Wed. Feb 1st, 2023

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


Ready Remarks Questions and Solutions Name Members

Ready Remarks:


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

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

Patricia Murphy — Vice President, Investor Relations

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

To offer extra data to our traders, our presentation contains sure non-GAAP measures. For instance, all of our references to income development 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 Non-public Securities Litigation Reform Act of 1995.

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These statements contain components that might trigger our precise outcomes to vary materially. Further details about these components is included within the firm’s SEC filings. So, with that, I will 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-year outcomes show the execution of our hybrid cloud and AI technique. We delivered robust income development in our enterprise. The expansion was broad-based throughout our software program, consulting, and infrastructure segments, in addition to throughout geographies.

Our shoppers acknowledge that expertise continues to be a elementary supply of aggressive benefit. Over the past a number of quarters, it has change into clear that expertise is enjoying a big position 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 method. Trying 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 circulation. However I will acknowledge there may be extra to do. This 12 months, we’ll unlock extra productiveness, increase our strategic partnerships, and put extra funding in particular development markets. For 2023, we see income development in keeping with our mid-single-digit mannequin vary and about $10.5 billion of free money circulation.

This retains us on a path of sustainable development. I’ll now present some shade 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 right this moment.

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 Crimson 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. Shoppers realizing actual worth from working with IBM’s hybrid cloud platform method. For instance, we labored with the Canadian Imperial Financial institution of Commerce, CIBC, to undertake a hybrid cloud method. Utilizing Crimson Hat expertise, CIBC manages and abilities its infrastructure with larger pace and adaptability.

They’ll now develop functions in a non-public cloud and rapidly deploy them to a public cloud. They ship tons of of latest functions and decreased provisioning time by 95% and deployment time by 50%. We’re serving to Delta Airways leverage hybrid cloud to modernize choices, automate operations and combine safety. IBM Consulting deployed Crimson Hat on Amazon Net Providers and IBM Cloud Packs to offer a constant platform.

Delta now has extra levers that may 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 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 consumers 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 hundreds of thousands of shoppers with inquiries and appointments. By making use of AI and automation, we have now helped safety analysts to make use of the time to reply to threats from hours or days to minutes.

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

However by utilizing giant language fashions, corporations 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 giant language, our basis fashions for our shoppers, and have infused these capabilities throughout our AI portfolio. Our accomplice ecosystem performs a crucial position within the execution of our technique.

Within the fourth quarter, we made a sequence of latest IBM software program choices accessible as a service within the AWS market. Likewise, Crimson Hat continued the enlargement of its choices in hyperscaler marketplaces, making Ansible automation platform accessible on each Azure and AWS. Adobe and Salesforce are additionally leveraging open-source innovation based mostly on Crimson 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 12 months.

We have 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. Not too long ago launched Companions Plus, a brand new simplified program that will increase our attain and scale by new and present 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 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 12 months. On the identical time, we proceed to accumulate corporations to enhance our natural innovation. Within the fourth quarter, we acquired Octo, which improves our footprint within the U.S.

federal market. This caps the 12 months with eight acquisitions throughout software program and consulting. As sustainability turns into extra of a precedence, corporations want digital applied sciences to investigate knowledge, making a baseline and enhance the way in which they function. Our software program has helped IBM scale back its personal carbon footprint.

Throughout IBM’s world actual property presence, we have been capable of scale back carbon emissions by over 61% when in comparison with 2010. Utilizing IBM sustainability software program, we have now simplified and automatic our sustainability reporting processes and decreased reporting prices by 30%. Let me wrap by saying I am happy with the progress we have now made with our portfolio, our go-to-market, and our ecosystem. I am assured in our capability 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 may be 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 provides you with extra detailed data on our efficiency and expectations.

Jim Kavanaugh — Senior Vice President and Chief Monetary Officer

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

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 will focus my feedback on fixed forex. And I will remind you that we wrapped on the separation of Kyndryl initially of November.

The one-month contribution to our fourth-quarter income development was offset by the impression of our divested well being enterprise. Income development this quarter was once more broad-based. Software program income was up 8% and consulting up 9%. These are our development vectors and 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 robust transactional development in software program and {hardware} to shut the 12 months. On the identical time, our recurring income, which offers a stable base of income and revenue additionally grew, led by software program. I will remind you that on an annual foundation, about half of our income is recurring. Over the past 12 months, we have seen the outcomes of a extra centered 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 12 months, our hybrid cloud income was over $22 billion, up 17% from 2021. 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 12 months to 12 months, pushed by forex dynamics. Inside our base expense, the work we’re doing to digitally remodel our operations offers flexibility to proceed to spend money on innovation and in expertise.

Our working tax charge 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 circulation. We generated $5.2 billion within the quarter and $9.3 billion for the 12 months.

Our full-year free money circulation is up $2.8 billion from 2021. As we talked about all 12 months, we have now a couple of drivers of our free money circulation development: First, I will remind you, 2021’s money circulation outcomes included Kyndryl-related exercise together with the impression of spin costs and capex. Second, we had working capital enhancements pushed by efficiencies in our collections and mainframe cycle dynamics. Regardless of robust collections, the mixture of income efficiency above our mannequin and the timing of the transactions within the quarter led to higher-than-expected working capital on the finish of the 12 months.

This impacted our free money circulation efficiency versus expectations. Our year-to-year free money circulation development additionally features a modest tailwind from money tax funds and decrease funds for structural actions, partially offset by elevated capex funding for right this moment’s IBM. By way of money makes use of for the 12 months, we invested $2.3 billion to accumulate 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 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 12 months to 12 months, and our debt stability is down practically $1 billion.

Our stability sheet stays robust, and I say the identical for our retirement-related plans. At year-end, our worldwide tax-qualified plans are funded at 114%, with the U.S. at 125%. Each are up 12 months to 12 months.

You may recall, again in September, we took one other step to cut back the danger 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 members. This resulted in a big noncash cost in our GAAP ends in the third quarter, and we’ll see a profit in our nonoperating costs going ahead.

You possibly can see the good thing about this and different pension assumptions to the 2023 retirement-related prices in our supplemental charts. Turning to the segments. Software program income grew 8%, fueled by development in each hybrid platform and options and transaction processing. We concluded the 12 months with seasonally robust transactional efficiency, in addition to a stable and rising recurring income base in software program.

In hybrid platform and options, income was up 10%, with pervasive development throughout our enterprise areas: Crimson Hat, automation, knowledge, 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 cloud packs throughout automation, knowledge and 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%. Progress was led by enterprise automation, utility 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 knowledge. This efficiency displays demand in areas together with knowledge administration, knowledge cloth, and asset and provide chain administration.

Safety delivered 10% income development. We’re serving to shoppers detect, forestall, and reply to safety incidents, which led to energy throughout menace administration, knowledge safety, and identification. Throughout these companies, the annual recurring income or ARR for hybrid platform and options is $13.3 billion. And for all of software program, hybrid cloud income is now greater than $9.3 billion over the past 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 over the past couple of product cycles and robust renewal charges continued this quarter. Each are proof of the significance of this platform in a hybrid cloud surroundings. Transferring to software program revenue.

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

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

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

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

Our partnerships with key ISV companions like SAP, Salesforce, and Adobe allow IBM Consulting to rework crucial workloads at scale. In expertise consulting, the place we architect and implement shoppers cloud platforms and methods, income was up 10%. Progress was led by cloud utility improvement practices. Crimson 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 scale 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 12 months. The fourth quarter margin is up practically two factors 12 months to 12 months and over one level sequentially. We’re beginning to see the profit from pricing actions and productiveness and our acquisitions have change into extra accretive. Turning to Infrastructure phase.

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

This efficiency was fueled by energy in Energy following the extension of Energy 10 innovation all through the product line. Infrastructure help efficiency was flat, together with the impression from consumer adoption of latest {hardware} with the most recent z16 product cycle. Transferring to infrastructure revenue. Pretax margin was down lower than one level within the quarter, and for the total 12 months, our pre-tax margin was practically 15%.

Now, let me deliver 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 circulation era. Since then, we have been centered on our portfolio, our go-to-market mannequin, our ecosystem, and our capital allocation to execute that technique and create worth by focus. We now simply accomplished the primary 12 months as right this moment’s IBM.

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

We invested organically and inorganically and returned vital worth to shareholders by dividends. Now, there have been some exterior components 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 have now made in executing our technique. Our 2022 efficiency demonstrates that we now have the next development, higher-value firm with greater return on invested capital and a powerful and rising free money circulation. For 2023, we once more anticipate stable development in our two most vital measures of success: income and free money circulation. 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 development for the 12 months to be in keeping with our mid-single-digit mannequin. As we enter this 12 months, I feel it is prudent to anticipate the low finish of the mid-single-digit mannequin. And totally free money circulation, we might anticipate to generate about $10.5 billion in 2023, which is up over $1 billion 12 months to 12 months. 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 development in keeping with software program’s mid-single-digit mannequin. This income development generates working leverage, and we might anticipate software program pre-tax margin to increase by about two factors 12 months to 12 months. 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 help consulting income development on the excessive finish of its mannequin regardless of the robust evaluate. We anticipate to increase consulting pre-tax margin by a minimum of one level as we proceed to comprehend extra of the worth will increase and improved utilization. Infrastructure income is roughly flat over the midterm mannequin horizon, with efficiency in any 12 months reflecting product cycle dynamics. We’re getting into the 12 months 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 impression IBM’s general income development by over some extent. With these phase dynamics, we might anticipate IBM’s working pre-tax margin to increase by a few half some extent. That is in keeping with our mannequin and our tax charge must be within the mid- to excessive teenagers vary.

Let me touch upon a couple of objects inside our expectations. First, as I mentioned, forex was a big headwind in 2022, impacting income by $3.5 billion. With the motion of spot charges over the past 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 will remind you that we had over $650 million of hedging positive factors in 2022, which is not going to repeat in 2023, leading to an impression to our revenue and money on a year-to-year foundation.

Second, as you recognize, we have taken various vital portfolio actions over the past 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 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 frequently assessment the helpful lives of our property.

As a consequence of advances in expertise, we’re making an accounting change to increase the helpful lifetime of our server and networking tools efficient the primary of January. Primarily based on our year-end asset base, we anticipate this transformation to learn 2023 pre-tax revenue by over $200 million, primarily in our Infrastructure phase. Given it is a change to the depreciation, there is not any profit to money. Trying on the first quarter, our constant-currency income development must be pretty per the total 12 months.

Reported development will even embrace a few three-point forex headwind at present spot charges. With working leverage, we might anticipate working pre-tax margin to increase 50 to 100 foundation factors within the first quarter. And that is earlier than the cost I simply talked about for the remaining stranded prices. Given the timing of 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 have now made lots 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 might like to say a few objects. First, supplemental data for the quarter and the 12 months is supplied on the finish of the presentation. After which second, as all the time, I might 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 Daryanani — Evercore ISI — Analyst

Thanks rather a lot for taking my query. I suppose my query is across the free money circulation numbers. And maybe you could possibly spend a bit little bit of time on — you touched on type of the 22 levers a good bit and the way you bought there. However as you concentrate on calendar ’23 free money circulation 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’ll be able to stage set that as a result of I do suppose from if 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 nicely. Thanks.

Jim 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 circulation 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 robust free money circulation era engine. And we put in place a steerage for 2022 nicely in extra of our mannequin of $750 million 12 months to 12 months.

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 fees in capex. And we have been going to get a bit bit greater than half of that out of our base operations general. And I feel if you take a look at 2022, what occurred we bought impacted by two exterior components: primary, the unlucky humanitarian disaster with the battle in Russia and Ukraine, and we exited that enterprise, the precise 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 bought hit with that, however we’re capable of overcome a few of that with the basic underpinnings of our enterprise general and nonetheless delivered nearly $3 billion of free money circulation 12 months over 12 months.

By the way in which, Russian forex by themselves is over $600 million of revenue and money we needed to take up. So, now, to your query about 2023, we guided, as you heard within the ready remarks, a $10.5 billion that is up $1.2 billion 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 totally 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 circulation 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 is actually given the quantity dynamics of what occurred within the fourth quarter with a really robust and accelerated development profile as we went by fourth quarter, we completed extraordinarily robust on our transactional enterprise within the month of December. So, that now creates a possibility totally free money circulation era 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 12 months.

So, that type of performs out 2022 and 2023 now. How does that relate to a midterm mannequin? To begin with, 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 impression on revenue and money. However as you all know fairly nicely, that is not a one-time impression, 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 solely centered on how we execute this firm on a sustainable income development profile and producing that $10.5 billion of free money circulation. So, it permits us, with the precise 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

Sure. Thanks. Arvind, good to see the income information right here. I used to be questioning when you might share some ideas round what’s taking place in software program, particularly, you have had a very robust efficiency in transaction processing over the previous 12 months.

How are you interested by the trajectory of that? I do know traditionally, we have type of considered this as mid-single digit or greater decliner, and clearly, we’re monitoring very in another way right here. For those who might share some ideas across the trajectory of that in 2023 and past, that may be very useful. Thanks.

Arvind Krishna — Chairman and Chief Govt Officer

Yeah. Thanks, Wamsi, for the query. So, I will tackle your transaction processing query first after which all of software program proper after that. So, a few of you have got 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 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 capability to have some very modest pricing uplift, we might now take a look at that enterprise as being a slight improve versus a modest decliner. So, I feel in case you are taking a look at that one, Wamsi, low single-digit will increase for transaction processing is what we predict is acceptable for the quick to medium-term mannequin wanting ahead. Now, that does assist in general 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 per our mannequin of the mid-single digits based mostly on each the consumption, the utilization, in addition to what we have now seen by ’22 in individuals renewing that base of software program enterprise. Then I’ll acknowledge to you that ’22 was an awesome ELA 12 months, ’23 can be not so good as ’22.

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

Wamsi 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

Sure. Thanks. I used to be questioning when you might simply touch upon working revenue extra broadly. I feel your goal initially of the 12 months 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 circulation 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 have got a twin mandate, Arvind. One is to try to develop mid-single digits and the opposite is to ship very robust money circulation, which is impacted by margins.

The margin was not as robust this 12 months, and I am questioning when you can spotlight what was totally different out of your expectations. And what have been the challenges in forecasting that and the way traders ought to take into consideration that and free money circulation realization going ahead?

Arvind Krishna — Chairman and Chief Govt Officer

Yeah. Toni, thanks. So, you are utterly correct that these numbers are barely under our expectations from the start of the 12 months. I’ll ask Jim to remark and offer you much more shade on it.

However let me first remark in your assertion of we have now a double mandate of income development and free money circulation 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 more over time is what we’re centered on. And we have now to ship the free money circulation 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 bit. We weren’t anticipating the forex headwinds to be as extreme because it turned out to be.

That is actually impacted. And I will acknowledge an inflation as in wage inflation confirmed up and impacted our margins in consulting much more than we have been anticipating. Now a solution might have been to not rent individuals and to not give that however that may have resulted then in decrease capability on the finish of this 12 months, which might not have allowed us the boldness into the expansion, each in consulting and in software program that we at the moment are committing for 2023. So, as we stability these, it turns into a enterprise choice to say we’re going to preserve happening growing capability, which ends up in more healthy income and it’ll lead to bettering margins, however that flows by into 2023 versus giving all of it to us in 2022.

So, Toni, that is type of how we take into consideration balancing the investments within the enterprise versus a quarterly outcome. And I will ask Jim to remark a bit extra on a few of the specifics of what you have been asking.

Jim Kavanaugh — Senior Vice President and Chief Monetary Officer

Yeah. Simply to place some numbers round this, Toni, you are precisely proper. We entered the 12 months, we talked a few enterprise profile, greater income development firm, greater working margins, robust free money circulation 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 way in which, that was a few half some extent as a result of forex, bear in mind, as we have talked about many instances all through these calls, not solely the speed, breadth, and velocity and alter in magnitude that we’ve not seen in about two to 3 many years, however it impacts human capital-based consulting enterprise very in another 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 together with your income exterior of worldwide supply. However in a product-based enterprise, our prices just like the {industry} is predominantly U.S.

greenback supply, and that is why you have seen stress 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 guess 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 2022 that we then have been working in a extremely inflationary surroundings. After which it grew to become a charge and tempo dialogue on how fast are you able to get value margin and optimization and understand by your backlog. And I feel we have acknowledged that we have been fairly sluggish all year long. Now, with that mentioned, 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 steerage in 2023 on the excessive finish of our excessive single-digit mannequin in consulting on income coming off of a really robust 15% development in ’22 and guiding one other one point-plus in working margins going ahead.

Patricia 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 capable of hear you in convention. Please verify the mute function in your telephone.

Shannon Cross — Credit score Suisse — Analyst

Are you able to hear me?


Sure, we are able to hear you now. Chances are you’ll go forward.

Shannon Cross — Credit score Suisse — Analyst

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

And I suppose I am attempting 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 more of a — turns into increasingly more 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 at the moment are and the place you are going to take it. Thanks.

Arvind Krishna — Chairman and Chief Govt Officer

Thanks, Shannon. So, first, let me acknowledge AI has change into an enormous subject of dialog this 12 months. I used to be in Davos final week, and it in all probability 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 over the past decade, I feel there have been three moments you’ll be able to speak about, after which I will start to translate these right into a enterprise impression.

One, when IBM received Jeopardy with Watson, I feel it was an enormous second, and AI got here onto everybody’s street map. Second, when deep thoughts from Google or Alphabet began successful 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 giant language fashions because the underlying science. Universities do it, Google does it, IBM does it as does OpenAI.

To simply get to why it is so thrilling. For instance, for us, it permits us to do 13 language fashions after 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 may get an order of magnitude enchancment in value and pace 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 centered 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 embrace governments into it. Some examples, when you can automate the drive-through and order-taking for quick-serve eating places, that is an instance of what can occur. If we are able to get deflection charges of 40%, 50%, 60% at everybody’s name facilities, that is a large operational effectivity for all of our shoppers.

if we can assist retirees get their pensions by 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 anyplace from tons of to 1000’s 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 individuals 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 methods happening 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 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 probably stood out to you the place energy in signings is coming from modifications to contract length? Perhaps simply double-clicking on the consulting enterprise. Simply to assist us perceive what offers you confidence to be type of on the excessive finish of your midterm mannequin for 2023. Thanks.

Jim Kavanaugh — Senior Vice President and Chief Monetary Officer

Thanks, Eric, for the query. I will take this. After 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 ability functionality, increasing ecosystem, strategic partnerships, and acquisitions. However we noticed that pipeline getting into the quarter, we noticed a really stable and fairly disciplined gross sales closure charge as we transfer by the 12 months. Now, how did the 12 months finish? That positions us for 2023, and let me simply put some stats to actually deliver it residence. Primary, ecosystem velocity, we noticed proceed to extend all year long of our strategic partnerships.

I feel we mentioned within the ready remarks, strategic partnerships, one grew income 25% in 2022 and was about 40% of our consulting base of enterprise. That’s up about 50% 12 months over 12 months. We’ve noticed — seen intensive acceleration. And by the way in which, 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 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 have now great energy that is fueling our backlog, level primary. Level quantity two, Crimson Hat. We proceed to see acceleration of consulting being the tip of the spear that is actually driving the size and adoption of our hybrid cloud platform.

And oh, by the 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 Crimson Hat, great energy, and that, once more, fuels our backlog for 2023. And then you definitely take a look at full 12 months, we grew each giant transformational offers, and we grew small offers double digit, each side. So, it is pervasive throughout the board.

So, after 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 way in which, 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 — Analyst

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

I feel with earnings coming in from numerous enterprise tech gamers, to this point, we’re seeing a fairly big selection of indicators about how the demand surroundings is shaping up for 2023. Are you able to simply remark a bit on what you are seeing out of your giant shoppers, say, type 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 have been first actually happy that there wasn’t a lot of a distinction by geography. As I kind 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 almost all of our shoppers do consider that even when there are some, I will name, the minor or totally different headwinds in 2023, they will 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 individuals to rent. Consequently, we’re seeing them double down, and that’s the reason we have now centered 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.

Perhaps 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 consumer 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 points.

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

I agree that our shoppers might have a client enterprise, however we do not have that instantly. And so, I feel, consequently, we may be seeing a bit bit totally different subset of the financial system than those that might need a big direct publicity to a client 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 Monetary Corp. — Analyst

Thanks. So, you recognize, 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 development might mirror lots of these modifications that you’ve got been speaking about within the go-to-market technique and gross sales modifications. That mentioned, Arvind, are you able to discuss particularly or determine any product-specific modifications in software program that you simply suppose could also be driving that momentum and which 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.


Arvind Krishna — Chairman and Chief Govt Officer

Yeah. Thanks, David. Let me discuss a bit bit in regards to the product capabilities and as you mentioned, exterior Crimson Hat known as deal with automation, knowledge, AI, and cyber. If I take a look at these — let’s take automation.

I am actually happy with the progress we have now made round an space I will 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 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. And so they additionally wish to fear about how to ensure some go to all the time on.

And so, I feel our AIOps portfolio there actually benefits us, and I consider we’re in a singular 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 deal with knowledge cloth and permitting our shoppers to leverage the info 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 have now a singular functionality. And third, if I take a look at cyber, we focus rather a lot on menace administration. And if we take into consideration how we are able to leverage the inputs from all types of sources in nowadays and persons are actually nervous about all the threats coming, whether or not from nation-states or from simply unhealthy actors, then it permits them to leverage that portfolio higher.

Consequently, we’ll stay fairly centered on these areas. It’s best to anticipate each natural and inorganic funding. And David, I am unable to assist however say, we’re giving our shoppers the power to deploy these capabilities on a number of public clouds, in addition to on-premise. And I consider that does benefit them as a result of it offers them much more flexibility and freedom than they may have from another distributors.

Jim Kavanaugh — Senior Vice President and Chief Monetary Officer

Sure. I’d simply construct on that, Arvind. I imply, Software program ebook of enterprise right this moment, 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, if 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 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 % vary as we transfer ahead. So, David, I feel you additionally requested a query about clarification.

Free money circulation development, $10.5 billion about, up $1.2 billion 12 months to 12 months, above our mannequin of $750 million. That can be pushed based mostly on the basic 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 yet one more query.


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

Kyle McNealy — Jefferies — Analyst

Thanks very a lot for squeezing it in. And this one is macro-related as nicely, however it’s fairly fast. It looks like a few of the slowing macro’s implied in your 2023 steerage, however I do not suppose you talked particularly about whether or not you are seeing something particularly slowing. It sounded typically constructive for you guys, although 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 development 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 a few of the type of recurring and cross-selling capability expansions holding up? How a lot of both of these is driving your decrease finish of mid-single-digit development steerage for 2023? And type of break it down when you can. Thanks.

Arvind Krishna — Chairman and Chief Govt Officer

OK. Look, I feel that first — and I will tackle your level on new utility versus present fairly instantly. The purpose in regards to the decrease finish of the mid-single digit is basically from the truth that Infrastructure phase can 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 improvement. Now from our perspective, if anyone is doing an expanded Salesforce deployment, I name {that a} new utility. If anyone is doing a brand new utility 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 functions they may have of their store or that they purchase as SaaS properties, we take into account all that new improvement. And so, for us, our consulting groups are largely doing that new improvement for our shoppers. And in that course of, they have a tendency to make use of OpenShift from Crimson Hat. They have an inclination to make use of Crimson Hat Linux.

They have an inclination 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 deliver. So, we’re not actually seeing that divergence, I’ll inform you straightforwardly, however there may be probably a spotlight that in that new utility, is it serving to automate issues extra. Is it serving to make issues, I will name it, straight by versus with lots of handbook intervention? That’s in all probability an even bigger focus.

Perhaps we do not see it as a result of we type of name that play in late ’21 as a result of we type of noticed these issues coming and turning 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 12 months for us.

As Jim mentioned, 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 may be all the time extra to do, we’re happy with our place as we enter 2023, and I sit up for persevering with this dialogue as we transfer by 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 signoff]

Period: 0 minutes

Name members:

Patricia Murphy — Vice President, Investor Relations

Arvind Krishna — Chairman and Chief Govt Officer

Jim 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 — Analyst

David Grossman — Stifel Monetary Corp. — Analyst

Kyle McNealy — Jefferies — Analyst

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