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

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Worldwide Enterprise Machines (IBM 0.40%)
This fall 2022 Earnings Name
Jan 25, 2023, 5:00 p.m. ET


  • Ready Remarks
  • Questions and Solutions
  • Name Contributors

Ready Remarks:


Welcome, and thanks for standing by. At the moment, all contributors are in a listen-only mode. Immediately’s convention is being recorded. When 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 MurphyVice President, Investor Relations

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

To supply further data to our buyers, our presentation contains sure non-GAAP measures. For instance, all of our references to income progress are at fixed forex. We’ve supplied 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-about forward-looking beneath the Personal Securities Litigation Reform Act of 1995.

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

Arvind KrishnaChairman and Chief Government Officer

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

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

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

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

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

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

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

Our consultants and others leverage their intensive technical and enterprise experience to speed up shoppers’ digital transformation journeys. Purchasers realizing actual worth from working with IBM’s hybrid cloud platform method. For instance, we labored with the Canadian Imperial Financial institution of Commerce, CIBC, to undertake a hybrid cloud method. Utilizing Purple Hat expertise, CIBC manages and abilities its infrastructure with higher velocity and suppleness.

They will now develop functions in a personal cloud and rapidly deploy them to a public cloud. They ship lots of of latest functions and lowered provisioning time by 95% and deployment time by 50%. We’re serving to Delta Airways leverage hybrid cloud to modernize choices, automate operations and combine safety. IBM Consulting deployed Purple Hat on Amazon Internet Providers and IBM Cloud Packs to supply a constant platform.

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

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

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

However by utilizing massive language fashions, corporations can now create a number of fashions utilizing the identical information 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, our basis fashions for our shoppers, and have infused these capabilities throughout our AI portfolio. Our associate ecosystem performs a important position within the execution of our technique.

Within the fourth quarter, we made a sequence of latest IBM software program choices obtainable as a service within the AWS market. Likewise, Purple Hat continued the growth 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 Purple Hat applied sciences of their choices. Enterprise with our strategic companions continues to develop with SAP, Microsoft, and AWS, throughout $1 billion in income for the yr.

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

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

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

Throughout IBM’s international actual property presence, we have been capable of cut back carbon emissions by over 61% when in comparison with 2010. Utilizing IBM sustainability software program, we now have simplified and automatic our sustainability reporting processes and lowered reporting prices by 30%. Let me wrap by saying I am happy with the progress we now have made with our portfolio, our go-to-market, and our ecosystem. I am assured in our skill 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 offers us a strong basis to construct upon on this yr. Whereas there may be extra to be completed, we enter the brand new yr as a extra succesful and nimble firm, well-equipped to satisfy our shoppers’ wants. I’ll now flip it over to Jim who provides you with extra detailed data on our efficiency and expectations.

Jim KavanaughSenior Vice President and Chief Monetary Officer

Thanks, Arvind. I am going to 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 movement.

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 progress. As at all times, I am going to focus my feedback on fixed forex. And I am going to remind you that we wrapped on the separation of Kyndryl originally of November.

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

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

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

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

This displays a powerful portfolio combine and bettering software program and consulting margins. These identical dynamics drove a 60-basis-point improve in working gross margin. Our expense was down yr to yr, 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 price was 14% which is flat versus final yr. And our working earnings per share of $3.60 was up over 7%. Turning to free money movement. We generated $5.2 billion within the quarter and $9.3 billion for the yr.

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

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

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

You may recall, again in September, we took one other step to cut 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 major noncash cost in our GAAP ends in the third quarter, and we’ll see a profit in our nonoperating prices going ahead.

You’ll be able to 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 progress in each hybrid platform and options and transaction processing. We concluded the yr with seasonally robust transactional efficiency, in addition to a strong and rising recurring income base in software program.

In hybrid platform and options, income was up 10%, with pervasive progress throughout our enterprise areas: Purple Hat, automation, information, and AI, and safety. Our platform-based method 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 modernize and optimize our software program capabilities, together with by means of cloud packs throughout automation, information and AI, and safety for that platform. Purple Hat income grew 15% within the quarter, led by power 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 functions. Knowledge and AI income grew 8% with enterprise wants to arrange, retailer, and handle their information. This efficiency displays demand in areas together with information administration, information material, and asset and provide chain administration.

Safety delivered 10% income progress. We’re serving to shoppers detect, stop, and reply to safety incidents, which led to power throughout risk administration, information safety, and id. Throughout these companies, the annual recurring income or ARR for hybrid platform and options is $13.3 billion. And for all of software program, hybrid cloud income is now greater than $9.3 billion during the last yr, up 16%.

In transaction processing, income was up 3%. Demand for this mission-critical software program has adopted will increase in zSystems put in base capability 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 two factors this quarter, contributing to a full-year margin of practically 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 progress was broad-based throughout all enterprise traces and geographies.

And I am going to remind you that that is on prime of the 16% progress consulting delivered within the fourth quarter of 2021. Robust demand for our choices led to signings progress of 17%. With this, fourth quarter had the most effective quarterly book-to-bill of the yr, and we sequentially improved our trailing 12-month book-to-bill ratio to 1.1. Purchasers are partnering with IBM Consulting as they resolve what functions to modernize and the right way to migrate these functions throughout hybrid, multi-cloud environments.

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

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

Our partnerships with key ISV companions like SAP, Salesforce, and Adobe allow IBM Consulting to remodel important workloads at scale. In expertise consulting, the place we architect and implement shoppers cloud platforms and methods, income was up 10%. Development was led by cloud software growth practices. Purple Hat engagements, together with our strategic hyperscaler partnerships, contributed to the expansion.

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

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

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

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

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

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

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

Placing all of it collectively, we’re happy with the basics of our enterprise and the progress we now have made in executing our technique. Our 2022 efficiency demonstrates that we now have a better progress, higher-value firm with increased return on invested capital and a powerful and rising free money movement. For 2023, we once more anticipate strong progress in our two most vital measures of success: income and free money movement. Arvind talked in regards to the vital position expertise performs on this surroundings and the way our options are carefully aligned to the wants of our shoppers.

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

In software program, with continued momentum in our recurring income stream in each hybrid platform and options and transaction processing, we anticipate income progress in step with software program’s mid-single-digit mannequin. This income progress generates working leverage, and we might anticipate software program pre-tax margin to broaden by about two factors yr to yr. Consulting’s mannequin is to ship excessive single-digit income. We’re coming off a powerful yr with income progress of 15% as we assist shoppers with their digital transformations.

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

Because of this, we anticipate 2023 infrastructure income under its mannequin and pre-tax margin within the low teenagers. For perspective, infrastructure ought to affect IBM’s total income progress by over some extent. With these phase dynamics, we’d anticipate IBM’s working pre-tax margin to broaden by a few half some extent. That is in step with our mannequin and our tax price must be within the mid- to excessive teenagers vary.

Let me touch upon just a few objects inside our expectations. First, as I stated, forex was a major 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 am going to remind you that we had over $650 million of hedging positive factors in 2022, which won’t repeat in 2023, leading to an affect to our revenue and money on a year-to-year foundation.

Second, as , we have taken a lot of important portfolio actions during the last couple of years, which has resulted in some stranded value in our enterprise. We anticipate to deal with these remaining stranded prices early within the yr 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 yr. After which third, we repeatedly assessment the helpful lives of our belongings.

Attributable to advances in expertise, we’re making an accounting change to increase the helpful lifetime of our server and networking gear efficient the primary of January. Based mostly on our year-end asset base, we anticipate this modification to profit 2023 pre-tax revenue by over $200 million, primarily in our Infrastructure phase. Given it is a change to the depreciation, there is no profit to money. Trying on the first quarter, our constant-currency income progress must be pretty in step with the complete yr.

Reported progress can even embody a few three-point forex headwind at present spot charges. With working leverage, we might anticipate working pre-tax margin to broaden 50 to 100 foundation factors within the first quarter. And that is earlier than the cost I simply talked about for the remaining stranded prices. Given the timing of forex and stranded value dynamics, we might anticipate 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 now have made a whole lot of progress this previous yr. Whereas there’s at all times extra work to do, we’re assured within the fundamentals of our enterprise, and the way we’re positioned as we enter the brand new yr. Patricia, let’s go to the Q&A.

Patricia MurphyVice President, Investor Relations

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

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

Questions & Solutions:


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

Amit DaryananiEvercore ISI — Analyst

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

What are the places and takes? What are the bridge that will get you there? After which perhaps associated to that, as I take into consideration what you probably did in ’22 and ’23, it does indicate 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 once you supplied the $35 billion quantity, a good bit has modified. So, perhaps a bridge for ’23 and simply an replace on how you concentrate on the $35 billion quantity over three years as properly. Thanks.

Jim KavanaughSenior Vice President and Chief Monetary Officer

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

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

First, as we have been very clear, we have been going to get a minimum of about half of that out of the Kyndryl-related spin dynamics. That is the costs in capex. And we have been going to get a bit bit greater than half of that out of our base operations total. And I feel once you have a look at 2022, what occurred we acquired impacted by two exterior components: 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 feel final time I appeared, the speed, the breadth, the magnitude of the change is essentially the most we have seen in a number of many years. We acquired hit with that, however we’re capable of overcome a few of that with the basic underpinnings of our enterprise total and nonetheless delivered nearly $3 billion of free money movement yr over yr.

By the way in which, 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 is up $1.2 billion yr over yr. And once more, above our $750 million yr to yr. The underpinnings of that, although, are going to be very totally different in ’23.

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

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

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

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

Patricia MurphyVice President, Investor Relations

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


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

Wamsi MohanFinancial institution of America Merrill Lynch — Analyst

Sure. Thanks. Arvind, good to see the income information right here. I used to be questioning should you might share some ideas round what’s taking place in software program, particularly, you have had a extremely robust efficiency in transaction processing over the previous yr.

How are you desirous about the trajectory of that? I do know traditionally, we have form of considered this as mid-single digit or increased decliner, and clearly, we’re monitoring very in a different way right here. If you happen to might share some ideas across the trajectory of that in 2023 and past, that may be very useful. Thanks.

Arvind KrishnaChairman and Chief Government Officer

Yeah. Thanks, Wamsi, for the query. So, I am going to deal with your transaction processing query first after which all of software program proper after that. So, a few of you’ve gotten heard me speak about that transaction processing can be a mid-single-digit decliner up to now.

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

So, first, let us take a look at software program and decompose it. Software program, as Jim talked about in his ready remarks, is sort of 80% recurring income. We see that recurring income growing in step with our mannequin of the mid-single digits primarily based on each the consumption, the utilization, in addition to what we now have seen by means of ’22 in folks renewing that base of software program enterprise. Then I’ll acknowledge to you that ’22 was an awesome ELA yr, ’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 affect on the general progress price. As you set all that collectively, we see the mid-single digits as being applicable for the software program enterprise.

Wamsi MohanFinancial institution of America Merrill Lynch — Analyst


Patricia MurphyVice President, Investor Relations

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


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

Toni SacconaghiAllianceBernstein — Analyst

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

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

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

Arvind KrishnaChairman and Chief Government Officer

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

However let me first remark in your assertion of we now have a double mandate of income progress and free money movement progress, however I wish to even be clear, income progress has — which manifests itself in shopper satisfaction, increased 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 targeted on. And we now have to ship the free money movement progress. 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 bit. We weren’t anticipating the forex headwinds to be as extreme because it turned out to be.

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

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

Jim KavanaughSenior Vice President and Chief Monetary Officer

Yeah. Simply to place some numbers round this, Toni, you are precisely proper. We entered the yr, we talked a few enterprise profile, increased income progress firm, increased working margins, robust free money movement yield. And we had guided at mid-single-digit income progress, 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 way in which, that was a few half some extent as a result of forex, keep in mind, as we have talked about many occasions all through these calls, not solely the speed, breadth, and velocity and alter in magnitude that we have not seen in about two to 3 many years, nevertheless it impacts human capital-based consulting enterprise very in a different way 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 mainly matched along with your income exterior of world supply. However in a product-based enterprise, our prices just like the {industry} is predominantly U.S.

greenback supply, and that is why you have seen strain on the gross revenue margin line and the pre-tax revenue margin line round our expertise base of enterprise. Now, underlying that, although, I feel you are 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 is been a rate-and-pace dialogue. You dial again 15, 18 months in the past, we known 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 ability functionality ecosystems, and we opened up the aperture to construct prolonged capabilities inorganically.

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

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

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

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

Patricia MurphyVice President, Investor Relations

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


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

Shannon CrossCredit score Suisse — Analyst

Are you able to hear me?


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

Shannon CrossCredit score Suisse — Analyst

OK. Attention-grabbing. Sure. Arvind, are you able to speak a bit about AI and the way it runs by means of your small business? There’s clearly a lot dialogue proper now about open AI and Microsoft making investments.

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

Arvind KrishnaChairman and Chief Government Officer

Thanks, Shannon. So, first, let me acknowledge AI has turn into an enormous matter of dialog this yr. I used to be in Davos final week, and it most likely got here up at nearly each single dialogue round expertise, what’s taking place with AI, in addition to what’s taking place with OpenAI. If I give it some thought during the last decade, I feel there have been three moments you possibly can speak about, after which I am going to start to translate these right into a enterprise affect.

One, when IBM received Jeopardy with Watson, I feel it was an enormous second, and AI got here onto everybody’s highway map. Second, when deep thoughts from Google or Alphabet began profitable competitions round, for instance, GO, and that grew to become 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 known as massive language fashions because the underlying science. Universities do it, Google does it, IBM does it as does OpenAI.

To only get to why it is so thrilling. For instance, for us, it permits us to do 13 language fashions once we are taking a look at understanding totally 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 could be very a lot targeted on that $16 trillion of productiveness that I’ve talked about that we’ll recover from the last decade. The overwhelming majority of that comes from enterprise automation and once I say enterprise, I embody governments into it. Some examples, should you can automate the drive-through and order-taking for quick-serve eating places, that is an instance of what can occur. If we are able to get deflection charges of 40%, 50%, 60% at everybody’s name facilities, that is a large operational effectivity for all of our shoppers.

if we may help retirees get their pensions by means of 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 way in which, all my three examples are actual shoppers the place we’re leading to wherever from lots of to hundreds of individuals, effectivity for every of those shoppers. So, that is how we get it. If I look inside IBM, how we do promotions, how we do folks motion, how we start to enhance our code to money, how we enhance our customer support and folks ask sophisticated questions round triage of IT techniques taking place are all very actual examples the place we’re bettering shopper service and saving cash all on the identical time.

Patricia MurphyVice President, Investor Relations

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


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

Erik WoodringMorgan Stanley — Analyst

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

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

Jim KavanaughSenior Vice President and Chief Monetary Officer

Thanks, Eric, for the query. I am going to take this. After we entered the fourth quarter, we had a fairly strong pipeline. And we talked about reaffirmed mid-teens progress for consulting for the yr, which as , is properly above our mannequin.

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

I feel 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% yr over yr. We’ve noticed — seen intensive acceleration. And by the way in which, within the fourth quarter, our signings progress which delivered a 1.3 book-to-bill, our hyperscaler partnerships with Azure, and what AWS, our signings have been 2x.

And our ISV portfolio with the likes of SAP, Salesforce, Adobe, we have been up over 50% in signings. So, our ebook of enterprise and the partnerships we now have great power that is fueling our backlog, level primary. Level quantity two, Purple Hat. We proceed to see acceleration of consulting being the tip of the spear that is actually driving the dimensions and adoption of our hybrid cloud platform.

And oh, by the way in which, can be dragging IBM expertise and software program. Since inception, a bit over three years we signed $7.4 billion of enterprise in Purple Hat, great power, and that, once more, fuels our backlog for 2023. And then you definately have a look at full yr, we grew each massive transformational offers, and we grew small offers double digit, either side. So, it is pervasive throughout the board.

So, once we have a look at our backlog, we have a look at all of our indicators of our enterprise on the belief 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 way in which, to Toni’s query, at working margins being accretive.

Patricia MurphyVice President, Investor Relations

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


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

Lisa EllisMoffettNathanson — Analyst

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

I feel with earnings coming in from varied enterprise tech gamers, thus far, we’re seeing a fairly wide selection of alerts about how the demand surroundings is shaping up for 2023. Are you able to simply remark a bit on what you are seeing out of your massive shoppers, say, form of relative to this previous yr? Thanks.

Arvind KrishnaChairman and Chief Government Officer

Yeah. Thanks, Lisa, for the query. Look, if I take into consideration our total shopper base, we have 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 U.Ok., North America have been actually fairly robust in demand throughout.

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

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

And what we do with Purple Hat performs into that. So, I form of see, Lisa, that each one of our shoppers play into that. Now you have talked about a large spectrum from the folks you are seeing not too long ago. I feel the rationale that we’re remaining on this optimistic state of mind, we now have no shopper enterprise.

I agree that our shoppers could have a shopper enterprise, however we do not have that straight. And so, I feel, consequently, we could be seeing a bit bit totally different subset of the financial system than those that may need a big direct publicity to a shopper enterprise.

Patricia MurphyVice President, Investor Relations

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


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

David GrossmanStifel Monetary Corp. — Analyst

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


Arvind KrishnaChairman and Chief Government Officer

Yeah. Thanks, David. Let me speak a bit bit in regards to the product capabilities and as you stated, exterior Purple Hat known as give attention to automation, information, AI, and cyber. If I have a look at these — let’s take automation.

I am actually happy with the progress we now have made round an space I am going to name AIOps. But when you concentrate on, we made a few small acquisitions, Instana and Turbonomic, we constructed our personal AIOps portfolio, and we’re seeing great pickup from that as our shoppers wish to take out labor complexity but additionally wish to optimize their total IT infrastructure, {hardware}, and software program. Additionally 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 verify some go to at all times on.

And so, I feel our AIOps portfolio there actually benefits us, and I imagine 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 personal clouds in that area. If I take into consideration information and AI, our give attention to information material and permitting our shoppers to leverage the info wherever it’s, not at all times transferring it however permitting them to catalog it, leveraging AI deep inside our merchandise is one other instance of the place we now have a novel functionality. And third, if I have a look at cyber, we focus so much on risk administration. And if we take into consideration how we are able to leverage the inputs from all types of sources in today and persons are actually anxious 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’ll stay fairly targeted on these areas. It is best to anticipate each natural and inorganic funding. And David, I am unable to 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 imagine that does benefit them as a result of it provides them much more flexibility and freedom than they may have from another distributors.

Jim KavanaughSenior Vice President and Chief Monetary Officer

Sure. I’d simply construct on that, Arvind. I imply, Software program ebook of enterprise as we speak, it is an integral a part of our hybrid cloud platform thesis. It’s the basis.

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

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

Patricia MurphyVice President, Investor Relations

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


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

Kyle McNealyJefferies — Analyst

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

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

Arvind KrishnaChairman and Chief Government Officer

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

Now, for us, I do not actually see that. I see that our shoppers do wish to do new growth. Now from our perspective, if someone is doing an expanded Salesforce deployment, I name {that a} new software. If someone is doing a brand new software on Azure or if they’re transferring, properly, they by no means actually straight transfer.

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

They have a tendency to make use of our AI automation. Our AI automation then surrounds all these issues to make them rather more resilient, rather more strong, rather more safe, and people are the capabilities we convey. So, we aren’t actually seeing that divergence, I’ll inform you straightforwardly, however there may be doubtless a spotlight that in that new software, is it serving to automate issues extra. Is it serving to make issues, I am going to name it, straight by means of versus with a whole lot of handbook intervention? That’s most likely a much bigger focus.

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

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

Patricia MurphyVice President, Investor Relations

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


[Operator signoff]

Period: 0 minutes

Name contributors:

Patricia MurphyVice President, Investor Relations

Arvind KrishnaChairman and Chief Government Officer

Jim KavanaughSenior Vice President and Chief Monetary Officer

Amit DaryananiEvercore ISI — Analyst

Wamsi MohanFinancial institution of America Merrill Lynch — Analyst

Toni SacconaghiAllianceBernstein — Analyst

Shannon CrossCredit score Suisse — Analyst

Erik WoodringMorgan Stanley — Analyst

Lisa EllisMoffettNathanson — Analyst

David GrossmanStifel Monetary Corp. — Analyst

Kyle McNealyJefferies — Analyst

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