for data curation, model building and fine-tuning. |
3,232 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | For enterprises to deploy AI at scale, AI is not a one-size-fits-all proposition. It requires tuned, domain-specific models trained with quality data to maximize its impact. Clients value the flexibility of our approach. They appreciate having the ability to leverage a combination of AI models, whether they're IBMs; their own models; open source models, such as Llama from Meta and Mixtral from Mistral. And they can deploy these AI models across multiple environments. The flexibility we offer is resonating as our use cases are both large and more efficient models.
We are committed to an open innovation ecosystem around AI to help our clients maximize flexibility and leverage skills. Let me spend a minute on our progress in this area.
We see early parallels to Linux in making open source AI models performant for enterprise use. We believe that IBM with Red Hat can be a key driver of open source AI. As you know, we have done a lot of work with AI models and recently released a family of state-of-the-art open source code models from our Granite series. Red Hat and IBM also recently launched Instruct Lab to evolve and improve AI models through incremental community contributions, much like open source software. This open strategy is resonating around the world. We recently announced a collaboration with the Spanish government to leverage IBM's investments across their entire AI stack and open source to build the world's leading suite of foundation models proficient in the Spanish language.
Enterprise use cases addressing code modernization, customer service and digital labor remain top of mind for our clients. This quarter, we signed a multiyear contract with Providence Health to reimagine talent and HR workflows with AI from IBM and partners. We're also providing data-driven insights and enabling Spanish language narration for this year's Masters golf tournament. |
3,233 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Our partner ecosystem remains essential to both AI and hybrid cloud growth. This quarter, we progressed strategic partnerships with a number of industry leaders. Consulting joined forces with NVIDIA to accelerate clients' AI journeys. ServiceNow will embed watsonx AI capabilities into the ServiceNow platform to accelerate enterprise digital transformation. We also expanded our relationship with Adobe around OpenShift and watsonx as it relates to the Adobe Experience Platform.
We continue to invest in emerging technology as well, bringing new innovations to the market. Since we put the world's first Quantum system on the cloud in 2016, we have deployed over 80 Quantum systems, and our users have run over 3 trillion programs to date. We just installed a Quantum System One at Rensselaer Polytechnic Institute. This is the first IBM Quantum system on a college campus anywhere in the world. This installation will advance research in critical areas such as energy storage, material science and financial modeling.
As always, focusing on our portfolio remains a key priority. We closed the sale of The Weather Company in the first quarter and expect to close the announced acquisition of StreamSets and webMethods from Software AG by midyear.
Overall, we had a positive start to the year, which gives us confidence in our next quarter and full year expectations.
Jim will now take you through the details of the quarter. Jim, over to you.
James Kavanaugh: Thanks, Arvind. In the first quarter, we delivered $14.5 billion in revenue; $3 billion of adjusted EBITDA; $1.7 billion of operating pretax income; $1.68 operating earnings per share; and we generated free cash flow of $1.9 billion, up approximately $600 million year-over-year.
Our revenue for the quarter was up 3% at constant currency. We saw an impact to our top line performance from the closing of The Weather Company earlier than expected in the quarter. |
3,234 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Software grew by 6% with growth across Hybrid Platform & Solutions and Transaction Processing and continued strength in our recurring revenue base.
Consulting was up 2%, reflecting organic growth. We continue to have solid signings performance and a trailing 12-month book-to-bill of over 1.15.
Infrastructure had strong performance, delivering growth across all of our hardware offerings.
Looking at our profit metrics, we expanded operating gross margin by 100 basis points and operating pretax margin by 130 basis points over last year, inclusive of about 100 basis point currency headwind to pretax margin.
At the end of January, we closed on the divestiture of The Weather Company, generating a pretax gain of $241 million in the quarter. Mitigating that benefit, we took charges of $374 million to address workforce rebalancing.
Operating pretax margin was up 50 basis points, excluding the year-over-year impacts of workforce rebalancing and divestiture dynamics. We are pleased with this performance, in line with our guidance of roughly 50 basis points of operating pretax margin improvement in 2024.
Margin expansion was driven by our operating leverage, product mix and ongoing productivity initiatives. This allows for continued investments to drive innovation, which you can see in our higher R&D expense. The timing of discrete tax items this quarter resulted in an operating tax rate of about 6%. We are still expecting a full year operating tax rate consistent with last year.
Overall, the combination of our revenue and operating margin performance resulted in 7% growth in our adjusted EBITDA. This contributed to our free cash flow performance. For the quarter, we generated $1.9 billion of free cash flow, up $600 million year-over-year. This growth reflects the performance of our underlying business, with adjusted EBITDA up $200 million year-over-year and about $400 million from timing of balance sheet dynamics and CapEx. |
3,235 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Over the last 12 months, we generated free cash flow of $11.8 billion. This puts us on track to deliver about $12 billion of free cash flow for the year, with the growth largely driven by adjusted EBITDA.
Since our acquisition of Red Hat, excluding 2021 when we spun off Kyndryl, our operating net income to free cash flow realization averaged 120%. Two factors drive this. One is stock-based compensation, which today represents 15 points of realization. And two, given the shift in our portfolio to a growing software business, deferred income also contributes to our realization.
In terms of cash uses, we returned $1.5 billion to shareholders in the form of dividends. From a balance sheet perspective, we have a very strong liquidity position with cash of $19.3 billion, up from $13.5 billion at year-end 2023. Our debt balance at the end of the first quarter was $59.5 billion, including $9.9 billion from our financing business.
Turning to the segments. Software revenue grew 6% with good performance across both Hybrid Platform & Solutions and Transaction Processing. As mentioned in January, the Software revenue growth drivers for the year include Red Hat growth, acquisitions, strong recurring revenue and transaction processing. And this is just how the first quarter played out. Hybrid Platform & Solutions revenue was up 7%. Let me spend a minute on the various elements.
Red Hat revenue grew 9%, reflecting solid performance across the 3 key solutions: RHEL, OpenShift and Ansible. Annual bookings growth was again in the mid-teens, with OpenShift up over 40% this quarter and RHEL and Ansible each up double digits. |
3,236 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Beyond Red Hat, recent acquisitions contributed to the growth profile of Hybrid Platform & Solutions as did new innovation areas, including watsonx. The combination of Apptio, acquired mid-last year, and our IT automation portfolio has delivered strong results, unlocking the full benefits of a fin op solution for technology investments across hybrid cloud environments. In fact, just this quarter, we partnered with Microsoft to bring Apptio to Azure and we'll co-sell to our joint customers, and Microsoft has agreed to adopt Apptio's capabilities in parts of their organization.
Our revenue performance continues to reflect growth in our high-value recurring revenue base. Our ARR, after removing The Weather Company and security services, is now $13.9 billion, up over 8% since last year.
Transaction Processing, with its strong base of recurring revenue, delivered revenue growth of 4%. Clients continue to value this portfolio of mission-critical software, supporting growing workloads on our hardware platforms. And there's an increasing interest in generative AI application modernization capabilities, like watsonx Code Assistant for Z.
Software segment profit was up 80 basis points while absorbing both key investments in innovation and about 1 point of currency impact in the quarter. We continue to deliver operating leverage driven by our revenue performance this quarter.
Our Consulting revenue was up 2%. We continue to see clients prioritizing large data and technology transformation projects focused on driving productivity with AI and analytics. These results reflect the organic performance of our business.
Solid demand for our offerings led to signings growth of 4%, our highest absolute first quarter signings in recent history, and our trailing 12-month book-to-bill ratio remains over 1.15. |
3,237 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Our overall backlog remains healthy, up 7% year-over-year, and backlog erosion levels remain stable. At the same time, we saw both a lengthening of backlog duration driven by large-scale digital transformations and a reduced level of revenue realization in the quarter as clients tightened discretionary spending.
Contributing to growth across the business this quarter, our strategic partnerships continue to make up over 40% of our Consulting revenue, with both AWS and Azure practices growing double digits. Additionally, our Red Hat practice grew revenue double digits. Expanding upon our partnerships, we are leveraging Microsoft Copilot to drive productivity for our clients. Just as we quickly ramped a meaningful book of business around Red Hat to address the hybrid cloud opportunity, we are ahead of pace at this stage with our generative AI book of business.
Turning to our lines of business. Business Transformation revenue grew 3% led by supply chain and finance transformations. Customer experience transformations also contributed to growth.
Technology Consulting revenue was also up 3% with double-digit growth in cloud modernization projects, and both strategic partnerships and Red Hat engagements delivered double-digit growth.
Application Operations revenue declined, reflecting weakness in on-prem custom application management projects, partially offset by strength in cloud-based application management offerings.
Moving to Consulting profit. We delivered over 8% of segment profit margin, which is flat year-to-year. Our segment profit margin was impacted by about 1 point of currency, offsetting improvements in pricing and productivity actions we have taken.
Moving to Infrastructure. Revenue grew, reflecting growth in Hybrid Infrastructure of 6% and declines in Infrastructure Support of 7%. Within Hybrid Infrastructure, growth was broad-based with strong demand from our hardware offerings across IBM Z, Power and Storage. |
3,238 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | In IBM Z, revenue was up 5% in the eighth quarter of z16 product availability. Now 2 years in, this product cycle continues to resonate with clients and surpassed z15 revenue performance. IBM Z is uniquely positioned for AI with the first processor design with on-chip acceleration for real-time AI inferencing. In fact, we're working with over 100 clients on the application of AI on z16. Use cases range from fraud detection to anti-money laundering, to anomaly detection. This remains an enduring platform, driving not just hardware adoption but also related software, storage and services.
Distributed Infrastructure delivered 7% revenue growth with strength in both Power and Storage. Power performance was fueled by demand for data-intensive workloads. Storage delivered strong double-digit revenue growth, including demand for high-end storage tied to the Z16 cycle. And clients are also looking to our storage offerings for data curation, model building and fine-tuning and support of generative AI.
Looking at Infrastructure profit. We delivered both gross profit and segment profit margin expansion. Segment profit margin expanded 20 basis points in the quarter, reflecting benefits from productivity while absorbing about 1 point of impact from currency.
Now let me bring it back to the IBM level to wrap up. More than 2 years into our midterm model, we are a more focused business that has delivered sustained revenue and free cash flow growth. Over this time, we've continued to invest organically and inorganically, bring new products and innovation to market, expand our ecosystem and drive productivity across our business.
Our first quarter performance is another proof point of this progress with constant currency revenue growth, operating gross margin and operating pretax margin expansion, and the strongest first quarter free cash flow in many years. |
3,239 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Looking to the full year 2024, we are holding our view on our 2 primary metrics: revenue and free cash flow. We see full year constant currency revenue growth in line with our mid-single-digit model, still prudently at the low end. And for free cash flow, we expect to generate about $12 billion driven primarily by growth in adjusted EBITDA.
On the segments. In Software, we had a solid start to the year and continue to expect growth slightly above the high end of our mid-single-digit model. In Consulting, we continue to see strong demand for digital transformations. Though, as I said, we are seeing some pressure on smaller, more discretionary projects. We now see mid-single-digit revenue growth in Consulting with acceleration throughout the year. Given our ongoing productivity initiatives and investment in innovation, we expect to see about 1 point of segment profit margin expansion in both of these segments. And in Infrastructure, given product cycle dynamics, we expect revenue to decline, driving about a 0.5 point impact to our overall growth.
Given IBM Z cycle dynamics, we expect segment profit margin to be lower year-over-year. With these segment dynamics, we continue to expect IBM's operating pretax margin to expand by about 0.5 point year-to-year, consistent with our view 90 days ago, and we are maintaining our view of operating tax for the year to be consistent with last year, in the mid-teens range.
We took a workforce rebalancing charge this quarter. And as I mentioned 90 days ago, we continue to see the overall amount this year consistent with last year. We expect this to pay back by the end of the year.
On currency, given the strengthening of the dollar, we now expect a 150 to 200 basis point impact to revenue growth for the year, which is about 1 point worse than 90 days ago. |
3,240 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | For the second quarter, I expect our constant currency revenue growth rate to be consistent with the full year. Our tax rate is expected to be in the high teens. And for profit, we expect the first half skew of net income will remain a couple of points ahead of the prior year.
In closing, we are pleased with our performance to start the quarter. We are positioned to grow revenue, expand operating profit margin and grow free cash flow for the year.
Arvind and I are now happy to take your questions. Olympia, let's get started.
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: [Operator Instructions] Our first question comes from Amit Daryanani with Evercore.
Amit Daryanani: I guess I was hoping you could talk a bit more on the Consulting side of the business because revenues did decelerate rather notably in March quarter, but I think, on the other side, your AI-centric backlog at over $1 billion is doing extremely well. So I'm hoping you'd touch on the near-term side, what are you hearing from your customers? What are they telling you around the duration of this pause? Because I think the expectation of mid-single-digit growth would imply this business will recover rather quickly. So I'd just love to get a sense on what are customers' view on Consulting, in terms of the duration of the pause? And then longer term, what does the opportunity look like given the AI-centric backlog appears a lot more robust versus what I think folks have expected beyond '24? |
3,241 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | James Kavanaugh: Thanks, Amit. I appreciate the question. Let's take a step back because I think you're seeing some interesting dynamics in the consulting industry overall. And let's bifurcate it between how you asked the question. Let's look at real demand that's being measured in bookings, and then let's talk about what's happening with the revenue realization.
On demand, we continue to see and capitalize on solid demand in key areas around digital transformation, application modernization and Gen AI. Our signings in the quarter, up 4%, the strongest absolute first quarter signings we've had as far back as I can go. We have a strong book-to-bill, over 1.15 on a trailing 12 months. Our backlog dynamic is in a very strong position, 7% overall with stable erosion, but our duration has been going up the last 2 quarters. It's been up a couple of months.
But let's talk about the underpinnings of what's driving demand because I think that's what's most important around the key growth focus areas. You talked about Gen AI. Gen AI for IBM, Arvind indicated, inception to date, over a $1 billion book of business. Consulting in the first quarter, the book of business on Gen AI was 2x all of last year, so I think we're winning in the marketplace. We're taking share. And by the way, we're well above that ramp we saw with regards to Red Hat.
Our strategic partnerships still have great velocity, book-to-bill well north of 1.2. Our Red Hat book business is now $2.8 billion ARR around hybrid cloud. And we're seeing very nice acceleration in Gen AI and digital transformation around core workflow use case areas of finance, supply chain, HR and talent. So I think in the key focus areas, is our demand profile still continues to be good. |
3,242 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Now let's translate that to revenue. Revenue, first of all, in the first quarter, as we indicated, it was all organic. We ramped on our acquisitions. We continue to operate a very disciplined M&A process and we continue to be opportunistic, but that 2% revenue growth was all organic quarter-to-quarter. Second, in this marketplace, you look at competition, we're taking share still.
So when you look at it, 90 days ago, we talked about the year. We talked about the year was going to play out accelerating throughout the year. Why? Because, one, we knew we had a strong backlog and that backlog realization showed us that it was going to play out throughout the year with sequential improvement. But second, Easter. Easter, we knew calendar was there, it was at the end of March. That does impact a human capital-based business on a number of billing days.
So when you look then at first quarter, that backlog duration extending out a couple of months. We also saw, though, less revenue backlog yield, and that really played out if you look at our subsegments, in Application Operations. That's centered around custom AMS applications which, by the way, many of that, as you know quite well, is volume-based business. And that volume, like I said, backlog is stable overall. We're not losing the business. That is moving out to the right.
So with all that said, what are we focused on? We're focused on capturing new client demand in areas around our key growth areas. Two, we're continuing to focus and we are gaining share in the marketplace. Three, we're driving that economic multiplier of consulting and technology across our hybrid cloud and AI platform.
So in light of all that, that's why you see the mid-single-digit growth. I think that's prudent just given what every other consulting competitors come out with. By the way, that still drives 1.5 points of growth to IBM for the full year. And as I stated earlier, we see an accelerated growth profile as we move through the year. |
3,243 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Operator: The next question comes from Wamsi Mohan with Bank of America.
Wamsi Mohan: Arvind would love to get a little bit more of sort of a macro demand backdrop. I mean I know Jim mentioned the tightened discretionary spending in some areas. How do you think about the risk of that sort of filtering more broadly as you go through the course of the year, especially given your guidance calls for an accelerating trend here?
And if I could, quickly, Jim, the synergies relative to HashiCorp on the cost side, is there any way you can dimensionalize that given that, when you're defining accretion on EBITDA basis, I get that, but can you also help on the net income basis or from a free cash flow how much it might be dilutive in year 1 and accretive on year 2?
Arvind Krishna: Thanks, Wamsi. So let me address your thought about the demand profile globally. So if I look at where we are right now and where we project for the rest of the year, demand is actually quite strong. I would put it as very similar to 2023. This is backed up by IMF GDP estimates, which are now north of 3% for the global business.
If I look at it by geography, Japan remains very strong. I think that they are taking this opportunity to refresh the technology across their enterprise and government base. If you look at South Asia, extremely strong; even the Middle East, U.A.E., Saudi, very strong; Europe has remained consistent to last year; North and South America. So on a geography basis, we're seeing very, very strong demand. |
3,244 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Now interest rates are higher than people were expecting. I think we should acknowledge that. That means you get two effects going on. One, there is even stronger demand for software and infrastructure because people believe technology helps you in those environments and helps in an environment of increased labor costs and increased supply chain costs. Then when you look at the discretionary side, Jim answered this in the previous question, we are seeing a little bit, not across the board, not in all of the offerings in consulting, but where there is a little bit of discretionary labor, that is where we sense that pressure.
What we are going to do is pivot into the areas around helping people become more productive, take more cost out, digital transformation, work with our partners where there is very strong demand in the market. And as you pivot there, we believe that our growth rate in Consulting will continue to accelerate.
So I hope, Wamsi, that, that gave you a flavor on the demand vectors we have, both in Software and Infrastructure and in Consulting and on a geography basis.
Jim, over to you for part 2.
James Kavanaugh: Okay. Thank you. Thanks, Wamsi, for the question. As Arvind indicated in the prepared remarks, we couldn't be more excited about the powerful combination of HashiCorp with IBM and Red Hat together. We talked about it in the prepared remarks, we've been very disciplined in our set of criteria around M&A. And this fits strategically. It has tremendous synergistic value to our hybrid cloud and AI portfolio and it has an attractive financial return overall. |
3,245 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | And Hashi meets all three: One, it's a higher revenue growth profile company, so it accelerates IBM's revenue growth over time; two, to your question, adjusted EBITDA accretive in the first 12 months; and three, levered free cash flow accretive by the end of year 2. We think there are a potential for meaningful synergies overall and, when we look at it, significant near-term operating efficiencies, cost synergies. And to put that in perspective, we see this business profile moving from about a mid-single-digit free cash flow margin business to about a 30% to 40% free cash flow margin business in a handful of years, free cash flow accretive by the end of year 2.
Now the multiple we paid on that, fully supported by, one, the stand-alone revenue growth and the cost synergies that come out. All of the IBM revenue synergies around Red Hat, around data security, around watsonx, around consulting and IT automation are all upside potential.
So let's talk and conclude on the cost synergy. Cost synergies are where you would fully expect. IBM runs a global operations in 175 countries. We run a very disciplined G&A-efficient structure. We see significant G&A operating efficiencies that we're going to go capitalize on. Second, running the playbook on how we expand it globally, our go-to-market model that we did with Red Hat, and that has both global incumbency, global scale, global breadth and ecosystem leverage overall. And when you look at that, those significant synergies allow us to invest in product, R&D, innovation and capability that's built into our case and also deliver our financial returns, so we feel pretty good about it.
Operator: Our next question comes from Toni Sacconaghi with Bernstein.
Toni Sacconaghi: Jim, just to clarify, you've taken down your consulting outlook for the year from 6% to 8% to 5%. I think that's about 60 basis points to company growth. Is there anything offsetting that? Or is that just kind of a rounding error, in the low single-digit guidance? |
3,246 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | And then my question is, maybe you could just elaborate a little bit more on the AI book of business, maybe just help clarify exactly how you define that. I think it's both revenue recognized and your bookings. And maybe partner bookings, maybe you could just help define that? And last quarter, you said it doubled sequentially. This quarter, you just commented that it grew sequentially, maybe you could add a little color. Was that double digits or 20% or 30% or 40%? And at least when I do the math, it sounds like it's less than 5% of your Consulting backlog, AI backlog. Could you help to mention that as well?
James Kavanaugh: Okay, Toni. Many questions here, let me see if I can get through them quick. You look at full year, full year, as Arvind indicated, we're maintaining our guidance on our model mid-single digit, I think, prudently just coming out of a first quarter. We've got a lot of work to do in the next 3 quarters, but I think prudently, at the low end of that model. By the way, that was very consistent with what we said 90 days ago.
Now let's unpack that. When you take a look at full year, first of all, we are dealing with a stronger U.S. dollar. So we've given you supplemental chart, now we've lost basically about 1 point more of headwind on currency.
Well, let's talk about the underlying fundamentals of our business across our segments because I think that's at the heart of your question. When you take a look at our growth at mid-single digit, one, we said software would grow slightly above the high end of our mid-single-digit model. We are very pleased with our Software performance in the first quarter. We've accelerated growth from fourth quarter to 6% overall. We have a very strong recurring revenue base. We accelerated Red Hat to a very strong 9% with our third consecutive quarter of mid-teen booking growth, which positions our business extremely well for double-digit growth for the full year, and we're getting nice scale and leverage on acquisitions. |
3,247 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Software for the year will deliver over 3 points of that IBM mid-single digit by itself. Based on that Red Hat momentum, acquisitions, solid recurring revenue; TP, by the way, nice start, up 4%; and new innovation like watsonx. Consulting, we said for the full year, appropriately, in light of the market and still gaining share, would be mid-single digits. That will deliver about 1.5 points of growth to IBM. Why did we feel good about that? One, solid book-to-bill, winning in key focus areas, strategic partnerships, Gen AI scale overall. But like first quarter, we're going to continue to monitor that backlog realization to see how that plays out.
But between Software and Consulting, over 3 points in Software, about 1.5 points, now you get to Infrastructure. We started out well above what we expected here in the first quarter. Mainframe, eighth quarter in, grew 5%. Our Distributed Infrastructure, Power and Storage, both grew double digits as we're capitalizing on Distributed Infrastructure and demand requirements for Gen AI. Full year, that's a little bit better than what we thought 90 days ago off our first start, so we expect about a little bit less than 0.5 point impact to IBM. You throw on top of that, we executed the closure of The Weather Company, that would be about 0.5 point. So that's kind of how we build up our full year overall.
So AI book of business, I think you nailed it in your question. It's, one, on a Consulting perspective, it's our signings book of business overall. And on our Software, it's our subscription, our SaaS and perpetual licenses. Again, as you know, we offer clients flexibility on how they want to purchase that overall. |
3,248 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | And Consulting backlog, yes, 5% overall. I would tell you, let's put it in perspective, it's probably mid- to high single digits. But we've got, give or take, about a $30 billion book of business on backlog with Consulting. So coming from where we started, less than 9 months ago, I think that's a very good ramp. And let's put it in perspective. When we drove the hybrid cloud platform-centric play with Consulting, which has done extremely well, over the first 4 quarters, we did a $1 billion book of business. Right now, through less than 3 quarters, we're very damn close to that $1 billion book of business.
Operator: Our next question comes from Ben Reitzes with Melius Research.
Benjamin Reitzes: I wanted to ask about Red Hat. You accelerated it to 9% in the quarter from 7%. What is your confidence level you get to the mid-teens, which kind of equals your bookings growth? And then on Red Hat, the follow-up would be, how much can HashiCorp augment that growth rate? And can you clarify the synergies a little bit more between Red Hat and Hashi? And was Hashi needed to help grow Red Hat? Or is it a bonus? How do you see that?
Arvind Krishna: Ben, let me take the first part of those questions. We are very, very pleased with Red Hat. If I look at Red Hat now, we have had mid-teens or better bookings growth for the last 3 quarters, third quarter, fourth quarter and first quarter. That, combined with the growth we are seeing in OpenShift as well as in both Ansible and RHEL, OpenShift growing almost 40%, gives us a lot of confidence. So bookings growth plus OpenShift plus what we're seeing in the revenue now at 9% tells us that we should see that Red Hat growth continue or accelerate through the year. |
3,249 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Two, let me just address the macro point. Hashi is a nice add for the Red Hat portfolio. But it's not inside Red Hat, let's just be clear. So when we talk about Red Hat growth numbers in line and accelerating, that is Red Hat as is. Hashi will be measured in software, but in IBM software, not in Red Hat. Where the synergy comes is, we believe, there will be added demand because if a combined portfolio is more interesting, we think even more clients will talk to us. That is how Hashi will help Red Hat. It's not that the Hashi revenue counts at all for the numbers we just mentioned. So we kind of want to be clear on that.
Hashi to us is an accelerant for IBM strategy and for software strategy, and Hashi helps in being offensive in terms of giving us an overall better portfolio. So even more clients want to do business with us in the environments they're going to. That's kind of how I'd pitch it. And people know Hashi really well for their infrastructure management, but the security pieces of Hashi are also very, very interesting and really important as people navigate these very complex environments with all the worries about people losing secrets and keys and that resulting ransomware or hacking attacks. And that's kind of how I would paint the picture on that side.
James Kavanaugh: Yes, I would just add one other point, Ben. As you and I and many of the investors have talked about since first quarter earnings, we've kind of bifurcated this business when we saw the slowdown happen in second half last year between our subscription-based business within Red Hat versus our consumption-based services and offerings, the former being about 80% of our portfolio, the latter being about 20%. |
3,250 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | If you look at first quarter, as Arvind indicated, we're very pleased. Coming off of a 2-plus point acceleration positions us extremely well, even more confident in that double-digit for the year. But the reason why we're even more confident is that 80% of that portfolio, that subscription business, we accelerated 3 points quarter-to-quarter in revenue and we were above double digits.
On the consumption base, we finally saw a stabilization. We didn't see acceleration, we saw stabilization. But remember, we start ramping on that in the second half, so that provides us a tailwind in the second half. But our subscription business today, the 80%, 3 points acceleration, double-digit in the first quarter, all 3 major lines broad-based double-digit bookings; Red Hat OpenShift, over 40% booking strength; $1.3 billion ARR book of business, growing 25-plus percent; Ansible taking share, we feel even more confident as I said.
Operator: Next question comes from Erik Woodring with Morgan Stanley.
Erik Woodring: Arvind, maybe this one is for you. If we include the Software AG assets and now HashiCorp, I think you spent about $16 billion on acquisitions since your 2021 Analyst Day. Back then, you talked about kind of having $20 billion to $25 billion of M&A firepower you could leverage through 2024. Just curious, as we sit here today, your willingness or desire to go after more M&A for the rest of this year, would you be willing to go kind of above and beyond that total that you had laid out almost 3 years ago? And just as we think about the potential targets in the future, where do you believe you have gaps that you can still fill within your portfolio? |
3,251 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Erik, let me just maybe address the macro points on it, and I'll let Jim talk to some of the numbers here. We are going to remain incredibly disciplined on our M&A strategy. We kind of said it, but I just want to repeat, we've got to find things that meet our strategy, we've got to have some synergy opportunities at IBM, and it has to be financially accretive within the second year. So if we find things that meet that and we are committed, I'll say, to both our dividend and our investment-grade ratings, then that is kind of the picture we go in. Now within that, we believe we have some level of flexibility and that is what we will operate in. So that gives you a sense there.
By the way, while we've got these 2 yet to come, we've got Software AG that we hope to close midyear and HashiCorp which will come near the end of the year, we also have to look at what is our overall internal dynamics of making sure that we can succeed on these businesses as we proceed down the path. We need to build consulting practices. We need to have synergy plays in other parts of the portfolio. We have to enable our sales teams globally. As we say, a big part of our synergy is getting the amplification from our global footprint that is there with clients all around the world. Jim?
James Kavanaugh: Yes. Arvind, just building on your point, we are very confident in the capital structure of this company. We are committed to maintain a very solid investment-grade balance sheet. We are focused on debt leverage, obviously. But our primary capital allocation is to invest in our business, both organically and inorganically, and to maintain an attractive return to shareholder program with our dividend policy. So with all that said, just to reaffirm what Arvind indicated, we will remain in the market prudently evaluating complementary tuck-in opportunities that fit our M&A strategy, and we got the capability of doing that.
Operator: Our next question comes from Brent Thill with Jefferies. |
3,252 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Operator: Our next question comes from Brent Thill with Jefferies.
Brent Thill: Arvind, on the Software business, I mean, you've been ranging somewhere between 3% to 8%, 9% growth. Many have asked, it seems like the overall market is growing faster. What's going to take to unlock this incredible portfolio you've built to effectively maybe monetize at the rate the industry is growing out? Is there something that's causing friction to unlock that true potential of the Software business? Or are we just being too focused on the short term? What do you think unlocks that value in getting you to your closer TAM of the growth?
Arvind Krishna: So Brent, as you can imagine, we are very, very focused on that question. If I just want to lay out a 4-year trajectory, if you'll indulge me with just a minute, we began with a software portfolio that was, let's call it, flat, it would be a kind way of putting it, about 5 years ago. We've gone from flat to, as you said, some volatility. But we are now seeing that we can be north of 6% for this year, whether you want to call that 6.5% or 7%, and we are very confident in that. As we do organic innovation and as we do M&A, we will find that, that number will keep improving year-over-year. And I'm pointing to a very consistent 4-year trajectory of having achieved that.
By the way, within that, we do find there are a couple of slower growing pieces, but they're incredibly important to our overall profile, both for incumbency with clients and for the cash flow that we produce. We would never expect our mainframe software, the TPS piece, to be growing in the high-single digits or in double digits. So as that mix also changes over time, then we find that we're going to get closer and closer. And we do want to, over time, get software to grow above where we are right now. So right now, we are at the upper end of the mid-single-digit model. I think you can conclude what would be the next step we will go at, and then we'll go from there. |
3,253 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Operator: Our next question comes from Brian Essex with JPMorgan.
Brian Essex: Another Red Hat one. Maybe, Arvind, if you could maybe give us a little bit of sense of what's going on in the pipeline there and whether or not you're seeing a substantial benefit in the Red Hat pipeline from the VMware acquisition, both on the consulting side as well as the software side. Are you seeing a lot of migration? And how much of an opportunity do you think might be there longer term to capture more share of that market?
Arvind Krishna: Brian, great question. So let me talk to some of the Red Hat dynamics. It's not so much directly related to VMware per se, but clients are all beginning to say, they're asking the question, which is the platform they want to bet on for the next 10 to 20 years on which they will write their applications, deploy them both in their own data centers and on public cloud. We find an incredible amount of interest in that question. And as we have built out the Red Hat portfolio not just for containers, because many people know OpenShift as a great container platform, but also for virtualization with both container-native virtualization and with the KVM hypervisor, we are finding a lot of interest around those topics.
Then as we layer in, by the end of the year, the HashiCorp advantages of managing the infrastructure across all these environments, we do believe that, that will be an accelerant to the Red Hat portfolio. So first, RHEL has got its place as the primary place where people want to deploy, OpenShift as a platform for both containers and virtualization, Ansible and HashiCorp helping increase automation and reduce the complexity. We think all of this plays in. And Brian, I think the best number is the mid-teens bookings growth on the subscription side of the business. That speaks to the demand in terms of not only is there demand but we are realizing that demand in the book of business that we are getting clients to commit to on Red Hat. |
3,254 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | Operator: Our next question comes from Matt Swanson with RBC Capital Markets.
Matthew Swanson: I think I might try a qualitative version of an earlier question around gen AI. And I think just we see so much of the news feed being around kind of the hype cycle, and obviously, growing $1 billion book of business shows you're monetizing it. Can you just talk about maybe the pain points that enterprises are looking to address when they first come to you or when those consulting relationships start? Like, how much of a plan is in place versus how much they're looking to you to kind of hold their hand in terms of this gen AI journey?
Arvind Krishna: I think, Matt, that's a great question. So let me maybe take that, and I'll address it from both the consulting side and the software side. If we look 12 months ago, I would say that there was a lot of excitement and there was a lot of experimentation that we're starting, and people were not thinking through what does this mean for my overall ROI, what are the economics of running gen AI, how do I get the people changes done so that the ROI can actually be realized.
What is happening in all of my conversations this year, in the first quarter of 2024, is a lot of people have woken up that those issues need to be addressed as well. So when they talk to our consulting team, they are spending energy on, but can you help my people also do the transformation it takes, what is the change process through which you can recognize those things. They then go to immediately asking, in these models, how expensive is it to run them. And they begin to do the math, wait, if I run this model just for this one business process, the infrastructure costs alone could be $300 million a year. That doesn't close the ROI, can I do it in a much more cost-effective way but an equally good answer, and that is where you begin to see some of the models that IBM has produced. Our Granite series play very strongly into helping them recognize their ROI by reducing the economics. |
3,255 | IBM | 1 | 2,024 | 2024-04-24 17:00:00 | International Business Machines Corporation | 112,350 | And then lastly, and this is advice that I gave to the C-suite usually, and it resonates, don't take lots of little experiments, try to pick a few use cases which can scale. And by scale, meaning that they actually do impact a large fraction of their employees or their clients' customers and they begin to have a large impact in how business is done by either improving revenue or by making the enterprise significantly more productive. That's kind of a conversation shift from simply, oh, this is a neat new tool, let me try out to see what I can do, not what I should do, but what I can do. And I think that, that is a big change in terms of helping the organization scale.
So let me now wrap up the call. In the first quarter of 2024, we have executed on our strategy to deliver revenue growth and cash generation, allowing us to invest organically and through strategic acquisitions like HashiCorp. As always, we need to execute to capture the opportunity in front of us. I look forward to sharing our progress with you as we move through the rest of the year.
Olympia McNerney: Thank you, Arvind. Operator, let me turn it back to you to close out the call.
Operator: Thank you. Thank you all for participating on today's call. The conference has now ended. You may disconnect at this time. |
3,256 | IBM | 1 | 2,025 | 2025-04-23 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 first quarter 2025 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've 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. |
3,257 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Thank you for joining us today. We're off to a strong start in 2025, exceeding our expectations for the quarter driven by solid revenue growth, profitability, and cash flow generation. While sentiment and the operating environment have been rapidly shifting, our performance reflects the continued success of our focused strategy around hybrid cloud and AI. Especially where clients are looking for cost savings, productivity gains, and trusted partners to help them move fast and scale. Those needs remain front and center in today's market. Before going deeper into our results, let me start by saying that we appreciate the administration's focus on economic growth and rational regulation which will strengthen the US competitive position. We believe this will result in long-term value creation and make it easier for technology to contribute to economic growth. I'm going to now talk about our results for the quarter, and then address the macro and how we are positioning within these conditions. Our performance this quarter reflects the flywheel for growth we discussed at our investor day. It all starts with client trust, with a hundred-plus year history of delivering mission-critical solutions and navigating different operating environments. Trust is complemented by the flexible solutions we offer in hybrid cloud and AI, the innovation value we provide, our domain expertise to help clients digitally transform and scale AI, and our partner ecosystem to broaden our reach and impact. We saw these play out in the first quarter. Our growth was led by software, up 9% with strength across Red Hat, automation, data, and transaction processing. Our early leadership in generative AI and the consulting advantage platform using digital assets to deliver client value have positioned us well in today's evolving market. In infrastructure, z16 is our most successful program in history, highlighting customer adoption, and the value proposition of the mainframe. In generative AI, we continue to see strong traction. Our |
3,258 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | customer adoption, and the value proposition of the mainframe. In generative AI, we continue to see strong traction. Our book of business is now over $6 billion inception to date, up over $1 billion in the quarter. Approximately one-fifth of this book of business comes from software and the remaining four-fifths is consulting. This is similar to last quarter. The AI portfolio we have built is designed to give clients a comprehensive set of tools to deploy AI within their enterprise. In software, the ability to deploy our AI assistance and agents as well as AI middleware in a hybrid environment leveraging multimodal capabilities is resonating with clients. AI agents will accelerate the ability of many enterprises to turn the promise of generative AI into real value. Consulting is helping clients design, and deploy AI strategies and use cases. We continue to see our infrastructure segment play a larger role as clients bring AI to their data. Our clients will see these solutions at length at our client conference, Think in early May in Boston. We remain focused on accelerating innovation speed and impact. Earlier this month, we announced the upcoming launch of z17, which delivers enhanced AI acceleration through multimodal AI capabilities, new security features to protect data, and tools that leverage AI for improving system usability. Z17's value proposition particularly resonated with clients given significantly lower power requirements, higher capacity growth, and increased performance over z16. In quantum, we are proud to partner with the BASC government to deploy Europe's first IBM quantum system too in Spain. A milestone in global quantum leadership. M&A remains a key enabler of our strategy. This quarter, we closed the acquisitions of HashiCorp and AST. HashiCorp brings leading automation and security tools that integrate with our hybrid cloud strategy and we're excited about the synergy opportunities ahead. Let me now touch on the macro environment. Technology remains a key competitive advantage allowing |
3,259 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | synergy opportunities ahead. Let me now touch on the macro environment. Technology remains a key competitive advantage allowing businesses to drive cost efficiencies, productivity, and preserve their balance sheets. In the near term, uncertainty may cause clients to pause and take a wait-and-see approach. However, the value of hybrid cloud automation, data sovereignty, and on-premise solutions becomes even more critical in volatile windows. Recent conversations that I've had with clients reflect this view of the current environment. These conversations vary by industry, business, and geography. For example, our containerization, and virtualization pipeline continues to grow, with clients focused not only on near-term costs, but also longer-term savings driven by our modernization capabilities. There are also areas of our business where volatility acts as a catalyst for demand. Driving increased capacity requirements particularly across our mainframe environments. This played out over the last couple of weeks amongst our financial services clients. However, for clients with a more direct impact from current policy, the slowdown may be more pronounced. Consulting is also more susceptible to discretionary pullbacks and Doge-related initiatives. While no one is immune to uncertainty, we enter this environment from a position of relative strength and resiliency. Our clients run the world's most essential processes. Our diversity across businesses, geographies, industries, and large enterprise clients position us well to navigate the current climate. We have an experienced team that is focused on areas we can control around our supply chain, accelerating our productivity initiatives, and maintaining the strength of our balance sheet. With this backdrop, let me touch on our outlook. For the last several years, we have been strengthening our portfolio and building on our track record of execution and our outperformance this quarter was another proof point. While it is still very early in the second quarter, we have not |
3,260 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | and our outperformance this quarter was another proof point. While it is still very early in the second quarter, we have not seen a material change in client buying behavior. With the caveat that the macro situation is fluid, based on what we know today, we are maintaining our full-year guidance for accelerating revenue growth to 5% plus, and above $13.5 billion of free cash flow. Over the longer term, I'm confident in our ability to deliver on our model presented at investor day for sustainable higher revenue growth, and strong free cash flow. With that, I'll turn it over to Jim to walk through the financials. Jim? Over to you. Thanks, Arvind. In the first quarter, we delivered $14.5 billion in revenue, |
3,261 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Jim Kavanaugh: $3.4 billion of adjusted EBITDA, $1.7 billion of operating pretax income, and operating earnings per share of $1.60. And we generated $2 billion of free cash flow. Our highest first-quarter free cash flow in many years. Our revenue growth scale, and accelerating productivity drove 240 basis points of adjusted EBITDA margin expansion. And 12% adjusted EBITDA growth. We exceeded our expectations on revenue, profitability, adjusted EBITDA, and earnings per share. Our revenue for the quarter was up 2% at constant currency. As we discussed at our investor day, our mix shift towards software is driving growth. We saw this play out in the quarter with software up 9%. Driven by growth of 15% in automation, 13% in Red Hat, 7% in data, and 2% in transaction processing. This performance reflects demand for our focus portfolio that provides end-to-end hybrid cloud and AI capabilities. Red Hat delivered another strong quarter. Driven by bookings growth in the high teens. And OpenShift is now at $1.5 billion ARR. Growing about 25%. About six points of our growth in software was organic. With contribution from our generative AI products like our AI assistance and agents and WatsonX platform. We also benefited from our high-value recurring revenue base. Which comprises about 80% of our annual software revenue. Software's annual recurring revenue grew to $21.7 billion, up 11% since last year. Consulting revenue was flat and a sequential growth improvement quarter to quarter with solid backlog growth of mid-single digit. Strategy and technology revenue declined 1%. And intelligent operations revenue was flat for the quarter. While we are seeing clients delayed decision-making as especially in discretionary projects, which impact our in-period signings. We had good growth in transformational offerings like hybrid cloud and data as well as application management and cloud platform engineering services. We also continue to build our consulting generative AI book of business, which is now over $5 billion inception to |
3,262 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | services. We also continue to build our consulting generative AI book of business, which is now over $5 billion inception to date. Infrastructure revenue declined 4%. Hybrid infrastructure was down 7% driven by IBM z down 14%. As we wrapped on the twelfth and final quarter of the z16 program, which delivered strong performance in both revenue and capacity. Distributed infrastructure revenue was down 4%, with product cycle dynamics impacting power, while storage delivered another quarter of double-digit growth as our latest innovations continue to address the rising data demands of our clients. Now turning to profitability. In the current environment, we are focused on taking action to control things we can. To protect supply chain, margin, and free cash flow. IBM has been driving a productivity mindset for many years. And this quarter's margin performance reflects that intentional discipline and our flexibility of our operating model. During the quarter, operating leverage and yields from accelerated productivity initiatives drove expansion of operating gross profit margin of 190 basis points, adjusted EBITDA margin of 240 basis points, and operating pretax margin of 50 basis points. Excluding year-over-year divestiture dynamics, and net year-to-year workforce rebalancing, operating pretax margin was up 180 basis points. Ahead of our expectations and well above our model. We delivered very strong segment profit margin expansion in software and consulting, of over 370 basis points and 280 basis points, respectively. While infrastructure was down about 150 basis points reflecting product cycle dynamics and continued investments in innovation. Let me give you some more color on our productivity initiatives. As discussed at our investor day, we remain laser-focused on accelerating our productivity initiatives. We are transforming our enterprise operation leveraging technology, and embedding AI across more than 70 workflows such as HR, IT support, procurement, finance, quote to cash, and more. We have built a |
3,263 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | AI across more than 70 workflows such as HR, IT support, procurement, finance, quote to cash, and more. We have built a best-in-class enterprise IT platform leveraging our own IBM software solutions across hybrid cloud, automation, and AI. Decreased our vendor spend by more than $1 billion by optimizing our supply chain and service delivery. And rightsized our physical infrastructure. We exited 2024 at $3.5 billion of annual run rate savings achieved. And we continue to see these efforts play out in our margin performance this quarter. These actions create a flywheel that allows us to invest back in our business. Both organically and inorganically. Increase our financial flexibility, and deliver margin expansion. Our ability to toggle these actions up or down depending on the operating environment has significant flexibility in our financial model. The combination of our revenue scale and productivity enabled solid contribution to free cash flow generation. In the quarter, we generated $2 billion of free cash flow. Up $100 million year over year. Resulting in our highest first-quarter free cash flow margin in reported history. The largest driver of this growth comes from adjusted EBITDA. Up over $350 million year over year. Partially offsetting this given global trade dynamics, we proactively took actions to bolster our supply chain ahead of our z17 launch. Resulting in higher inventory levels. Despite these actions, we are a couple of points ahead of our three-year average attainment levels through the first quarter. Let me briefly address our supply chain dynamics. As Arvind mentioned, IBM has a long track record of operating globally and managing supply chain complexity. Over the last several years, we have strategically diversified and streamlined our supply chain. Goods imported to the US represent less than 5% of our overall spend. And under current US tariff policy, the impact to IBM is minimal. While we have limited direct exposure outside the United States, we are tactically evaluating alternative |
3,264 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | to IBM is minimal. While we have limited direct exposure outside the United States, we are tactically evaluating alternative sources and other strategies to mitigate tariffs. We continue to maintain a strong liquidity position. Solid investment-grade balance sheet, and a disciplined capital allocation policy. We ended the quarter with cash of $17.6 billion, which is up $2.8 billion from the end of 2024. Including spending $7.1 billion in acquisition driven largely by the closing of HashiCorp. In February, we accessed the debt markets raising over $8 billion on attractive terms. Our debt balance ending the quarter was over $63 billion. Including $10 billion of debt for our financing business. With the receivables portfolio that is over 75% investment grade. In addition, we returned just over $1.5 billion to shareholders in the form of dividends. Now let me talk about what we see going forward. As everyone knows, there's a level of macro uncertainty that exists and is hard to predict. That said, we are operating from a position of relative strength. The combination of our repositioned and focused portfolio, investment in innovation, and our diversity across businesses, geographies, industries, and large enterprise clients positions us to perform in a variety of macro scenarios. Our flywheel for growth begins with the incumbency and trust we have with clients from decades on the ground in over 175 countries. Which is a real point of differentiation in the current environment. Our client base is diverse. Operating across almost 20 industries, spanning 95% of the Fortune 500. Based on what we know today, we are maintaining our full-year guidance for accelerating revenue growth of 5% plus and about $13.5 billion of free cash flow. Let me go through the drivers of these key metrics. As discussed at our investor day, our mix shift towards software is a key driver of our growth acceleration. Software is now about 45% of our business. With 80% recurring revenue. As a reminder, in the first quarter, we generated $21.7 |
3,265 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Software is now about 45% of our business. With 80% recurring revenue. As a reminder, in the first quarter, we generated $21.7 billion of ARR, growing 11%. The combination of our portfolio strength, investment in innovation, and contribution from acquisitions to drive our full-year performance in software. And we continue to expect mid-teens growth for Red Hat. Underpinned by six-month revenue under contract which is growing in the mid-teens. In consulting, we are encouraged by this quarter's sequential growth in revenue. Our solid backlog up 6%, and our book of business in Gen AI. But given the current environment, we are appropriately more cautious on consulting's contribution to IBM this year. With our new mainframe launch, innovation across the portfolio, and capacity dynamics that could benefit our mainframe environments and storage needs we expect infrastructure to grow. While we feel good about the core growth drivers of our business, there are areas of our portfolio that could see greater variability in the event that the macroeconomic environment deteriorates. This includes consulting is more sensitive to discretionary pullbacks and Doge-related initiatives. Consumption-based services and software, including in Red Hat, and areas of distributed infrastructure. We continue to expect IBM's full-year operating pretax margin to expand by over a half a point driven by productivity initiatives, revenue scale, and mix, mitigated by the impact of dilution from acquisitions. And our tax rate expectation for the year remains in the mid-teens. 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. Driven primarily by growth in adjusted EBITDA. The headwinds I discussed last quarter of higher cash taxes and higher CapEx remain the same. As I mentioned earlier, we have been accelerating our productivity initiatives to plan for various scenarios. And to protect our profitability and free cash flow. As we look forward |
3,266 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | productivity initiatives to plan for various scenarios. And to protect our profitability and free cash flow. As we look forward to the rest of the year, we will remain disciplined about managing our costs. The strength of our balance sheet and strong liquidity position allow us to make investments in our business for the longer term. As Arvind mentioned, while still early through the first three weeks of the second quarter, we have not seen any material change in client buying behaviors. We expect revenue growth of at least 4% at constant currency. And given the increased currency volatility, a revenue range of $16.4 billion to $16.75 billion. And second-quarter operating pretax margin expansion should be consistent with the full year. With our tax rate in the mid to high teens. Let me conclude by saying that we have a durable and differentiated business model that positions us well to navigate a range of economic environments. While there is uncertainty, we remain laser-focused on taking actions to control what we can. And executing our strategy to accelerate revenue growth, and free cash flow. We believe our focused portfolio, disciplined investments in innovation, diverse set of businesses and clients, relentless focus on productivity, and strong liquidity drive the durability of our performance. Arvind and I are now happy to take your questions. Olympia, let's get started. |
3,267 | IBM | 1 | 2,025 | 2025-04-23 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. And at this time, we'll begin the question and answer session of the conference. On your telephone keypad. A confirmation tone will indicate that your line is in a question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Jim Schneider with Goldman Sachs. Please state your question.
James Schneider: Good afternoon. Thanks for taking my question. I was wondering if you could maybe start off with sort of framing the macro impact that you're seeing on both software and consulting. You talked about some of the potential drivers but I'm sort of curious at this point, are you seeing any kind of significant softening in, say, the consumption portion of the portfolio, either Red Hat or otherwise, and, you know, do you see any slowdown in specifically transaction processing for the year that wouldn't allow you to not sort of hit the target you laid out at the investor day. Similarly, on consulting, are you seeing the Doge impact sort of significantly impacting the near-term results? Or is this more of an expectation of a slowdown in a broader sort of enterprise mix of business? And then just broadly speaking, if you could address the sort of sub-segment guidance you had provided at Investor Day approaching double digits in software and low single digits in consulting and whether we'd expect either of those to change very much? Thank you.
Jim Kavanaugh: Okay.
Operator: Jim? |
3,268 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Jim Kavanaugh: Okay.
Operator: Jim?
Arvind Krishna: Hoping I can remember. I think it was five parts to your question. Let me address the macro pieces, and then I'm gonna ask Jim Kavanaugh to address the last piece on the subsegment guidance. So if we look at what happened in the first quarter and then if you project forward, there's a difference. We did not really see much of a slowdown in one Q. On the consumption parts of the software business. Whether it's in TPS or whether it's in Red Hat. Just to be straightforward. We are projecting though that if there is a slowdown in global GDP, there could be a small slowdown, not a big slowdown, in the Red Hat part of the consumption business. But just to remind you, it's only between 10% and 20% of the total business. If I look at transaction processing, if anything, we see tailwinds right now, not headwinds. So we expect that part of the portfolio to remain strong unless we approach recession or negative GDP, which we are not projecting, from everything that we can see and read. Going to consulting and Doge, yes, we are not immune from all those activities just like everybody else. We had a couple of contracts that were impacted in the first quarter. You would expect USAID, where we did some work, was impacted. But not really in most other cases. The work we tend to do is much more mission-critical, is much more about building the government systems, which make them more efficient, and so we see them carry on. Now it's hard to predict where that goes over the rest of the year. So I'm not gonna try and make that prediction on Doge and consulting. Except to caution, as Jim said in his prepared remarks, if there is pressure in the economy, consulting tends to see headwinds before other parts of the business. I think there was three or four of your five parts and subsegment compared to Investor Day. Jim, I'll leave to you. |
3,269 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Jim Kavanaugh: Alright. Thanks, Jim, for the question overall. You go back to Investor Day, what did we talk about? We talked about the strategic repositioning of our portfolio and our company overall to much more software-centric platform-centric, model. And we laid out a financial investment thesis. We called it our shareholder value creation thesis that said we would take this business from a no-growth profile to the last three years, kinda low single-digit profile, to an accelerating revenue growth profile a mid-single digit plus. And that's how we guided 2025. Underpinning that was an accelerating revenue growth profile of software. And right now, when you look at us maintaining our guidance in 2025, we are right on path to that. And I'm sure we could talk about the underpinnings of software a little bit later. Second, what was a big change we made? We said with the new innovation, investments, and the repositioning, of infrastructure, that we were moving that business from a cyclical business to a secular grower. And in our guidance for 2025 of the 5% plus, we are the first instantiation in 2025 of a secular grower as we're very excited about the new innovation of our mainframe that was just launched here in the beginning of April. And then we said, consulting over time, the market which we have confidence in, that's been growing on average you know, 5%, 6% over a decade long. Yeah. Are there some years up and down? Absolutely. But we have confidence in the long-term growth factor of consulting and more importantly, the integrated value of what consulting brings to our portfolio. The tip of the spear driving and pulling our technology and driving that attractive economic multiplier effect. So you look at 2025, we started the year out this year and we said, given the demand environment, we were prudently cautious at the low end of low single digits. We started out first quarter here, we stabilized the business, flat. We see that pretty much the same. There's a lot of dynamics going on. In the year, but, you |
3,270 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | we stabilized the business, flat. We see that pretty much the same. There's a lot of dynamics going on. In the year, but, you know, we're kinda confident in that stat flat stabilized area overall. So, hopefully, it gives you some perspective. |
3,271 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Great. Operator, let's take the next question.
Operator: The next question comes from Wamsi Mohan with Bank of America. Please state your question.
Wamsi Mohan: Yeah. Thanks so much. In terms of just the way to get to your 5% plus guide for the full year, it'd be helpful if maybe it'd be it'd be helpful if you could maybe just give us some sense both on Red Hat, we're just gonna face tougher comps and transaction processing, which is starting off at 2%. How we get to sort of this double-digit software or approaching double-digit software contribution. And Jim, you noted maybe it's prudent to be a little more cautious on contribution from consulting. Is that largely going to be offset maybe by better expectations on infrastructure as well? Thank you so much. |
3,272 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Jim Kavanaugh: Yes. Thanks, Wamsi. I'll take this. Let's take a step back. You go through what we talked about in January. And then we played out to Jim's question around our strategic investment thesis for a long-term perspective. Which aligned overall about how we accelerate this company and leverage all the work we've done on building a durable sustainable, inflecting higher growth business. We talked entering the year. One, we were coming into the year with a position of strength. That was centered around our software portfolio, our high-value recurring revenue, and our investment in innovation. Two, Red Hat momentum. The opportunity in front of us on virtualization, AI, was gonna grow mid-teens. Three, our next-generation mainframe that was coming out late in the first half that would fuel the second half. Four, our early leadership position in Gen AI. And five, our disciplined capital investment allocation and what we've seen with regards to M&A growth and synergies. I would tell you right now coming out of the first quarter, I'm actually feeling more confident on each one of those five. And let me put some numbers to it. We just exited it as a strong 2% growth here in the first quarter. We maintained our full year at 5% plus. How do you get there? Well, embedded in that 2% we got about four points of contribution from software. We had a one-point headwind given we were at the last twelve-quarter cycle of our infrastructure business, and consulting stabilized was flat. What goes forward? Number one, the new innovation in our infrastructure turns a point headwind in 2Q to a point tailwind for the full year. That's a full two-point change. So you go from 2% already to four. Number two, we are very excited. We closed HashiCorp at the end of February. Our actual contribution around inorganic in the first quarter give or take, was about a point and a half. To IBM for the full year at 2025, it's gonna be north of two and a half. We get another point of M&A. So now you're up to 5% growth. Now you get to okay. How |
3,273 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | it's gonna be north of two and a half. We get another point of M&A. So now you're up to 5% growth. Now you get to okay. How do we get north of that 5% growth, which is what our guide is? Three, Red Hat, seventh consecutive quarter of high teens ACV bookings. We are seeing great demand around virtualization, around automation, around our Linux capability. By the way, all three grew double digits here in the quarter. Pervasive and grew share. Our acceleration in Red Hat coming off of roughly 13.5% in the first quarter, we're gonna commit and we maintain mid-teens for the year. We get another half a point out of Red Hat. I haven't even went to our annuity profile, which is in a strong position with strong renewal rates. Etcetera, and we'll see how the consulting backlog plays out. But I think to your question, we are being very prudent. And cautiously prudent on consulting and not expecting any contribution. So that's kind of a walk from a first quarter to full year. |
3,274 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Operator, let's take the next question.
Operator: Our next question comes from Amit Daryanani with Evercore ISI. Please state your question.
Amit Daryanani: Yep. Thanks a lot. Yeah. I guess I was hoping you talk a bit more on the consulting side and you know, you've talked about there's a lot of noise happening on consulting, especially from the federal and Doge exposure. So I'd love to understand how big is the federal business for you folks, and how do you think about the discretionary part of your consulting business stack up in the back half of the year, given some of the macro noise. Just anything on the consulting side would be really helpful. And then
Jim Kavanaugh: Jim, if if I could just follow-up, you folks normally don't give a quarterly explicit revenue guide. You're doing it doing it this summer around for June quarter. So I'm just curious what led to the decision to give a more explicit June quarter guide other than you were afraid we were all gonna miss model it. |
3,275 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Jim Kavanaugh: Yeah. Let me first of all, thanks. Amit. Let me take the second question first and then I'll go into the Doge specifics to ground us in numbers. And then if Arvind has any of the client pieces back as we've been actively engaged with the administration as you can quite imagine. Well, let let's take a look at you know, on on currency, in particular, and given a quarterly guide. Why did we do that? Full transparency, we feel obligated. With our credibility on what we see in the near term given we're operating as we talked about in a very dynamic and uncertain macroeconomic environment, our best visibility right now is probably in the next ninety days. And given that credibility and transparency to to investors, and also in light of the significant US dollar devaluation that's happened over the last three weeks. Let's put that in perspective. The rate the magnitude, and the breadth of the US dollar depreciation we had not seen in quite some time. Like, 8% to 9% devaluation. So what do we do? We gave you both. We always guide on constant currency, and we guide it on constant currency. And we could talk about the underpinnings a little bit later. Second, just given the extreme volatility in the market, we guided on an absolute dollar range all in. Why did we do that? Because that 4% constant currency growth if you just dial back to where the FX rates were, as we entered April first, that would put you at $16.4 billion. If you actually take that same 4%, and you look at today's actually, today's spot rate devalued or actually, appreciated about a point. So we already gave a point back. But if you look at it from yesterday, we'd be at $16.75 billion. So we're not in the business of predicting the FX volatility. We're giving you a range, but we're saying as always, what we can control, which is the underlying dynamics of the operational performance of our business, we feel confident of at least 4%. So hopefully, that gives you that. On Doge. Let me ground some data and facts here. One, as Arvind said, no |
3,276 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | of at least 4%. So hopefully, that gives you that. On Doge. Let me ground some data and facts here. One, as Arvind said, no one's gonna be immune. From this. But our US federal business is less than 5% of IBM's total annual revenue. About 60% of that is consulting, which is more susceptible to discretionary efficiency type programs. Forty percent of it is technology. Which is all high-value annuitized revenue under contract. Let's put that off the to the side. |
3,277 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Amit Daryanani: In
Jim Kavanaugh: consulting, our US federal is less than 10% of the total. By the way, we have less than 3% market share. Overall. Now when you look at it, Arvind indicated by the way, all this data is public. We've had a handful of contracts, either statement of work, that have or canceled. And on our annualized backlog of over $30 billion to in total consulting. This is, like, less than $100 million of backlog over a duration of multi. So while no one's immune, we are absolutely focused on monitoring the dynamic process. And I think back to Wamsi's question, we're prudently cautious around consulting for the year.
Arvind Krishna: Look, Jim. I think the best thing for you to understand, Amit, is consulting is less federal consulting is less than 10%. Of consulting. I think that's statement number one. Within that, the vast majority is critical work. We actually process veterans benefit claims. We help process, how the GSA does procurement. We help implement payroll systems. I don't think of these as optional. Now are there some areas around the edges which could be viewed as discretionary?
Operator: Yes.
Arvind Krishna: But in our case, that is the minority of our business. Not the majority.
Olympia McNerney: Operator, let's take the next question.
Operator: The next question comes from Ben Reitzes with Melius Research. Please state your question. Ben Reitzes, your line is open. Please unmute yourself. |
3,278 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Ben Reitzes: Yeah. Thanks. Sorry about that. You can hear me now, I wanted to talk about the Red Hat business. It decelerated at you know, I guess, 300 basis points sequentially. And I was wondering if we could just talk a little bit more about the dynamics, why that occurred, I think you said the consumption business didn't get hit. And then it looks like it's gonna reaccelerate because of the great bookings. And then you mentioned virtualization. I don't know if you've mentioned that before in the conference calls, but wondering how much of a driver that is for for Red Hat given some of the changes going on at VMware.
Jim Kavanaugh: Thanks, Ben. Let me take some of the numbers around Red Hat, and then Arvind can add some of the color around the portfolio, etcetera. You know, I would tell you we're we're very pleased with our Red Hat performance. Entering the year. Very different profile than where we were a year ago, by the way. When we were trying to accelerate to get the double digits for the year. Yes. It decelerated, but let me unpack some of this for you. One, we grew 13.5%. I think well within our guidance range of where we wanted to start the year, Underpinning that, the most important thing as you called out, Ben, thank you our seventh consecutive quarter of strong ACV signings bookings high teens overall. The way I like to look at this business, you gotta break it out between the different compositions. One, 80% of our portfolio is subscription-based businesses. We continue to see strong performance high mid-teens level overall. Pervasive double-digit growth across the portfolio as I stated earlier, and gaining share. REL up 13%. Red Hat OpenShift up 23%. Oh, by the way, $1.5 billion ARR business overall. Capitalizing on virtualization, hybrid cloud application modernization.
Operator: Ansible, |
3,279 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Operator: Ansible,
Jim Kavanaugh: up strong mid-teens overall. Capitalizing on clients cost efficiency, productivity agenda. And, oh, by the way, very strong synergistic value of the IBM portfolio overall. So a very healthy profile. And within that, as we always do, we give you a CRPO next six months. We only see that actually accelerating overall. Now to Arvind's earlier point, the 20% of the business on consumption base did not see a decline. We saw a moderation. Remember, ninety days ago, we actually were surprised to the upside, We grew our consumption-based services low mid-teens. In in first quarter, that moderated the high single digits. By the way, our model can take high single digits. It's just when you look at the quarter to quarter growth, that had about a point and a half plus you know, deceleration overall. But growing high high single digits on consumption, given the acceleration of our Red Hat portfolio overall. We feel pretty good. And to your point, excited about the portfolio and growth prospects around the growth factor of virtualization around AI, around automation, around containerization, and the moderation's happening there. And just to put some numbers to it, you know, virtualization are are ready. Just the last couple quarters. We've already notched in over $200 million of annualized bookings. And we've been building a pipeline that is well north of a half a billion dollars worth of virtualization. That gives us the confidence as we go through the remainder of 2025 and why we feel confident in guiding mid-teens. |
3,280 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Yeah. So thanks, Jim. But let me just add a little bit of color on the portfolio. So OpenShift has become the leading platform which clients were using for both containerization but also how you run a collection of servers on premise and in private clouds. Now as they look forward, it's not just containerization. They're saying if I'm doing containerization, why wouldn't I also do virtualization on that environment? Since that set of products is sold by the number of cores or processors managed, then as they add virtualization, that adds to the footprint. Of course, as we all know, once they make a platform decision, then most new applications most migrated applications tend to come on to that infrastructure. Their skills around that platform grow and you get a a flywheel that over time but then we believe include both HashiCorp and Ansible that'll come in there. That is the way I think you should think about virtualization not so much as vis a vis competitors only. It's going to be much more about a platform, and people are making a decision which platform can I depend upon for the next ten to twenty years?
Olympia McNerney: Great. Operator, let's take the next question.
Operator: Our next question comes from Erik Woodring with Morgan Stanley. Please state your question.
Erik Woodring: Hey, guys. Thanks so much for taking my question. |
3,281 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Erik Woodring: Hey, guys. Thanks so much for taking my question.
Jim Kavanaugh: Jim, I just want to dig into your free cash flow guide. Just you re you reiterated the full-year revenue guide in constant currency, but FX just went from a two-point headwind to a one and a quarter point tailwind. So an incremental, call it, $2 billion of rev from FX alone you maintained your full-year PTI margin expansion targets obviously, really strong flow through to the bottom line. And so I guess my question is, you know, why aren't we seeing that necessarily show up in a higher free cash flow guide for the year? Are we just being conservative because it's early in the year? Or are there any new kind of incremental free cash flow offsets that that we now need to think about? Thanks so much. |
3,282 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Jim Kavanaugh: Yes. Thanks, Erik. I really appreciate the question. As we talk about you know, we've got two key measures in this company. One is the continue to accelerate the top-line growth profile of this company. Which we committed to 5% plus. And second, is that free cash flow generation engine. We're very pleased about the start to the first quarter, $2 billion free cash flow print highest free cash flow margin in the first quarter in the history of our company overall. And by the way, historically, compared to where we're at attainment-wise, we're a few points ahead. Now to your point, we're 15% of our free cash flow attained. Through first quarter. You know, I think it's prudent for us right now. We feel even stronger about our position around the $13.5 billion. But why take that up right now in this environment? Doesn't benefit us at all. We're focused on the durability, resiliency, and driving the discipline execution overall. Now with regards to currency overall, as you know, spent a lot of time both through the last recession of COVID, about when we see fundamental unprecedented rate magnitude, and breath changes in currency, it's always good to refresh our investors about how we handle currency. Number one, per gap. You can't hedge. Revenue. That revenue is gonna flow whether the dollar's appreciating or devaluing. But I think of couple important points overall. We have a very robust hedging program. But around that, we hedge only cash flows. As a proxy for earnings. That's all you can do. We don't hedge all a hundred plus currencies we operate in today. We only hedge about thirty because it's not economically viable to hedge more than thirty. So when you take a look at it at today, we don't also hedge out more than twelve months because we don't speculate. So when you look at it, the interesting thing is you have to overcome a operating pretax margin headwind when the dollar actually devalues because we have to wrap around on the hedges from last year. Right? You'll get absolute profit dollars, |
3,283 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | actually devalues because we have to wrap around on the hedges from last year. Right? You'll get absolute profit dollars, yes, but it's mitigated because we try to hedge as much as we can in quarter. Read that about a hundred percent. In outer quarters, we hedge about seventy-five percent. So around that, we have some tailwinds on free cash flow. Absolutely. But the the most, biggest driver of our free cash flow continues to be the same thing we talked about ninety days ago. The driver of high-quality adjusted EBITDA, which by the way, we grew 12% in the first quarter, up 240 basis points of margin and adjusted EBITDA in the first quarter. Our free cash flow is gonna be driven by double-digit EBITDA for the year. And it's gonna be driven by a hundred plus basis point margin overall. That hasn't changed. So nothing changed overall. I would say net more conservative, but prudently given we have 85% of our free cash flow to go. |
3,284 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: Operator, let's take the next question.
Operator: The next question comes from Brian Essex with JPMorgan. Please state your question.
Brian Essex: Hi. Good afternoon. Thank you for taking the question.
Arvind Krishna: Arvind, I know it's it's super early here with regard to the mainframe cycle. But given the experience that you have with previous cycles, what do you anticipate from a macro perspective on for an impact on the mainframe cycle. And would you consider taking on more balance sheet risk maybe to ease the pain of any customer CapEx for that business this year? |
3,285 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Arvind Krishna: Okay. Brian, thanks for the question. Actually, the last part of the question, Jim can add more, but it's actually pretty straightforward. We've been happy to lease our own hardware and software where our client wants it for decades. And so if they don't want to spend the CapEx, if they prefer to lease it, that is in our financing business. It's in the model. And it is surprising on how many people, even those with great balance sheets of their own, often choose to do that in order to maximize it. It doesn't really impact the balance sheet because in that case, we have a receivable against the the debt that we take on to do that. So we would happily do that for any creditworthy client. Let me just put that one caveat. That's it. And that is across all countries that we operate in. We don't do this only in the United States. Okay. The other part of your question, as you can imagine, we start testing very early with our clients. A good six to nine months in sort of more private confidential gatherings, on what their reaction is going to be. Given what we showed them, around security, around AI, and around increased capacity, almost all of them resonated very positively to the mainframe. The ones I would expect to be early have already come and said to me, that, yes, we are extremely interested. So I actually expect the volatility plays in our favor. Because those who are thinking about capacity expansion and the end of the year, are wondering whether it's more advantageous to have to do it earlier because there is a financial benefit if you have it as opposed to pay for over Overage is
Jim Kavanaugh: is actually certainly possible. |
3,286 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Jim Kavanaugh: is actually certainly possible.
Arvind Krishna: I expect that through this year 2025 and the first half of 2026, it will be a very strong cycle. If we see any weakness at all compared to the previous cycle, just one is to one? Maybe it'll be in late 2026 or early 2027 where some clients in in smaller geographies, smaller countries may choose to say, should I wait another six months? Or nine months? I don't expect that. Let me be clear. But I think that is the only caution I would put. So in the first year, I expect this to be very much like the previous cycle. |
3,287 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Jim Kavanaugh: Yeah. And Brian, on your question on the balance sheet and capital structure. Let me take it up a level. Yes. Mainframe is an integral part of our business portfolio overall, and it is an enduring platform that we are going to ensure that we prudently but aggressively manage both the client value equation which is very important because remember, we run forty-five to top fifty banks around the world. Nine of the top ten retailers, four to five top ten airlines of the world, we are gonna protect those clients and what the mainframe brings the table. But I wanna take a step back. You know, in we are confident in our capital structure overall and our liquidity position. And I think over the last four or five years, hopefully, all our investors agree we have a proven track record around being disciplined allocators of capital. We take that very seriously in this company. Overall. In times of uncertainty, around dynamic macro environment, which is what we're operating in today in a fluid environment, I would tell you as a CFO, as a teller of an old time, our job is to preserve the balance sheet is to make sure we have enough liquidity. Why? Because we have to continuously invest in bringing new innovation both organically and inorganically to this business, to create long-term sustainable competitive advantage. And I would tell you, we are very comfortable. We have over $17.5 billion of cash on the balance sheet. We got a free cash flow engine. We just talked about with Erik's question. We feel very confident in $13.5 billion of free cash flow and we got the capital structure and solid investment grade. That gives us optionality to ensure we continue that durability and resiliency of our performance going forward.
Olympia McNerney: Operator, let's take our next question.
Operator: The next question comes from Matt Swanson with RBC Capital Markets. Please state your question.
Matt Swanson: Yeah. Thank you guys so much for taking my question. |
3,288 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Matt Swanson: Yeah. Thank you guys so much for taking my question.
Arvind Krishna: You know, Arvind, across 2024, every time we had new
Matt Swanson: Gen AI product announcements, it was always really centered on this ROI-focused approach, and that was in a much better macro. Now we're in a more challenging macro. I'm just interested. Are you seeing in any spaces whether it be through the consulting arm or just more you know, customer interest in this ROI-driven approach, whether it be the hybrid or the Gen AI. And and does that make your product set you know, a bit more defensive? So, Matt, thanks for that question.
Arvind Krishna: If you don't mind, I'm gonna, like, go up a few feet and then come back to answer your question explicitly. Every time there's a new technology, you kind of see three waves. The first wave typically lasts one, two, or three years. Which is around the semiconductors that enable that new wave. Think PC, and the microprocessor was, think mobile phone, and the hardware was, you then switch to the system. So pretty quickly, if I think about the PC, people stopped caring about the processor. Yes. It was Intel as a matter, but they cared about a Bangor Compact or a Dell. Or an HP or take your favorite pick of of PC. You go to the system. That kinda lasts a year or two. And then you get a long tail of twenty years where people worry about the application because that is what gives them value. I think we're exactly at that point
Olympia McNerney: in AI. |
3,289 | IBM | 1 | 2,025 | 2025-04-23 17:00:00 | International Business Machines Corporation | 112,350 | Olympia McNerney: in AI.
Arvind Krishna: So the plan conversations have shifted from well, which GPU, which cloud, which model? I think of that all as the lower two layers too. Is this going to improve customer experience? Is this going to improve enterprise operations? And I'll reflect on one yesterday from a midsized client, they are four, five billion dollar client. They're out of mass so I'll call them midsize. And their question was, if we believe that we can get 30% savings in our back office finance process, and they meant procurement and payments and receivables. We're all in. So I think it is right at this moment, it is shifting to those conversations. And I believe that that is where the next two to three years of success in AI is gonna go.
Olympia McNerney: Operator, let's take one last question.
Operator: Thank you. And this question comes from Param Singh with Oppenheimer. And Company. Please state your question. Ram Singh, your line is open. Please unmute yourself. Your line is open. Please unmute yourself. No response from that caller.
Olympia McNerney: I think I think we can end. Let me turn it back to Arvind to close.
Arvind Krishna: Thank you, Olympia. Look, as I mentioned earlier, the diversity across our business positions us well to navigate the current climate. Our portfolio and track record of execution reinforce my confidence on this next chapter of our growth. I look forward to sharing our progress as we move through the rest of the year. Thank you all for listening.
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 is now ended. You may disconnect at this time. |
3,290 | INTC | 4 | 2,024 | 2025-01-30 17:00:00 | Intel Corporation | 21,127 | Operator: Thank you for standing by, and welcome to Intel Corporation's Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. John Pitzer, Corporate Vice President, Investor Relations. Please go ahead.
John Pitzer: Thank you, Jonathan, and good afternoon to everyone joining us today. By now, you should have received a copy of the Q4 earnings release and earnings presentation, both of which are available on our Investor Relations website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window. I'm joined today by our Interim co-CEOs, Michelle Johnston Holthaus; and Dave Zinsner. As you know, Michelle is also CEO of Intel Products; and Dave continues to serve as Intel CFO. In a few moments, Michelle will open up with some summary comments before providing more detail on Intel Products. Dave will then discuss Intel Foundry and the overall financials, including our Q1 guidance. Before we begin, please note that today's discussion contains forward-looking statements based on the environment as we currently see it. And as such, are subject to various risks and uncertainties. It also contains references to non-GAAP financial measures that we believe provide useful information to our investors. Our earnings release, most recent Annual Report on Form 10-K and other filings with the SEC provide more information on specific risk factors that could cause actual results to differ materially from our expectations. They also provide additional information on our non-GAAP financial measures, including reconciliations where appropriate to our corresponding GAAP financial measures. With that, let me turn things over to Michelle. |
3,291 | INTC | 4 | 2,024 | 2025-01-30 17:00:00 | Intel Corporation | 21,127 | Michelle Johnston Holthaus: Thank you, John, and let me add my welcome. It's been roughly two months since Dave and I stepped into our roles as interim co-CEOs. From day one, we have been working closely together alongside the Board to drive better execution of our strategy. There are no quick fixes. And we are committed to improving our performance and rebuilding our credibility through persistent hard work that delivers tangible results. As part of this, we are driving more focused investments across the business. We cannot be all things to all people, and we are prioritizing areas where we can drive differentiated value. We are also continuing to simplify our business and become a leaner, more efficient company. And most of all, we’re doing a better job of listening to our customers to ensure we meet their needs. Q4 was a step in the right direction. We delivered revenue, gross margin and EPS above our guide. Intel Products executed to drive revenue in the quarter, even as PC inventory continue to normalize. And Intel Foundry drove incremental operating efficiencies while achieving key grant related milestones, which supported solid upside to gross margins. As co-CEOs, you can expect us to be very straightforward and direct. We only make commitments, we are confident we can deliver. We firmly believe that what we say is not nearly as important, as what we do. And everything we do must be in service of our customers. Innovating to solve their most pressing challenges is the surest path to creating shareholder value. This is the mindset I have brought to my position as the CEO of Intel Products. This is a great business with great people, partners and IP to design world-class products from edge-to-cloud. I take nothing for granted. But I firmly believe that the core x86 architecture and the ecosystem we have built and invested in over the decades, create a solid foundation for success. Our customers share this view. But they need us to improve our execution and hit our commitments. I am setting clear priorities |
3,292 | INTC | 4 | 2,024 | 2025-01-30 17:00:00 | Intel Corporation | 21,127 | Our customers share this view. But they need us to improve our execution and hit our commitments. I am setting clear priorities and directions in each business to drive better outcomes. I think about Intel products in three buckets. First, client edge; second traditional data center; and third, the AI data center. Let me spend a few moments on each. In client, Intel CPUs power roughly seven out of every 10 PCs. This is a strong position that gives us advantages in the market. That said, the market is becoming more competitive, especially as we see new entrants trying to participate in the AI PC category. Personally, I thrive on competition. It drives a healthy paranoia across everything we do, and we are using it as motivation to up our game even more. The success of Core Ultra across, Meteor Lake, Arrow Lake and Lunar Lake has established Intel as the market leader in AI PC CPUs, and we remain on track to ship more than 100 million cumulative systems by the end of 2025. We are innovating at scale unlike any of our competitors. This was on display earlier this month at CES, where we launched the enterprise versions of our AI CPUs with compelling new features to Intel vPro. This is a testament to the strong ecosystem we have built with IT departments, around manageability, security, trust and brand. And we expect these investments to possession us well, as corporations begin their migration to Windows 11. Alongside our investments in enterprise, our ecosystem reach also positions us well in AI PC consumer markets. We are working with more than 200 ISVs across more than 400 features to optimize their software on our silicon. I'm excited about the new applications I'm seeing in the pipeline that will begin to proliferate over the coming months. Our goal is to innovate, partner and fortify our position, as the preferred CPU of choice. Looking ahead to the rest of the year, we will strengthen our client road map with the launch of Panther Lake, our lead product on Intel 18A in the second half of 2025. As the first |
3,293 | INTC | 4 | 2,024 | 2025-01-30 17:00:00 | Intel Corporation | 21,127 | our client road map with the launch of Panther Lake, our lead product on Intel 18A in the second half of 2025. As the first volume customer of Intel 18A, I see the progress that Intel Foundry is making on performance and yields, and I look forward to being in production in the second half, as we demonstrate the benefits of our world-class design and process technology capabilities. 2026 is even more exciting from a client perspective as Panther Lake achieved meaningful volumes, and we introduced our next-generation client family code named Nova Lake. Both will provide strong performance across the entire PC stack, with significantly better costs and margins for us, enhancing our competitive position and reinforcing our value proposition to our partners and customers. Let me now turn to our traditional data center business. The team has made good progress towards strengthening our offerings and driving better, more predictable execution. This year is all about improving Xeon's competitive position, as we fight harder to close the gap to competition. The ramp of Granite Rapids has been a good first step. We are also making good progress on Clearwater Forest, our first Intel 18A server product that we plan to launch in the first half of next year. All of this provides a strong foundation on which to build as we execute. The world's data center workloads still primarily run on Intel Silicon, and we have a strong ecosystem, especially within Enterprise. We are going to leverage these strengths, as we work to stabilize our market share in 2025. One of the ways we'll do this is by reengaging the x86 ecosystem. We have seen a positive response from the x86 ecosystem advisory group, we formed last fall, and we are encouraged by the enthusiasm for building both semi-custom and custom products. This is a big area of opportunity for the business, and we look forward to talking more about this as we have news to share. Turning to the AI data center. I will start by saying that this is an attractive market for us over time, |
3,294 | INTC | 4 | 2,024 | 2025-01-30 17:00:00 | Intel Corporation | 21,127 | have news to share. Turning to the AI data center. I will start by saying that this is an attractive market for us over time, but I am not happy with where we are today. On the one hand, we have a leading position as the host CPU for AI servers. And we continue to see a significant opportunity for CPU based inference on-prem and at the edge, as AI-infused applications proliferate. On the other hand, we are not yet participating in the cloud-based AI data center market in a meaningful way. We have learned a lot as we have ramped Gaudi, and we’re applying those learnings going forward. One of the immediate actions I have taken is to simplify our road map and concentrate our resources. Many of you heard me temper expectations on Falcon Shores last month. Based on industry feedback, we plan to leverage Falcon Shores as an internal test chip only without bringing it to market. This will support our efforts to develop a system-level solution at rack scale with Jaguar Shores to address the AI data center. More broadly, as I think about our AI opportunity, my focus is on the problems our customers are trying to solve, most notably, to lower the cost and increase the efficiency of compute. AI is not a market in the traditional sense. It's an enabling application that needs to span across the compute continuum from data center to the edge. As such, a one-size-fits-all approach will not work, and I can see clear opportunities to leverage our core assets in new ways to drive the most compelling total cost of ownership across the continuum. Before I turn the call over to Dave, let me close by speaking as Intel Foundry’s largest wafer customer. I have a pretty simple approach. When we are able to combine world-class products with world-class process technology, we win. As CEO of Intel Products, I’ll always make process technology decisions based on what is best for my customers. And Intel Foundry will need to earn my business every day, just as I need to earn the business of my customers. Having said that, I am confident in |
3,295 | INTC | 4 | 2,024 | 2025-01-30 17:00:00 | Intel Corporation | 21,127 | need to earn my business every day, just as I need to earn the business of my customers. Having said that, I am confident in the Intel Foundry team ability to support my current and future product roadmap. And I’m excited to do more business with them as their process technology continues to advance. A stronger Intel Products, combined with a more competitive Intel Foundry, is a recipe for success for Intel overall. Dave over to you. |
3,296 | INTC | 4 | 2,024 | 2025-01-30 17:00:00 | Intel Corporation | 21,127 | David Zinsner: Thanks, Michelle. Let me add my welcome. I’m going to address three topics today, update on Intel Foundry; second, Q4 and full-year financials; and, third, our Q1 guidance. Starting with Intel Foundry. I have had an opportunity to meet with a number of our partners and potential customers for Intel Foundry over the last couple months. I come away from those meetings encouraged by the opportunity we have in front of us, and I have received clear feedback on what our customers need from us to succeed. This starts with our execution on Intel 18A. This has been an area of good progress. Like any new process, there have been puts and takes along the way, but overall we are confident that we are delivering a competitive process. We are excited by the launch of Panther Lake this year and the internal ramp of Intel 18A in the second half that will support increased volumes and improved profitability in 2026. From the perspective of external customers, Intel 18A is a very competitive offering that gives each of them a reason to engage with us. However, foundry wins are about more than just technology. Trust is also a significant factor. Customers must believe you can execute consistently and be willing to invest in IP to port a design to a new foundry. That’s why past transitions in the industry have generally started with customers giving new foundry partners, smaller volumes then gradually increasing as trust grows. We have made good progress. But to accelerate this, I am asking the team to re-double their efforts on ease-of-porting, IP availability and best-known foundry methods. I am particularly pleased by the willingness of our suppliers and partners to engage with us, augmenting our expertise and hard work with theirs. Job Number 1, is earning the customer’s trust. The Intel 18A design wins to-date provide good validation of the strategy, and we continue to have a healthy RFQ pipeline of potential customers. But we won’t win every deal out of the gates. We will be selective and focus on areas, where |
3,297 | INTC | 4 | 2,024 | 2025-01-30 17:00:00 | Intel Corporation | 21,127 | pipeline of potential customers. But we won’t win every deal out of the gates. We will be selective and focus on areas, where we are confident that we can be a meaningful contributor to the success of our customer, and we look forward to updating you as RFQs become wins. In addition, we continue to have good momentum in advanced packaging and in our collaborations with Tower Semiconductor and UMC. All three are critical to utilize our assets longer for higher rates of return. This is a good segue into my other key areas of focus for Intel Foundry: improving our financials and making sure that we are deploying your capital appropriately. At roughly $18 billion in revenue, Intel Foundry today is larger than all but one external foundry. That is clearly not reflected on our P&L with negative gross margins and a greater than $13 billion operating loss in 2024. We are going to systematically attack our costs and remain highly focused on our goal of delivering break-even operating income for Intel Foundry by the end of 2027, and we expect to demonstrate improvements this year. The financial benefits of shifting our wafer volumes from Intel 7 to Intel 18A, along with learning to run our fabs more efficiently and our process nodes longer, will be important drivers of improving our financials. Beyond 2027, we need to drive to cash flow from operations that support our capital spending needs and ultimately generate a great return on your capital. I remain very optimistic on our opportunity at Intel Foundry. The pervasive growth of AI is driving accelerating and unprecedented demand for silicon and there continues to be an unmet need for greater choice and overall manufacturing capacity in the industry today. TSMC is a valued supplier to Intel Products and important partner to IMS, and they have established a very high standard for what it takes to be a world-class foundry. But the market overall needs multiple players, and, as we execute, Intel Foundry has a very important role to play globally and especially here in the |
3,298 | INTC | 4 | 2,024 | 2025-01-30 17:00:00 | Intel Corporation | 21,127 | needs multiple players, and, as we execute, Intel Foundry has a very important role to play globally and especially here in the U.S., where we continue to invest in leading-edge R&D and manufacturing capacity. We were also pleased to sign with the U.S. Department of Commerce a definitive agreement awarding us up to $7.86 billion in grants. As you know, these grants are milestone-based, and we have already received $1.1 billion in Q4 and have received an additional $1.1 billion in January of Q1. In addition, we continue to make good progress building out our Secure Enclave in partnership with the Department of Defense. We look forward to continued engagement with the Trump administration, as we advance this work and support their efforts to strengthen U.S. technology and manufacturing leadership. Finally, as you will recall, we announced our intention to establish an independent subsidiary structure for Intel Foundry to provide clear governance and operational separation. This structure also enables us to seek additional funding options from both strategic and financial partners, which we are now actively beginning to explore. Let me now turn to our consolidated financial results and Q1 guidance. Fourth [technical difficulty] $14.3 billion, up 7% sequentially and at the high end of the range we provided in October, as a result of solid growth in CCG, equipment sales at IMS and the edge business of NEX. Non-GAAP gross margin came in at 42.1%, 260 basis points ahead of guidance on higher revenue, better costs and the receipt of our first CHIPs grants, offset partially by inventory reserves related to Gaudi. We delivered fourth quarter earnings per share of $0.13 versus our guidance of $0.12. Higher revenue, stronger gross margin and improved operating leverage was offset by lower interest and other income, which includes an accrual related to our second SCIP agreement of roughly $750 million, reflecting an adjustment in our planned capacity ramp in Ireland. In Q2, we began the process of resizing our expense |
3,299 | INTC | 4 | 2,024 | 2025-01-30 17:00:00 | Intel Corporation | 21,127 | million, reflecting an adjustment in our planned capacity ramp in Ireland. In Q2, we began the process of resizing our expense structure to support more modest long-term growth, including adjusting our capacity plans to more conservative levels, driving impairments in Q3 and this accrual in Q4. Q4 operating cash flow was positive $3.2 billion, down approximately $900 million sequentially due to the cash outlays associated with our Q3 restructuring charges. We had gross CapEx of $6.3 billion with offsets of $1.6 billion in the quarter resulting in an adjusted free cash flow of negative $1.5 billion. As I mentioned earlier, we also received a portion of the CHIPs grants this quarter. For the full year, revenue was $53.1 billion, down 2.1% year-over-year. Modest year-over-year growth in Intel Products was more than offset by lower revenue at Mobileye and Altera, as well as the forecasted decline in Foundry Services due to the end of life on traditional packaging revenue. Full year gross margin was 36% and down 760 basis points due to Q3 impairments, lower revenue and inventory impacts. Full-year EPS was minus $0.13 and down $1.18 on lower revenue, lower gross margin and higher period charges. We generated $8.3 billion in cash from operations, made $24 billion of gross capital investments and generated capital offsets of approximately $13.4 billion from SCIP partner contributions and government grants and incentives. As a result, adjusted free cash flow was $2.2 billion and we ended the year with $22.1 billion of cash and short-term investments. Moving to segment results for Q4. Intel Products revenue was $13 billion, up 7% sequentially. CCG revenue was up 9% quarter-over-quarter as the rate at which our customers digested inventory slowed meaningfully from Q3. While difficult to quantify, we suspect a portion of Q4 revenue upside was due to customers hedging against potential tariffs. DCAI revenue was up slightly sequentially off a better-than-expected Q3, as demand for traditional servers remained stable. Revenue |
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