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


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Worldwide Enterprise Machines Company (NYSE:IBM) This autumn 2022 Earnings Name dated Jan. 25, 2023.

Company Individuals:

Patricia Murphy — Vice President, Investor Relations

Arvind Krishna — Chairman and Chief Govt Officer

James J. Kavanaugh — Senior Vice President and Chief Monetary Officer


Amit Daryanani — Evercore ISI — Analyst

Wamsi Mohan — Financial institution of America Merrill Lynch — Analyst

Toni Sacconaghi — AllianceBernstein — Analyst

Shannon Cross — Credit score Suisse — Analyst

Erik Woodring — Morgan Stanley — Analyst

Lisa Ellis — MoffettNathanson LLC — Analyst

David Grossman — Stifel Institutional — Analyst

Kyle McNealy — Jefferies LLC — Analyst



Welcome, and thanks for standing by. [Operator Instructions] If in case you have any objections, you could disconnect right now.

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

Patricia Murphy — Vice President, Investor Relations

Thanks. That is Patricia Murphy, and I’d prefer to welcome you to IBM’s Fourth Quarter 2022 Earnings Presentation. I’m right here immediately with Arvind Krishna, IBM’s Chairman and Chief Govt Officer; and Jim Kavanaugh, IBM’s Senior Vice President and Chief Monetary Officer. We’ll publish immediately’s ready remarks on the IBM investor web site inside a few hours, and a replay might be obtainable by this time tomorrow.

To offer extra data to our buyers, our presentation consists of sure non-GAAP measures. For instance, all of our references to income development are at fixed forex. We have now offered reconciliation charts for these and different non-GAAP measures on the finish of the presentation, which is posted to our investor web site. Lastly, some feedback made on this presentation could also be thought of forward-looking beneath the Non-public Securities Litigation Reform Act of 1995. These statements contain elements that would trigger our precise outcomes to vary materially. Extra details about these elements is included within the firm’s SEC filings.

So with that, I’ll flip the decision over to Arvind.

Arvind Krishna — Chairman and Chief Govt Officer

Thanks for becoming a member of us. Our fourth quarter and full 12 months outcomes show the execution of our hybrid cloud and AI technique. We delivered sturdy income development in our enterprise. The expansion was broad primarily based throughout our software program, consulting and infrastructure segments in addition to throughout geographies. Our shoppers acknowledge that know-how continues to be a elementary supply of aggressive benefit. During the last a number of quarters, it has develop into clear that know-how is enjoying a big function in boosting productiveness within the face of inflation, demographic shifts, provide chain challenges and sustainability necessities.

We entered 2022, a extra centered firm and took steps to strengthen our place. We strengthened our consulting experience and expanded strategic partnerships. To bolster our software program portfolio, we invested in hybrid cloud and AI capabilities. We additionally delivered vital improvements in infrastructure with our z16 and Energy platforms. All of this was dropped at market with a extra technical and experiential gross sales strategy.

Wanting again on the 12 months, we’re happy with the progress we made. We delivered income development above our mid-single-digit mannequin, and we delivered stable free money move. However I’ll acknowledge there’s extra to do. This 12 months, we’ll unlock extra productiveness, broaden our strategic partnerships and put extra funding in particular development markets. For 2023, we see income development according to our mid-single-digit mannequin vary and about $10.5 billion of free money move. This retains us on a path of sustainable development.

I’ll now present some colour on the progress we’re making within the execution of our technique. Our perspective is evident. Hybrid cloud and AI are the 2 most transformative applied sciences for enterprise immediately. These applied sciences work collectively to drive enterprise outcomes. Hybrid cloud is the place the world goes. Containers are the popular vacation spot for purposes. Hybrid cloud presents extra worth than counting on a singular public cloud. It allows organizations to drive enterprise worth throughout a number of clouds, on-premise or on the edge. This consists of scale, safety, ease of use, flexibility of deployment, seamless experiences and quicker innovation cycles.

Our platform constructed on Crimson Hat is the main container platform, permitting shoppers to harness the ability of open supply software program improvements. IBM software program and infrastructure applied sciences have been optimized for this platform. Our consultants and others leverage their intensive technical and enterprise experience to speed up shoppers’ digital transformation journeys. Purchasers are realizing actual worth from working with IBM’s hybrid cloud platform strategy.

For instance, we labored with the Canadian Imperial Financial institution of Commerce, CIBC, to undertake a hybrid cloud strategy. Utilizing Crimson Hat know-how, CIBC manages and scales its infrastructure with better velocity and adaptability. They will now develop purposes in a non-public cloud and rapidly deploy them to a public cloud. They delivered a whole lot of latest purposes and decreased provisioning time by 95% and deployment time by 50%.

We’re serving to Delta Air Strains leverage hybrid cloud to modernize choices, automate operations and combine safety. IBM Consulting deployed Crimson Hat on Amazon Internet Providers and IBM Cloud Paks to offer a constant platform. Delta now has extra levers they will use to spice up developer productiveness, scale back time to market and enhance worker satisfaction. CIBC and Delta are each nice examples of the worth hybrid cloud can present.

Let’s now speak about synthetic intelligence or AI. AI is projected to contribute $16 trillion to the worldwide economic system by 2030, together with an enormous enhance in productiveness by infusing AI into each enterprise course of. We have now been co-creating with many consumers to deploy AI at scale. We automated the drive-thru expertise for quick-serve eating places. We accelerated the rollout of COVID-19 vaccines by automating the processes that help thousands and thousands of consumers with inquiries and appointments. By making use of AI and automation we’ve helped safety analysts scale back the time to reply to threats from hours or days, to minutes.

Just lately, the U.S Patent and Trademark Workplace partnered with IBM to leverage a bunch of AI capabilities that make it simpler for individuals to glean insights from their huge database of patents. The BBC is now utilizing our AIOps software program to automate the administration of its IT infrastructure. For companies, deploying AI will be difficult as a result of it takes time to coach every mannequin. However through the use of massive language fashions, firms can now create a number of fashions utilizing the identical knowledge set. This implies companies can deploy AI with a fraction of the time and sources. That’s the reason we’re investing in massive language or basis fashions for our shoppers and have infused these capabilities throughout our AI portfolio.

Our companion ecosystem performs a crucial function within the execution of our technique. Within the fourth quarter, we made a collection of latest IBM Software program choices obtainable as-a-Service within the AWS market. Likewise, Crimson Hat continued the enlargement of its choices in hyperscaler marketplaces, making Ansible Automation Platform obtainable on each Azure and AWS. Adobe and Salesforce are additionally leveraging open-source innovation primarily based on Crimson Hat applied sciences of their choices. Enterprise with our strategic companions continues to develop, with SAP, Microsoft and AWS throughout a billion {dollars} in income for the 12 months. We’ve had nice success with our strategic companions, and as we enter the brand new 12 months, we’re increasing and higher enabling our broader ecosystem. We lately launched PartnerPlus, a brand new simplified program that will increase our attain and scale via new and current IBM companions.

We stay centered on delivering new improvements that matter to our shoppers. Within the fourth quarter, we launched Crimson Hat System Edge, a light-weight resolution to flexibly deploy conventional or containerized workloads on small units reminiscent of robots, IoT gateways, factors of sale and public transport. We additionally shaped a collaboration with the Japanese consortium Rapidus to leverage the depth of our mental property on superior semiconductors. We unveiled Osprey, a 433-qubit quantum processor that brings us nearer to delivering our aim of constructing a 1,000- qubit system later this 12 months.

On the identical time, we proceed to accumulate firms to enhance our natural innovation. Within the fourth quarter we acquired Octo, which improves our footprint within the US Federal market. This caps a 12 months with eight acquisitions throughout Software program and Consulting. As sustainability turns into extra of a precedence, firms want digital applied sciences to research knowledge, making a baseline and enhance the best way they function. Our software program has helped IBM scale back its personal carbon footprint. Throughout IBM’s international actual property presence, we had been in a position to scale back carbon emissions by over 61% when in comparison with 2010. Utilizing IBM Sustainability Software program, we’ve simplified and automatic our sustainability reporting processes and decreased reporting prices by 30%.

Let me wrap by saying I’m happy with the progress we’ve made with our portfolio, our go-to-market and our ecosystem. I’m assured in our potential to leverage hybrid cloud and AI to assist shoppers flip enterprise challenges into alternatives. Our technique continues to strongly resonate with shoppers and companions, and this provides us a stable basis to construct upon on this 12 months. Whereas there’s extra to be carried out, we enter the brand new 12 months as a extra succesful and nimble firm, well-equipped to fulfill our shoppers’ wants.

I’ll now flip it over to Jim, who offers you extra detailed data on our efficiency and expectations.

James J. Kavanaugh — Senior Vice President and Chief Monetary Officer

Thanks, Arvind. I’ll begin with the monetary highlights of the fourth quarter. We delivered $16.7 billion in income, $3.8 billion of working pre-tax earnings and working earnings per share of $3.60. In our seasonally strongest quarter, we generated $5.2 billion of free money move. Our income for the quarter was up over 6% at fixed forex. Whereas the greenback weakened a bit from 90 days in the past, it nonetheless impacted our reported income by over $1 billion and 6.3 factors of development. As all the time, I’ll focus my feedback on fixed forex. And I’ll remind you that we wrapped on the separation of Kyndryl at the start of November. The one-month contribution to our fourth quarter income development was offset by the influence of our divested well being enterprise.

Income development this quarter was once more broad primarily based. Software program income was up 8% and Consulting up 9%. These are our development vectors and signify over 70% of our income. Infrastructure was up 7%. Inside every of those segments, our development was pervasive. We additionally had good development throughout our geographies, with mid-single digit development or higher in Americas, EMEA and Asia Pacific. And for the 12 months, we gained share general. We had sturdy transactional development in software program and {hardware} to shut the 12 months.

On the identical time, our recurring income, which gives a stable base of income and revenue, additionally grew, led by software program. I’ll remind you that on an annual foundation, about half of our income is recurring. During the last 12 months, we’ve seen the outcomes of a extra centered hybrid cloud and AI technique. Our strategy to hybrid cloud is platform centric. As we land the platform, we get a multiplier impact throughout Software program, Consulting and Infrastructure. For the 12 months, our hybrid cloud income was over $22 billion, up 17% from 2021.

our revenue metrics for the quarter, we expanded working pretax margin by 170 foundation factors. This displays a powerful portfolio combine and bettering Software program and Consulting margins. These identical dynamics drove a 60-basis level enhance in working gross margin. Our expense was down year-to-year, pushed by forex dynamics. Inside our base expense, the work we’re doing to digitally remodel our operations gives flexibility to proceed to spend money on innovation and in expertise. Our working tax fee was 14%, which is flat versus final 12 months. And our working earnings per share of $3.60 was up over 7%.

Turning to free money move, we generated $5.2 billion within the quarter and $9.3 billion for the 12 months. Our full-year free money move is up $2.8 billion from 2021. As we talked about all 12 months, we’ve a couple of drivers of our free money move development. First, I’ll remind you 2021’s money move outcomes included Kyndryl-related exercise, together with the influence of spin costs and capex. Second, we had working capital enhancements pushed by efficiencies in our collections and mainframe cycle dynamics. Regardless of sturdy collections, the mixture of income efficiency above our mannequin and the timing of the transactions within the quarter led to higher-than-expected working capital on the finish of the 12 months. This impacted our free money move efficiency versus expectations. Our year-to-year free money move development additionally features a modest tailwind from money tax funds and decrease funds for structural actions, partially offset by elevated capex funding for immediately’s IBM.

By way of money makes use of for the 12 months, we invested $2.3 billion to accumulate eight firms throughout software program and consulting, mitigated by over $1 billion in proceeds from divested companies, and we returned almost $6 billion to shareholders within the type of dividends.

From a stability sheet perspective, we ended the 12 months in a powerful liquidity place with money of $8.8 billion. That is up over $1 billion year-to-year. And our debt stability is down almost $1 billion. Our stability sheet stays sturdy, and I’d say the identical for our retirement-related plans. At 12 months finish, our worldwide tax-qualified plans are funded at 114%, with the US at 125%. Each are up year-to-year.

You’ll recall again in September, we took one other step to scale back the chance profile of our plans. We transferred a portion of our U.S. certified outlined profit plan obligations to insurers, with out altering the advantages payable to plan contributors. This resulted in a big non-cash cost in our GAAP ends in the third quarter, and we’ll see a profit in our non-operating costs going ahead. You may see the good thing about this and different pension assumptions to the 2023 retirement-related prices in our supplemental charts.

Turning to the segments. Software program income grew 8%, fueled by development in each Hybrid Platform & Options and Transaction Processing. We concluded the 12 months with seasonally sturdy transactional efficiency in addition to a stable and rising recurring income base in Software program. In Hybrid Platform & Options, income was up 10% with pervasive development throughout our enterprise areas; Crimson Hat, Automation, Information & AI and Safety. Our platform-based strategy to hybrid cloud and AI is resonating with shoppers. As a proof level, OpenShift, our industry-leading hybrid cloud platform, now has $1 billion in annual recurring income. And we’ve modernized and optimized our software program capabilities, together with via Cloud Paks, throughout Automation, Information & AI and Safety for that platform.

Crimson Hat income grew 15% within the quarter led by energy in OpenShift and Ansible, each rising double digits and gaining market share. Automation income was up 9%. Development was led by Enterprise Automation, Software Servers and Integration as shoppers look to automate enterprise workflows and enhance purposes. Information & AI income grew 8%, with enterprise wants to arrange, retailer and handle their knowledge. This efficiency displays demand in areas together with Information Administration, Information Cloth and Asset & Provide Chain Administration.

Safety delivered 10% income development. We’re serving to shoppers detect, stop and reply to safety incidents, which led to energy throughout Menace Administration, Information Safety and Id. Throughout these companies, the Annual Recurring Income, or ARR, for Hybrid Platform & Options is $13.3 billion. And for all of Software program, hybrid cloud income is now greater than $9.3 billion during the last 12 months, up 16%. In Transaction Processing, income was up 3%. Demand for this mission-critical software program has adopted will increase in zSystems put in base capability during the last couple of product cycles. And powerful renewal charges continued this quarter. Each are proof of the significance of this platform in a hybrid cloud surroundings.

Transferring to Software program revenue, our pre-tax margin was up 2 factors this quarter, contributing to a full-year margin of almost 25%. Consulting income grew 9%. Purchasers are leveraging IBM’s hybrid cloud management and deep {industry} experience to navigate the complexity of their digital transformation journeys. Income development was broad primarily based throughout all enterprise strains and geographies. And I’ll remind you that that is on prime of the 16% development Consulting delivered within the fourth quarter of 2021. Sturdy demand for our choices led to signings development of 17%. With this, fourth quarter had one of the best quarterly book-to-bill of the 12 months, and we sequentially improved our trailing-twelve-month book-to-bill ratio to 1.1.

Purchasers are partnering with IBM Consulting as they determine what purposes to modernize and the right way to migrate these purposes throughout hybrid, multi-cloud environments. During the last 12 months, Consulting delivered $9 billion in hybrid cloud income, which is up 23%. This quarter, our Crimson Hat apply was once more a significant contributor to this development. Income from strategic partnerships additionally grew at a powerful double-digit fee. We proceed to see momentum on this area. In combination, our strategic partnership bookings had been up over 50%, with Azure and AWS greater than doubling.

Turning to our strains of enterprise, Enterprise Transformation income grew 7%. Development in Enterprise Transformation was as soon as once more pushed by knowledge and consumer expertise transformations, together with provide chain and finance optimizations. Our partnerships with key ISV companions like SAP, Salesforce and Adobe allow IBM Consulting to remodel crucial workloads at scale. In Expertise Consulting, the place we architect and implement shoppers’ cloud platforms and techniques, income was up 10%. Development was led by cloud software improvement practices.

Crimson Hat engagements together with our strategic hyperscaler partnerships contributed to the expansion. Software Operations income grew 12%. We assist shoppers to optimize their operations and scale back value by taking on the administration of purposes in hybrid and multi-cloud environments. Our incumbency and understanding of shoppers’ purposes are key differentiators.

Transferring to Consulting revenue, our pre-tax margin was 11% for the quarter and almost 9% for the 12 months. The fourth quarter margin is up almost two factors year-to-year and over one level sequentially. We’re beginning to see the profit from pricing actions and productiveness, and our acquisitions have develop into extra accretive.

Turning to the Infrastructure phase, income grew 7% pushed by Hybrid Infrastructure, which was up 11%. Inside Hybrid Infrastructure, zSystems income grew 21% this quarter. Among the many new z16 capabilities, shoppers are leveraging cyber-resiliency to adjust to enterprise rules and proactively keep away from outages of their operations. And the brand new on-chip AI accelerator, for instance, has been serving to mitigate threat and detect fraud in bank card software processing.

Our Distributed Infrastructure income was up 5%. This efficiency was fueled by energy in Energy, following the extension of Power10 innovation all through the product line. Infrastructure Assist efficiency was flat, together with the influence from consumer adoption of latest {hardware} with the most recent z16 product cycle. Transferring to Infrastructure revenue, pre-tax margin was down lower than 1 level within the quarter, and for the complete 12 months our pre-tax margin was almost 15%.

Now let me convey it again as much as the IBM stage to wrap up. At our investor briefing 15 months in the past, we laid out our hybrid cloud and AI technique, and our priorities of income development and free money move era. Since then, we’ve been centered on our portfolio, our go-to-market mannequin, our ecosystem and our capital allocation to execute that technique and create worth via focus. We’ve now simply accomplished the primary 12 months as At this time’s IBM.

Our 2022 income was up almost 12%, together with almost 4 factors of incremental Kyndryl contribution. That’s above our mannequin of mid-single digit development. Over 70% of our income was in our development vectors of Software program and Consulting, and about half of our income is recurring. With this excessive worth combine and contribution from the incremental Kyndryl income, we expanded our full-year working pre-tax margin by 2.5 factors. And our free money move And our free money move was $9.3 billion, up $2.8 billion from the prior 12 months. We invested organically and inorganically, and returned vital worth to shareholders via dividends.

Now, there have been some exterior elements that we confronted this previous 12 months that impacted our revenue and money. We exited a worthwhile enterprise in Russia, we’re coping with a a lot stronger greenback, and we’re working in a extremely inflationary surroundings, which put stress on our margins, particularly in Consulting. Placing all of it collectively, we’re happy with the basics of our enterprise and the progress we’ve made in executing our technique.

Our 2022 efficiency demonstrates that we now have a higher-growth, higher-value firm with greater return on invested capital and a powerful and rising free money move. For 2023, we once more count on stable development in our two most vital measures of success; income and free money move. Arvind talked in regards to the vital function know-how performs on this surroundings, and the way our options are intently aligned to the wants of our shoppers. With this, we count on fixed forex income development for the 12 months to be according to our mid-single digit mannequin. As we enter this 12 months, I believe it’s prudent to count on the low finish of the mid-single digit mannequin. And without cost money move, we’d count on to generate about $10.5 billion in 2023, which is up over $1 billion year-to-year.

Let me spend a minute on our expectations for fixed forex income and pre-tax revenue efficiency by phase. In Software program, with continued momentum in our recurring income stream in each Hybrid Platform & Options and Transaction Processing, we count on income development according to Software program’s mid-single digit mannequin. This income development generates working leverage, and we’d count on Software program pre-tax margin to broaden by about 2 factors year-to-year.

Consulting’s mannequin is to ship excessive single-digit income. We’re coming off a powerful 12 months with income development of 15%, as we assist shoppers with their digital transformations. This momentum and robust book-to-bill ratio assist Consulting income development on the excessive finish of its mannequin, regardless of the robust examine. We count on to broaden Consulting pre-tax margin by no less than 1 level as we proceed to comprehend extra of the value will increase and improved utilization.

Infrastructure income is roughly flat over the mid-term mannequin horizon, with efficiency in any 12 months reflecting product cycle dynamics. We’re coming into the 12 months with three quarters into the z16 cycle, and also will wrap on Power10. Consequently, we count on 2023 Infrastructure income under its mannequin, and pretax margin within the low teenagers. For perspective, Infrastructure ought to influence IBM’s general income development by over 1 level. With these phase dynamics, we might count on IBM’s working pre-tax margin to broaden by about 0.5 level, that’s according to our mannequin. And our tax fee ought to be within the mid-to-high-teens vary.

Let me touch upon a couple of gadgets inside our expectations. First, as I stated, forex was a big headwind in 2022, impacting income by $3.5 billion. With the motion of spot charges during the last 90 days, forex translation can be pretty impartial to income in 2023, with a headwind within the first half flipping to a tailwind within the second. However, I’ll remind you that we had over $650 million of hedging positive factors in 2022, which is not going to repeat in 2023, leading to a influence to our revenue and money on a year-to-year foundation.

Second, as you recognize we taken numerous vital portfolio actions during the last couple of years, which has resulted in some stranded prices in our enterprise. We count on to deal with these remaining stranded prices early within the 12 months and anticipate a cost of about $300 million within the first quarter. We might begin to see advantages within the second half and pay again by the tip of the 12 months.

After which third, we repeatedly evaluation the helpful lives of our property. On account of advances in know-how, we’re making an accounting change to increase the helpful lifetime of our server and networking tools, efficient the primary of January. Based mostly on our year-end asset base, we count on this alteration to learn 2023 pre-tax revenue by over $200 million, primarily in our Infrastructure phase. Given it is a change to depreciation, there’s no profit to money.

Wanting on the first quarter, our fixed forex income development ought to be pretty in step with the complete 12 months. Reported development will even embrace a few 3 level forex headwind at present spot charges. With working leverage, we’d count on working pre-tax margin to broaden 50 foundation factors to 100 foundation factors within the first quarter, and that’s earlier than the cost I simply talked about for the remaining stranded prices.

Given the timing of forex and stranded value dynamics, we’d count on about one-third of our web earnings within the first half and about two-thirds within the second half. To sum all of it up, we’ve made plenty of progress this previous 12 months. Whereas there’s all the time extra work to do, we’re assured within the fundamentals of our enterprise and the way we’re positioned as we enter the brand new 12 months.

Patricia, let’s go to the Q&A.

Patricia Murphy — Vice President, Investor Relations

Thanks, Jim. Earlier than we start the Q&A, I’d like to say a few gadgets. First, supplemental data for the quarter and the 12 months is offered on the finish of the presentation. After which second, as all the time, I’d ask you to chorus from multipart questions.

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

Questions and Solutions:


Thanks. [Operator instructions] Our first query will come from Amit Daryanani with Evercore. Your line is open.

Amit Daryanani — Evercore ISI — Analyst

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

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

James J. Kavanaugh — Senior Vice President and Chief Monetary Officer

Thanks, Amit. That is Jim. I admire the query. So, let’s begin there. We noticed a stable free money move era in 2022, up $2.8 billion 12 months over 12 months. Now, as you bear in mind, we entered 2022. We talked a few very sturdy free money move era engine. And we put in place a steering for 2022 nicely in extra of our mannequin of $750 million 12 months to 12 months. First, as we had been very clear, we had been going to get no less than about half of that out of the Kyndryl-related spin dynamics. That’s the fees in capex.

And we had been going to get a bit of bit greater than half of that out of our base operations general. And I believe whenever you take a look at 2022, what occurred we obtained impacted by two exterior elements: primary, the unlucky humanitarian disaster with the struggle in Russia and Ukraine, and we exited that enterprise, the best choice. Second is unprecedented U.S. greenback appreciation. I believe final time I seemed, the speed, the breadth, the magnitude of the change is probably the most we’ve seen in a number of many years.

We obtained hit with that, however we’re in a position to overcome a few of that with the elemental underpinnings of our enterprise general and nonetheless delivered nearly $3 billion of free money move 12 months over 12 months. By the best way, Russian forex by themselves is over $600 million of revenue and money we needed to take in. So, now, to your query about 2023, we guided, as you heard within the ready remarks, a $10.5 billion that’s up $1.2 billion 12 months over 12 months and once more, above our $750 million 12 months to 12 months.

The underpinnings of that, although, are going to be very completely different in ’23. Given the bettering enterprise fundamentals of our now sustainable income development with a high-value combine contribution, we see then continued working leverage. So, our money PTI goes to ship a considerable quantity of that free money move era 12 months over 12 months. We’re nonetheless going to get working capital effectivity. So, our realization will certainly be up over 100%.

However that’s actually given the quantity dynamics of what occurred within the fourth quarter with a really sturdy and accelerated development profile as we went via fourth quarter, we completed extraordinarily sturdy on our transactional enterprise within the month of December. So, that now creates a possibility without cost money move era in ’23 and that’s in our steering. After which there are another places and takes. Sure, we’ll get modest structural actions tailwind, however they’re going to be offset by a money tax headwind for the 12 months.

So, that sort of performs out 2022 and 2023 now. How does that relate to a midterm mannequin? Initially, we’re one 12 months into that midterm mannequin and as I talked about, the dynamics in coping with the choice to exit our Russia enterprise and the numerous U.S. greenback appreciation. I quantified it for you over a $600 million influence on revenue and money.

However as you all know fairly nicely, that’s not a one-time influence, that may proceed over a multi-period, and it positively places stress on our midterm mannequin to the tune cumulatively about over $2.5 billion. So, we’re completely centered on how we execute this firm on a sustainable income development profile and producing that $10.5 billion of free money move. So, it allows us, with the best ample monetary flexibility, to proceed to spend money on our enterprise and return worth to our shareholders general.

Patricia Murphy — Vice President, Investor Relations

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


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

Wamsi Mohan — Financial institution of America Merrill Lynch — Analyst

Yeah. Thanks. Arvind, good to see the income information right here. I used to be questioning in case you might share some ideas round what’s occurring in software program, specifically, you’ve had a extremely sturdy efficiency in transaction processing over the previous 12 months. How are you enthusiastic about the trajectory of that? I do know traditionally, we’ve sort of thought of this as mid-single digit or greater decliner, and clearly, we’re monitoring very otherwise right here. For those who might share some ideas across the trajectory of that in 2023 and past, that might be very useful. Thanks.

Arvind Krishna — Chairman and Chief Govt Officer

Yeah. Thanks, Wamsi, for the query. So, I’ll deal with your transaction processing query first after which all of software program proper after that. So, a few of you’ve got heard me speak about that transaction processing can be a mid-single-digit decliner previously. And that’s successfully, Wamsi, is what you requested, what’s going to be completely different. As we take a look at our enterprise there and we glance each on the underlying MIPS development, in addition to the criticality of that software program, in addition to our potential to have some very modest pricing uplift, we might now take a look at that enterprise as being a slight enhance versus a modest decliner. So, I believe if you’re taking a look at that one, Wamsi, low single-digit will increase for transaction processing is what we expect is suitable for the brief to medium-term mannequin wanting ahead.

Now, that does assist in general software program. So, first, let’s take a look at software program and decompose it. Software program, as Jim talked about in his ready remarks, is sort of 80% recurring income. We see that recurring income rising in step with our mannequin of the mid-single digits primarily based on each the consumption, the utilization, in addition to what we’ve seen via ’22 in individuals renewing that base of software program enterprise. Then I’ll acknowledge to you that ’22 was an important ELA 12 months, ’23 might be not so good as ’22. However with the transactional piece of the enterprise being lower than 20%, that has a a lot smaller influence on the general development fee. As you place all that collectively, we see the mid-single digits as being applicable for the software program enterprise.

Wamsi Mohan — Financial institution of America Merrill Lynch — Analyst


Patricia Murphy — Vice President, Investor Relations

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


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

Toni Sacconaghi — AllianceBernstein — Analyst

Yeah. Thanks. I used to be questioning in case you might simply touch upon working revenue extra broadly. I believe your goal at the start of the 12 months was for working revenue to enhance 400 foundation factors, and it got here in at 270. I believe your goal for the fourth quarter was 250 foundation level enchancment in working margin and got here in at 170. And that’s manifesting itself right into a free money move quantity that was decrease than you had anticipated and this 12 months and probably for subsequent 12 months relative to your $35 billion goal.

So, you’ve got a twin mandate, Arvind. One is to attempt to develop mid-single digits and the opposite is to ship very sturdy money move, which is impacted by margins. The margin was not as sturdy this 12 months, and I’m questioning in case you can spotlight what was completely different out of your expectations. And what had been the challenges in forecasting that and the way buyers ought to take into consideration that and free money move realization going ahead?

Arvind Krishna — Chairman and Chief Govt Officer

Yeah, Toni. Thanks. So, you’re fully correct that these numbers are barely under our expectations from the start of the 12 months. I’ll ask Jim to remark and provide you with much more colour on it. However let me first remark in your assertion of we’ve a double mandate of income development and free money move development, however I wish to even be clear, income development has — which manifests itself in consumer satisfaction, greater NPS from our shoppers higher consumption of each software program and consulting from our shoppers, which permits them to eat increasingly over time is what we’re centered on.

And we’ve to ship the free money move development. Jim talked about in a response to the primary query that we weren’t anticipating the enterprise and Russia to get shut down, that impacted it a bit of bit. We weren’t anticipating the forex headwinds to be as extreme because it turned out to be. That’s definitely impacted. And I’ll acknowledge an inflation as in wage inflation confirmed up and impacted our margins in consulting much more than we had been anticipating. Now a solution might have been to not rent individuals and to not give that however that might have resulted then in decrease capability on the finish of this 12 months, which might not have allowed us the arrogance into the expansion, each in consulting and in software program that we are actually committing for 2023.

In order we stability these, it turns into a enterprise choice to say we’re going to hold happening rising capability, which ends up in more healthy income and it’ll end in bettering margins, however that flows via into 2023 versus giving all of it to us in 2022. So, Toni, that’s sort of how we take into consideration balancing the investments within the enterprise versus a quarterly consequence. And I’ll ask Jim to remark a bit extra on among the specifics of what you had been asking.

James J. Kavanaugh — Senior Vice President and Chief Monetary Officer

Yeah. Simply to place some numbers round this, Toni, you’re precisely proper. We entered the 12 months — we talked a few enterprise profile, greater income development firm, greater working margins, sturdy free money move yield. And we had guided at mid-single-digit income development, and we guided that 4 factors of working margin enchancment. The 2 factors of exterior that each Arvind and I’ve each talked about Russia and forex. By the best way, that was a few half a degree as a result of forex, bear in mind, as we’ve talked about many instances all through these calls, not solely the speed, breadth, and velocity and alter in magnitude that we haven’t seen in about two to 3 many years, nevertheless it impacts human capital-based consulting enterprise very otherwise than a product technology-based enterprise.

As we talked about, human capital is all just about a pure hedge as a result of your value is principally matched together with your income outdoors of worldwide supply. However in a product-based enterprise, our prices just like the {industry} is predominantly U.S. greenback supply, and that’s why you’ve seen stress on the gross revenue margin line and the pre-tax revenue margin line round our know-how base of enterprise. Now, underlying that, although, I believe you’re seeing a elementary enchancment in our margins as we go ahead so about 50 foundation factors of forex.

The remaining 100 foundation factors was consulting. And we talked about that. That’s been a rate-and-pace dialogue. You dial again 15, 18 months in the past we referred to as a really accelerated demand surroundings of our shoppers shifting to digital transformation and journey to cloud. And beginning within the second half of ’21, we made the wager to make investments round talent functionality ecosystems, and we opened up the aperture to construct prolonged capabilities inorganically. And we knew as we went via 2022 that we then had been working in a extremely inflationary surroundings.

After which it turned a fee and tempo dialogue on how fast are you able to get value margin and optimization and notice via your backlog. And I believe we’ve acknowledged that we had been fairly sluggish all year long. Now, with that stated, we completed the 12 months about 9 factors of margin in consulting. We had good enchancment. We exited fourth quarter at 11-point PTI mannequin that was up nearly 200 foundation factors 12 months over 12 months. Our first half to second half, we noticed an acceleration of three factors of margin from a few seven-point working PTI mannequin to nicely over 10 factors of an working PTI mannequin. And most significantly, the inexperienced shoots are beginning to play out within the fourth quarter.

Our utilization of efficient capability, one of many three levers we talked about all 12 months, up three factors within the fourth quarter. Our value margins, third consecutive quarter are up 12 months to 12 months, and also you’re seeing that play out in that working revenue efficiency. And at last, acquisitions. Now, we’re on a gradual state and our acquisitions are again to accretion. So, we see good inexperienced shoots that result in our steering in 2023 on the excessive finish of our excessive single-digit mannequin in consulting on income coming off of a really sturdy 15% development in ’22 and guiding one other one-point-plus in working margins going ahead.

Patricia Murphy — Vice President, Investor Relations

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


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

Shannon Cross — Credit score Suisse — Analyst

Are you able to hear me?


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

Shannon Cross — Credit score Suisse — Analyst

Okay. Fascinating. Yeah. Arvind, are you able to discuss a bit about AI and the way it runs via what you are promoting? There’s clearly a lot dialogue proper now about open AI and Microsoft making investments. And I suppose I’m making an attempt to consider how we should always take into consideration IBM monetizing it, capitalizing on it, how you consider your aggressive place relative to others. I don’t know if there are examples you can provide the place you’re using it. However I’m simply — I’m questioning, as AI will get increasingly of a — turns into increasingly of a dialogue level apparently for 2023 and you’ve got such an extended historical past with it, how we should always take into consideration the place you are actually and the place you’re going to take it. Thanks.

Arvind Krishna — Chairman and Chief Govt Officer

Thanks, Shannon. So, first, let me acknowledge AI has develop into an enormous subject of dialog this 12 months. I used to be in Davos final week, and it most likely got here up at nearly each single dialogue round know-how, what’s occurring with AI, in addition to what’s occurring with OpenAI. If I give it some thought during the last decade, I believe there have been three moments you possibly can speak about, after which I’ll start to translate these right into a enterprise influence. One, when IBM gained Jeopardy with Watson, I believe it was an enormous second, and AI got here onto everybody’s highway map.

Second, when deep thoughts from Google or Alphabet began successful competitions round, for instance, GO, and that turned one other huge second together with the protein folding that they did and now with OpenAI and ChatGPT. But when I step again only a second, all of this newest model is predicated on what is known as massive language fashions because the underlying science. Universities do it, Google does it, IBM does it as does OpenAI. To simply get to why it’s so thrilling; for instance, for us, it permits us to do 13 language fashions once we are taking a look at understanding completely different pure languages in the identical value as initially one.

That’s what is so thrilling about these applied sciences as a result of if you will get an order of magnitude enchancment in value and velocity and the useful resource consumed, each by way of {hardware} and folks, that’s extremely thrilling. Now, let me translate this into how will we monetize this. So, our monetization of AI may be very a lot centered on that $16 trillion of productiveness that I’ve talked about that we’re going to recover from the last decade.

The overwhelming majority of that comes from enterprise automation and after I say enterprise, I embrace governments into it. Some examples, in case you can automate the drive-through and order-taking for quick-serve eating places, that’s an instance of what can occur. If we are able to get deflection charges of 40%, 50%, 60% at everybody’s name facilities, that’s an enormous operational effectivity for all of our shoppers. If we might help retirees get their pensions via interacting with a Watson-powered AI chatbot that’s an enterprise use case the place all of those applied sciences come into play.

By the best way, all my three examples are actual shoppers the place we’re leading to wherever from a whole lot to 1000’s of individuals, effectivity for every of those shoppers. So, that’s how we get it. If I look inside IBM, how we do promotions, how we do individuals motion, how we start to enhance our code to money, how we enhance our customer support and folks ask difficult questions round triage of IT programs taking place are all very actual examples the place we’re bettering consumer service and saving cash all on the identical time.

Patricia Murphy — Vice President, Investor Relations

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


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

Erik Woodring — Morgan Stanley — Analyst

Hey, guys. Good afternoon, and thanks for taking the query. I wished to only contact on the consulting enterprise. Signings had been very sturdy within the December quarter, up 17%. Your quarterly book-to-bill was an enchancment from the September quarter. Are you able to perhaps simply, once more, simply step again and elaborate on the surroundings, what we’re in, what you noticed in 4Q that probably stood out to you the place energy in signings is coming from modifications to contract period? Perhaps simply double-clicking on the consulting enterprise. Simply to assist us perceive what provides you confidence to be sort of on the excessive finish of your midterm mannequin for 2023. Thanks.

James J. Kavanaugh — Senior Vice President and Chief Monetary Officer

Thanks, Erik, for the query. I’ll take this. Once we entered the fourth quarter, we had a fairly stable pipeline. And we talked about reaffirmed mid-teens development for consulting for the 12 months, which as you recognize, is nicely above our mannequin. However once more, as I talked about on the earlier query, we had made the investments in bringing in talent functionality, increasing ecosystem, strategic partnerships, and acquisitions.

However we noticed that pipeline coming into the quarter — we noticed a really stable and fairly disciplined gross sales closure fee as we transfer via the 12 months. Now, how did the 12 months finish? That positions us for 2023, and let me simply put some stats to actually convey it dwelling. Primary, ecosystem velocity, we noticed proceed to extend all year long of our strategic partnerships. I believe we stated within the ready remarks, strategic partnerships, one grew income 25% in 2022 and was about 40% of our consulting base of enterprise.

That’s up about 50% 12 months over 12 months. We have now noticed — seen intensive acceleration. And by the best way, within the fourth quarter, our signings development which delivered a 1.3 book-to-bill, our hyperscaler partnerships with Azure, and what AWS, our signings had been 2 instances. And our ISV portfolio with the likes of SAP, Salesforce, Adobe, we had been up over 50% in signings. So, our ebook of enterprise and the partnerships we’ve super energy that’s fueling our backlog, level primary. Level quantity two, Crimson Hat. We proceed to see acceleration of consulting being the tip of the spear that’s actually driving the size and adoption of our hybrid cloud platform.

And oh, by the best way, can also be dragging IBM know-how and software program. Since inception, a bit of over three years we signed $7.4 billion of enterprise in Crimson Hat, super energy, and that, once more, fuels our backlog for 2023. And then you definately take a look at full 12 months, we grew each massive transformational offers, and we grew small offers double digit, either side. So, it’s pervasive throughout the board. So, once we take a look at our backlog, we take a look at all of our indicators of our enterprise on the conclusion of that mannequin. We glance on the acquisition portfolio and the way it’s scaling. We really feel fairly assured in regards to the excessive finish of our excessive single-digit mannequin in 2023. Oh, by the best way, to Toni’s query, at working margins being accretive.

Patricia Murphy — Vice President, Investor Relations

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


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

Lisa Ellis — MoffettNathanson LLC — Analyst

Hello. Good afternoon. Thanks for taking my query. Perhaps following on that, I had a broader query, Arvind, on the general demand surroundings you’re seeing. I believe with earnings coming in from varied enterprise tech gamers, up to now, we’re seeing a fairly wide selection of indicators about how the demand surroundings is shaping up for 2023. Are you able to simply remark a bit on what you’re seeing out of your massive shoppers, say, sort of relative to this previous 12 months? Thanks.

Arvind Krishna — Chairman and Chief Govt Officer

Yeah. Thanks, Lisa, for the query. Look, if I take into consideration our general consumer base, we had been first actually happy that there wasn’t a lot of a distinction by geography. As I type of undergo it, Japan, India, Australia, the Center East, Western Europe, the UK, North America had been actually fairly sturdy in demand throughout. So, I believe, Lisa, if I break it down into the 2 parts round know-how and consulting, what we’re seeing is that the majority of our shoppers do consider that even when there are some, I’ll name, the minor or completely different headwinds in 2023, they’re going to emerge stronger.

As they’re to emerge stronger, meaning they’re all deploying know-how to assist offset wage inflation, cyber points, provide chain challenges, and all of the demographic shifts, which means there’s simply fewer expert individuals to rent. Consequently, we’re seeing them double down, and that’s the reason we’ve centered on sure areas and sure companions, each for consulting and in know-how. All of them wish to deploy automated methods to get from the entrance to the again.

Perhaps Salesforce and Adobe play a really sturdy function in that. All of them wish to leverage cloud applied sciences, to allow them to scale know-how as much as higher deal with consumer demand. Our partnerships with the hyperscalers play into that. All of them wish to leverage way more know-how than they’ve earlier than to counteract the wage inflation and different inflationary facets. And what we do with Crimson Hat performs into that.

So, I sort of see, Lisa, that each one of our shoppers play into that. Now you’ve talked about a large spectrum from the individuals you’re seeing lately. I believe the rationale that we’re remaining on this optimistic state of mind, we’ve no shopper enterprise. I agree that our shoppers might have a shopper enterprise, however we don’t have that instantly. And so, I believe, consequently, we may be seeing a bit of bit completely different subset of the economic system than those that may need a big direct publicity to a shopper enterprise.

Patricia Murphy — Vice President, Investor Relations

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


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

David Grossman — Stifel Institutional — Analyst

Thanks. So that you had an excellent transactional momentum within the Software program enterprise within the fourth quarter, and also you offered some good high-level commentary in your ready remarks in regards to the enterprise, and the broad-based development might replicate lots of these modifications that you simply’ve been speaking about within the go-to-market technique and gross sales modifications.

That stated, Arvind, are you able to discuss particularly or determine any product-specific modifications in software program that you simply assume could also be driving that momentum and that will recommend your aggressive positioning is shifting in any of these three non-Crimson Hat segments? After which only one different factor, simply sorry in regards to the two-part query. However only for Jim, I simply wished to make clear with that working capital headwind within the fourth quarter that you simply talked about reverses in 2023. Thanks.

Arvind Krishna — Chairman and Chief Govt Officer

Yeah. Thanks, David. Let me discuss a bit of bit in regards to the product capabilities and as you stated, outdoors Crimson Hat referred to as give attention to automation, knowledge, AI, and cyber. If I take a look at these — let’s take automation. I’m actually happy with the progress we’ve made round an space I’ll name AIOps. But when you consider, we made a few small acquisitions, Instana and Turbonomic, we constructed our personal AIOps portfolio, and we’re seeing super pickup from that as our shoppers wish to take out labor complexity but additionally wish to optimize their general IT infrastructure, {hardware}, and software program.

In addition they wish to have uptime that’s now the speak about not simply two nines and three nines however as much as 5 nines. They usually additionally wish to fear about how to ensure some go to all the time on. And so, I believe our AIOps portfolio there actually benefits us, and I consider we’re in a novel place as a result of we assist our shoppers in an surroundings throughout a number of public clouds and on-premise and with their non-public clouds in that area.

If I take into consideration knowledge and AI, our give attention to knowledge material and permitting our shoppers to leverage the information wherever it’s, not all the time shifting it however permitting them to catalog it, leveraging AI deep inside our merchandise is one other instance of the place we’ve a novel functionality. And third, if I take a look at cyber, we focus lots on risk administration. And if we take into consideration how we are able to leverage the inputs from every kind of sources in today and individuals are actually apprehensive about the entire threats coming, whether or not from nation-states or from simply dangerous actors, then it permits them to leverage that portfolio higher.

Consequently, we’re going to stay fairly centered on these areas. You must count on each natural and inorganic funding. And David, I can’t assist however say, we’re giving our shoppers the flexibility to deploy these capabilities on a number of public clouds, in addition to on-premise. And I consider that does benefit them as a result of it provides them much more flexibility and freedom than they could have from another distributors.

James J. Kavanaugh — Senior Vice President and Chief Monetary Officer

Yeah. I’d simply construct on that, Arvind. I imply, Software program ebook of enterprise immediately, it’s an integral a part of our hybrid cloud platform thesis. It’s the basis. We eclipsed $25 billion for the primary time ever right here in 2022, so over 40% of IBM’s income and two-thirds of our EBITDA. So, whenever you take a look at it, we’re a hybrid cloud AI platform-centric firm general, and Software program is correct at that course. So why that recurring income stream and the enhancements we’ve been seeing all through 2022?

And as Arvind answered earlier, getting that again to a rising contribution not solely helps the competitiveness and market share of our prime line, however I believe all of you perceive the marginal greenback of that ebook of enterprise is within the 90-plus p.c vary as we transfer ahead. So, David, I believe you additionally requested a query about clarification. Free money move development, $10.5 billion about, up $1.2 billion 12 months to 12 months, above our mannequin of $750 million. That might be pushed primarily based on the elemental enhancements of our underlying income development and working leverage and money PTI, however there will even be, sure, a working capital effectivity contribution to our money era subsequent 12 months, actually simply the quantity dynamics of what performed out within the fourth quarter. We’ll get that again.

Patricia Murphy — Vice President, Investor Relations

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


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

Kyle McNealy — Jefferies LLC — Analyst

Thanks very a lot for squeezing it in. And this one is macro-related as nicely, nevertheless it’s fairly fast. It looks like among the slowing macro’s implied in your 2023 steering, however I don’t assume you talked particularly about whether or not you’re seeing something particularly slowing. It sounded typically constructive for you guys, despite the fact that there’s a little bit of a slowdown implied within the steering.

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

Arvind Krishna — Chairman and Chief Govt Officer

Okay. Look, I believe that first — and I’ll deal with your level on new software versus current fairly instantly. The purpose in regards to the decrease finish of the mid-single digit is essentially from the truth that Infrastructure phase might be a headwind going into 2023, whereas it was a tailwind in ’22. I wouldn’t learn something greater than that into our low finish versus the center of the vary. Now, for us, I don’t actually see that. I see that our shoppers do wish to do new improvement. Now from our perspective, if any individual is doing an expanded Salesforce deployment, I name {that a} new software.

If any individual is doing a brand new software on Azure or if they’re shifting, nicely, they by no means actually instantly transfer. They all the time speak about refactoring, placing in new operate, integrating with different purposes they could have of their store or that they purchase as SaaS properties, we think about all that new improvement. And so, for us, our consulting groups are largely doing that new improvement for our shoppers. And in that course of, they have a tendency to make use of OpenShift from Crimson Hat.

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

Perhaps we don’t see it as a result of we sort of name that play in late ’21 as a result of we sort of noticed these issues coming and changing into extra vital. And we determined to spend money on them, each in know-how and in consulting. Patricia, with that being the final query, let me now make a few very fast feedback to wrap up the decision. 2022 was an vital 12 months for us. As Jim stated, it was the primary full 12 months of the brand new IBM. The outcomes we delivered reinforce our confidence in our technique and our mannequin. Whereas there’s all the time extra to do, we’re happy with our place as we enter 2023, and I look ahead to persevering with this dialogue as we transfer via the 12 months.

Patricia Murphy — Vice President, Investor Relations

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


[Operator Closing Remarks]


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