Welcome and thank you for standing by at this time all participants are in a listen only mode today's conference is being recorded if you have any objections you may disconnect at this time now I will turn the meeting over to Olympia McNerney IBM's Global head of investor relations Olympia you may begin thank you I'd like to welcome you to IBM's fourth quarter 2023 earnings Presentation I'm Olympia McNerney and I'm here today with Arvin Krishna IBM's chairman and chief executive officer and Jim Kavanaugh IBM's senior vice president and Chief Financial Officer we'll post today's prepared remarks
on the IBM investor website within a couple of hours and a replay will be available by this time tomorrow to provide additional information to our investors our presentation includes certain non-et measures for example all of our References to revenue and signings growth are at constant currency we provided reconciliation charts for these and other non-gaap Financial measures at the end of the presentation which is posted to our investor website finally some comments made in this presentation may be considered forward-looking under the private Securities litigation Reform Act of 1995 these statements involve factors that could cause our
actual results to Differ materially additional information about these factors is included in the company's SEC filings so with that I'll turn the call over to arbent thank you for joining us we are a solid close to 2023 with growth across our businesses and strong cash generation our fourth quarter and full year results demonstrate the strength of our portfolio and sustainability of our Revenue growth we are pleased with the progress We made in 2023 delivering Revenue growth of 3% and over 11 billion doar of free cash flow 2third of the way through our midterm model I
am proud of our achievements since 2021 we delivered average revenue growth for IBM and for each segment at or above our model the overall Trends we are seeing reinforce our views of the future we are confident in achieving our midterm Revenue model and the strength of our Diversified business model allows us to make Progress each quarter we entered the year intent on enhancing our software portfolio and strengthening our consulting position we have done both mid last year we launched Watson X our Flagship Ai and data platform and we are excited by the traction we are
seeing Consulting has delivered durable Revenue growth through the year despite an uneven macro environment our expanding ecosystem skills and Technical expertise Global Reach and co-creation approach not only set a support but also Alo contributed to our Consulting performance outpacing that of our competitors this year also underscored the enduring nature and relevance of our Z systems platform before getting into the execution of our strategy I'll make a few comments about what we see in the current environment I expect many macro Trends To be similar to 2023 technology demand will continue to be strong and serve as
a major driving force behind global Economic and Business growth it allows businesses to scale offer better Services Drive efficiencies and seese New Market opportunities every client I speak with is asking about how to boost productivity with AI and how to manage their technology stack much of which is Deployed across a hybrid environment public private and on premises these Trends continue to fuel demand for both hybrid cloud and artificial intelligence I will now provide some color on the progress we are making in the execution of our strategy starting with AI our approach to AI for business
is resonating earlier in 23 we introduced whatson X IBM's core platform that Enables clients to train tune validate and deploy AI models we believe AI will be multimodal with our client leveraging a combination of models ibms open source their own proprietary models and those of other companies flexibility of deployment is key simply put we meet clients where they are and allow clients to deploy AI models across multiple environments in the fourth quarter we released Watson x.g governance to help Clients and partners govern and instill trust in generative AI this toolkit helps organizations manage and monitor
their Ai and prepare for compliance with future AI related regulation IBM was recently named a leader in generative AI for governance platforms by IDC as I have mentioned before IBM was one of the first companies to announce the indemnification of all our models additionally IB and and meta Announced in December the formation of the AI Alliance a group of 70 industry and academic leaders joining together to advance open safe and responsible AI we continue to believe our Consulting business will be an early beneficiary of AI we are the only provider today that offers both a
technology stack with our Watson X platform and consulting services for deploying and managing generative AI the early work for clients around Data architecture security and governance is critical and hard and we think Consulting expertise is going to be crucial here just as we quickly Ram to meaningful practice around Red Hat to address the hybrid Cloud opportunity we are on a similar trajectory with generative AI Consulting is a Cod driver of our value proposition for clients last quarter I shared with you that our book of business in the third quarter specifically related to Generative AI Watson
X was in the low hundreds of millions since then demand continues to increase and our book of business in the fourth quarter is roughly double that third quarter amount we continue to have thousands of Hands-On client interactions including an acceleration in Pilots that were completed during the quarter software transactional revenue and SAS ACV was approximately onethird of our book of business related to Generative AI in the fourth quarter and 2/3 was Consulting signings there was a balance of both large and small transactions across both segments Enterprise use cases addressing code modernization customer service and digital
labor continue to offer meaningful near-term benefits to clients we've been collaborating with numerous clients using what's the next code assistant for anible this includes a successful pilot With city where initial results point to substantial develop of productivity and code quality improvements that have led to plans for a rapid expansion focused on scaling for Enterprise wide outcomes this is just one of many examples in other Industries we have done work with clients such as NatWest locked and Binger ingleheim we working on an interesting use case with the sevila football club using what's the next to find
the right Players to sign by describing attributes across a database of more than 200,000 scouting reports as clients build out their AI strategies and focus in driving Roi and productivity the importance of optimizing it spend and consumption is magnified APO a virtual Command Center for managing technology Investments comes up in nearly all of my client discussions the value proposition is clearly Resonating looking Beyond AI we had a number of important client wins in the fourth quarter for example we're helping NATO strengthen their cyber security posture and build out a customized solution to have greater visibility
into cyber threats and respond to them more quickly we are working with Riad air to help them Drive their digital and Technology strategy and establish their hybrid Cloud integration platform we also saw meaningful Consulting renewals Which combin combined with new winds highlights the focus and unique strengths of our capabilities our strategic Partnerships with companies such as sap AWS Microsoft Salesforce and Adobe continue to expand and Thrive for instance we working together with Adobe to embed Watson X into their platform we also continue to deepen our partnership with sap through further collaboration across whatson X and
quantum We also have several new Watson X isv Partners what we see is clear many isvs are eager to work with us as a trusted provider that understands Enterprise needs we continue to invest and bring new Innovations to the market in other areas as well in the quarter Red Hat enhanced its anible automation platform introducing new offerings like anable light speed and event driven anible we announced the availability of red hat device Edge to manage your workloads and Deliver automation at the edge in Quantum Computing we introduced Heron the most advanced Quantum processor and the
system to IM modular quantum computer focusing our portfolio remains a key priority we completed nine Acquisitions this year including aptio and we recently announced the acquisition of stream sets and web methods from software AG which we expect to close mid year with respect to devises we announced the sale of our Weather assets which we expect to close in the first quarter we also announced the Enterprise AI Venture fund a $500 million fund with the goal of partnering with the startup Community to tap into the latest AI Innovations in the market and help them scale in
summary I believe that the changes we have made to our business over the last couple of years position us for the evolving technology landscape as I reflect on our Performance since we presented our midterm model in October of 2021 I am pleased with the progress we have made internally and with our clients we have delivered average revenue growth for IBM in line with our midterm model and this is true for all our segments software has delivered average growth at the high end of the mid singled digigit model Consulting delivered average growth in line with the
high single digit model and Infrastructure is well ahead of expectation this performance gives me confidence as we move into the new year for 2024 we expect performance in line with our midterm model with myid single-digit Revenue growth and about $1 billion of free cash flow this keeps us firmly on a path of sustainable growth Jim will now take you through the details of the quarter and our expectations for 2024 Jim over to You thanks Arvin in the fourth quarter we delivered $17.4 billion in Revenue $4.2 billion of operating pre-tax income and operating earnings per share
of $387 and we generated 6.1 billion of free cash flow this wrapped up another solid year where we continue to deliver durable growth in our reposition business aligned with client priorities of digital transformation and driving productivity taking a step back let me touch on a full year before I go into Additional details of the quarter our revenue for the year was nearly $62 billion up 3% and in line with our expect 90 days ago we generated $10.3 billion of operating pre-tax income and operating earnings per share of across hybrid platform and solutions and transaction processing
Consulting Revenue was up over 6% with solid growth every quarter and broad-based growth across all three Lines of business highlighting the durability of our results and differentiated client offerings infrastructure was down 4% reflecting product cycle Dynamics our Revenue growth and productivity initiatives led to to margin expansion and strong free cash flow generation for the full year we expanded operating gross profit margin by 130 basis points with every segment growing Margin across every quarter our operating pre-tax margin expanded by 40 basis points in line with our expectations and driven by strong productivity gains and operating leverage
and this includes 110 basis point headwind from currency Dynamics now turning to a deeper dive on the quarter our Revenue was up over 3% software Revenue was up 2% our fourth quarter performance reflects continued growth in our recurring revenue and a Wrap on last year's seasonally strong transactional performance Consulting had another solid quarter with 55% Revenue growth which is a qu quential Improvement in the growth rate we had good signings performance and a trailing 12-month bookto Bill ratio over 1.15 this continued momentum and Consulting is reflective of how we work with clients the investment we
are making in skills and talent velocity in Our strategic Partnerships and our integrated value proposition we had great infrastructure performance this quarter Revenue was up 2% with growth in both Z systems and distributed infrastructure this performance is particularly notable given it's the seventh quarter of the Z16 cycle in on our seasonally largest quarter again highlighting The Innovation we are bringing to this Mission critical Platform looking at our profit metrics we expanded operating gross margin by 140 basis points and operating pre-tax margin by 110 basis points inclusive of 150 basis point currency headwind the pre-tax margin
currency impacted operating pre-tax profit growth in a quarter by over $200 million margin expansion was driven by our operating leverage and ongoing productivity initiatives which allowed for continued Investments to drive Innovation in our portfolio you can see this in our higher R&D expense our operating tax rate was 14% which is flat versus last year and our operating earnings per share of $387 was up 8% we remain laser focused on our productivity initiatives as we digitally transform our business processes and scale AI within IBM this includes simplifying our application and infrastr structure Environments streamlining our supply
chain aligning our teams by workflow reducing our real estate footprint and enabling a higher value added Workforce through Automation and Aid driven efficiencies against a target of $2 billion in annual run rate savings by the end of 2024 which I mentioned back in April of last year we have already achieved over $1.5 billion dollar our productivity initiatives have Allowed us to increase our investments in Innovation Technical and Industry skills and go to market capabilities including our ecosystem and we have accomplished this while simultaneously growing our profit margin and free cash flow which in turn has
increased our financial flexibility this remains our Playbook going forward and given our success to date we now believe we can achieve at least $3 billion in annual run rate Savings by the end of 2024 overall the combination of our revenue and margin performance resulted in 9% growth in our operating pre-ex profit for the quarter this contributed to our free cash flow performance for the year we generated 11.2 billion of free cash flow up $1.9 billion year-over-year the largest driver of this growth comes from $900 million of adjusted ibida for better transparency we have included a
View of our adjusted iida performance in our supplemental slides our free cash flow growth also reflects benefits of about $400 million from working capital efficiencies which is consistent with what we've been suggesting throughout the year capex was also down about $400 million reflecting actions to optimize our real estate portfolio these actions reduced our net cap X although had limited benefit to Our profit performance in terms of cash uses for the year we invested over5 billion to acquire nine companies and we returned just over $6 billion to shareholders in the form of dividends looking at the
balance sheet we ended the year with a strong liquidity position with cash of$ 13.5 billion which is up $4.6 Billion year-over-year total debt is up $5.6 Billion over the same period and our debt balance ended The year at $ 56.5 billion including approximately 12 billion of debt associated with our financing business our retirement related plans remain in a strong financial position at year end our worldwide tax qualified plans are funded at 111% with the us at 123% turning to our segments software grew 2% with growth across both hybrid platform and solutions and transaction processing this
quarter's performance Again reflects growth in our high value recurring Revenue base which is up mid single digits I'll remind you this comprises about 80% of our annual software Revenue transaction processing with its strong base of recurring Revenue delivered Revenue growth of 4% clients continue to Value this portfolio of mission critical software supporting growing workloads on our Hardware platforms like Z Systems this together with price increases contributed to growth in both recurring and transactional software Revenue in transaction processing for the year hybrid platform and solutions Revenue was up 1% within this performance Red Hat Revenue was
up 7% automation was flat data in AI was up 1% and security declined looking across hybrid platform and solutions the strength of our Recurring base of business is evident in our ARR now $4.4 billion and up over 7% since last year we also faced a tough compare here in the fourth quarter wrapping on seasonally strong transactional performance including strength in elas as we discussed at the start of the year what played out in the fourth quarter reflects just these Dynamics and while transactional Revenue overall was significant it was down year toe a little more than
Expected in Red Hat Revenue performance was similar to last quarter as we continue to see dampen growth in consumption-based services our future growth indicators are encouraging Red Hat annual bookings were up 177% including double digigit bookings growth across all three key offerings re open shift and anible renew tools have been strong this quarter with our nrr up Well over 100% And up six points over last year and open shift continued its strong performance with annual recurring revenue of $1.2 billion Beyond open shift our platform-based approach is resonating with clients we're seeing growing interest in our
generative AI platform Watson X as Arvin touched on earlier and we been investing to both extend and expand our hybrid cloud and AI capabilities and software from new Offerings and anable to the launch of Watson x. governance to the announced acquisition of stream sets and web methods looking at software profit gross profit margin expanded and pre-tax margin was flat with the latter reflecting key investments in Innovation and about two points of currency impact in the quarter in Consulting our Revenue in the quarter was up 55% we continue to see solid demand for Data and Technology
transformation projects with a focus on AI and analytics clients are also prioritizing cloud modernization and cloud-based application development projects this focus on digital transformation and AI initiatives to drive productivity and cost savings has been consistent throughout the year our ability to address these client demands drove signings growth of 8% with a 1.3 book to Bill ratio in the quarter That caps off a solid year where signings grew at a high teens rate and with this our trailing 12- Monon butto bull ratio remains over 1.15 there has been significant interest this year here regarding our Consulting
outperformance relative to competitors let me give you my thoughts on what differentiates us our integrated value investments in skills and strategic Partnerships and focused execution first we are the only Technology company with the Consulting business at scale this unique integrated value proposition helps our clients Implement digital Transformations and generative AI Solutions second we reposition our portfolio to address our clients top priorities through investments in skills capabilities and strategic Partnerships Consulting is even more powerful when working in collaboration with our partners our strategic Partnerships now make up over 40% of our Consulting revenue and deliver double-
digigit growth in both signings and revenue for the full year within this performance our AWS and asure practices each grew Revenue more than 50% for the year finally our solid results throughout the year demonstrate our focus on execution when you look at our three lines of business and Consulting we have consistently delivered solid Revenue Performance business transformation Revenue grew 5% for the third consecutive quarter again led by data and Technology Transformations including Ai and analytics focused projects finance and supply chain Transformations also contributed to growth technology Consulting Revenue was up over 4% with growth in
Cloud modernization projects and cloud-based application development application operations Revenue grew 6% driven Again by Cloud application management and platform engineering services with both strategic Partnerships and red hat engagements contributing to growth moving to Consulting profit we expanded gross margin 30 basis points and delivered pre-tax margin of 115% which is up 50 basis points year toe our pre-tax margin performance continues to reflect the pricing and productivity actions we have taken Offsetting increased labor cost and nearly a point of currency impact in our infrastructure business Revenue was up 2% hybrid infrastructure Revenue grew 7% and infrastructure support
declined 9% within hybrid infrastructure Z systems Revenue was up 8% now seven quarters into the product cycle Z16 Revenue performance has significantly outperformed prior Cycles including the success uccessful z15 Cycle the Z16 program incorporates a number of key Innovations for our clients including Cloud native development for hybrid Cloud embedded AI at scale Quantum safe cyber resilience security Energy Efficiency and strong reliability and scalability clients are increasingly leveraging these systems for more and more workloads and that translates to demand for more capacity which we described in terms of Mips in fact install mips have roughly doubled
over the last two cycles putting this all together Z systems remains an enduring platform driving not just Hardware adoption but also related software storage and services distributed infrastructure Revenue was up 7% with growth across both power and Storage power performance was fueled by demand for data intensive workloads on power 10 and storage traction was aligned to the Success of the Z16 cycle we just mentioned infrastructure support Revenue declined given our successful Hardware performance looking at infrastructure profit we deliver gross profit and pre-tax margin expansion pre-tax margin expanded 280 bases points in the quarter reflecting benefits
from productivity while absorbing over a point of impact from currency now let me bring it back up to the IBM level to wrap it up as Arvin Mentioned we are now two-thirds of the way through our midterm model and so I'd say it's a good time to reflect on what we have accomplished over this period let me start with the actions we've taken to execute our strategy and deliver sustainable revenue and free cash flow growth we aligned our business to a platform Centric model focused on hybrid cloud and AI our go to market is based
on more Technical and experiential Selling we open IBM's ecosystem and strategic Partnerships to give our clients greater choice and Technical depth and give IBM multiple ways to win across our portfolio we have invested in Innovation and skills and pursued strategic m&a and we presented a simplified reporting structure to give increased transparency into our performance these actions resulted in a fundamentally different company with an Improved business mix and a higher value recurring Revenue Base today our growth vectors of software and Consulting represents 75% of our Revenue base up from about 55% in 2020 and our stable
recurring Revenue stream represents about half of IBM's Revenue as Arvin said our two-year average revenue growth is in line with our mid singled digigit model and our segments have delivered at or above the revenue Models with this backdrop let me turn to 2024 guidance and our two key measures of success Revenue growth and free cash flow we expect constant currency Revenue growth in line with our mid singled digigit model as we start the year I think it's prudent to assume the low end of that model and for free cash flow we expect to generate about
122 billion our Revenue expectations are underpinned by solid growth in both software and Consulting in software given our pipeline of business investment in Innovation and the contribution of Acquisitions we expect Revenue growth slightly above the highend of our mid- singled digigit model in Consulting our solid signings and booked a bill ratio support Revenue growth in a range of 6 to 8% with acceleration throughout the year given this growth profile coupled with our productivity actions we expect The see well over a point of pre-tax margin expansion in each of these segments and then in infrastructure as
we are entering the year seven quarters into the Z16 cycle we expect 2024 infrastructure Revenue to decline this should drive over a point impact to IBM's overall Revenue growth and given these Z cycle Dynamics we expect infrastructure pre-ex margin to be lower year-over-year bringing it all together with these Segment Dynamics we expect IBM's operating pre-ex margin to expand by about half a point consistent with what we delivered in 2023 our tax rate for the year should also be fairly consistent with 2023 and as always the timing of discreet items can cause the rate to vary
within the year for free cash flow we expect to generate about 12 billion in 2024 driven primarily by growth and Adjusted eida we will have lower cash requirements driven by changes in our retirement plans which will be offset by higher capex and other balance sheet Dynamics let me comment on a couple of items that are included in our guidance first we are seeing increased productivity in our business which will lead to Workforce rebalancing fairly consistent with 2023 levels and second as we remain focused On portfolio optimization we expect to close the sale of the weather
company Assets in the first quarter on a full year basis we expect this to impact Revenue growth by over a half a point and any pre-tax gain from the transaction will be partially offset by foregone profit in the first quarter of 2024 the company company will realign its management structure to manage these assets outside of the software segment Within other divested businesses which will provide comparability within software on a year over-year basis looking into the first quarter I'd expect our Revenue growth rate to be similar to the full year for profit we expect the first
half to second half skew of net income to be fairly consistent with history and first quarter to be a couple points better than last year's skew in summary we have a durable growth Business with strong free cash flow generation we have made a lot of progress this past year and feel good about our position as we enter 2024 Arvin and I are now happy to take your questions Olympia let's get started thank you Jim as a reminder supplemental information is provided at the end of this presentation and please refrain from multi-part questions operator let's please
open it up thank you at this time we'll begin The question and answer session of the conference if you would like to ask a question please press star one on your telephone keypad a confirmation tone will indicate that your line is in the question Q you may press star two if you would like to remove your question from the queue our first question comes from wanzi moan with Bank of America please St your question uh yes thank you um if we look at your uh cash flow performance uh it's It's really very compelling uh at
12 billion on on your guidance uh Jim could you maybe help us Bridge uh from from 2023 to 2024 what are the items that are driving that 12 billion in in free cash flow uh what's happening with maybe cash taxes within that uh and working capital and any other detail that that you can help par out would be would be great thank you so much thanks wamy I appreciate the uh the question overall we're obviously very Pleased the team has executed extremely well in 2023 our strongest free cash flow since 2019 11.2 billion up .9
billion year to year I think it's important to your point before we get to 24 to take a step back a year ago and and talk about how we guided the year and by the way we've been consistent every quarter about our guidance of about about 10 A5 billion dollar the reason I think it's important because it goes right at the heart of your question Which is the quality and sustainability and why we here at IBM have the confidence in the guide of about 12 billion we said a year ago about 10 A5 billion it
was predominantly going to be driven by the improving fundamentals of our business read that sustainable Revenue growth operating leverage and that by the way is our model 750 million year to year on top of that remember we had an opportunity Gap coming out of fourth quarter 2022 we Said we would get working capital efficiency of 400 million and then we would have modest structural action tail win offsetting modest cash tax headwin that kind of brought it all together 750 is from proving fundamentals of the business 400 million now how did we how did 2023 play
out number one the improving fundamentals of our business we had a very strong second half both on our Topline Revenue our portfolio mix our productivity and we delivered $900 Million of growth in a justed EAA year to year which by the way we gave you as far as increased transparency on top of that we got the 400 million worth of working capital efficient efficiency very consistent then we've got and we capitalized on all of the productivity actions that we have done we capitalized on being opportunistic on some real estate rationalization that's why our capex was
down about 400 million by the way full Transparency that's a timing that was a 2024 item we got that in 2023 so let's put that aside and then we've got about $100 million worth the cash tax that came in a little bit better so I would say against that very strong high quality sustainability that sets the Baseline for 24 24 really is simple as we said in the prepared remarks one we see very consistent growth in a fundamentals of our business around Revenue profile margin and productivity That we will get a similar level of growth
year toe and adjusted iida by the way that's above our model again as I'll state so that we did 900 Million last year we'll get it again with that we will also have benefits from the changes in retirement plans that many of you have written about about but offsetting that we got higher cash taxes year-to year and we've also got capb backs that we are going to continue invest for the long-term sustainable leadership of this Company so it's really in 2024 entirely driven by the business model of our adjusted evid of growth so thank you
again wamy for the question thank you our next question comes from Amit next question thank you our next question comes from Amit darani with evercore please your question yep um thanks a lot and good afternoon everyone um I guess my question is will focus on the software side U you when I think about the Calendar 24 guide of you know I think slightly about the mid single legit long-term medium-term Target that you f have can you maybe talk about how do I think about the split between organic versus inorganic in 24 and if you could
also perhaps unpack what do you expect to see across from the key segments like red hat with that which I think was somewhat below your expectations in 23 and then also the TPP side would be really helpful thank You okay U I thank you let me do some of the financial Bridges here over here then turn it over to Arvin and talk about the portfolio the competitiveness the innovation and why we feel very confident overall when you look at our guide by the way an acceleration from 2023 you know I would first start with full
year last year we were very pleased with our software performance over 5% growth year-over-year and on a 2-year CGR against our mid single digit model We're at the high end of that model so when you look at our guide we feel confident in the level of innovation we've been bringing in but I would break that guide down mathematically into about three or four different buckets number one I think we've proven over the last two years that we have rebuilt and reposition our portfolio and we now have a high value recurring Revenue stream that can grow
in this business off of The Innovation and the success of our of Our Hardware platform business that's about two points of growth of slightly above the mid- single digigit model of software so two points based on credibility of our sustained growth and a high value recurring Revenue number two you talked about Acquisitions we are going to continue to invest in fuel investment into into our software portfolio to improve the Innovation the synergistic value the Strategic fit to hybrid cloud And AI you saw we uh we closed very excited off to a great start with APO
and we announced the acquisition of web methods and uh stream sets Acquisitions will probably give us a little bit less than two points of that growth in 2024 so two points from high value recurring Revenue a little bit less than two points of acquisition and then Red Hat to your point we actually delivered about what we said in fourth quarter we said High single digit we still got Impacted by consumption based Services by the way we'll start wrapping on that later in 2024 but we're extremely excited about the acceleration of demand in our single-ear bookings
in our subscription book of business 14 15% growth in third quarter 177% growth in fourth quarter Red Hat will give us about two and a half points of growth year-over-year and then the remaining half a point is our continued growth of our transaction processing and that's About a half a point you add those up you're over 6% growth and I think we feel pretty good but let me turn it over to Arvin thanks Jim and I me the second part of that is all of the Innovation that we are delivering when we play it up
against the demands in the marketplace our AI platform is going to be a part of what FS Innovation and as I think you all understand when people like one part of the portfolio they tend to also leverage other parts of the Portfolio other than the AI portfolio automation which really helps our clients with productivity Jim mentioned aptio or APO turbonomic the whole category called AI Ops in the market we believe is going to be a big driver of demand for us and on the main frame uh let's remember TP does get driven by increased myips
and Jim talked about the increased mips that are out there those mips coupled with the Innovation we do in that part Of the portfolio Drive the growth so it's re very well balanced you have m&a you have red hat Innovation you have ai Innovation automation Innovation and TP Innovation and that is really what comes together to give us that growth and give us the confidence of being able to deliver all of that growth the next question thank you our next question comes from Tony sakaki with Bernstein please St your Question uh yes thank you uh
I have uh one clarification uh and one question please so just on the free cash flow Jim I'm wondering can you give us a bridge from net income which I think the street is expecting is about 9 billion or a little over for fiscal 24 for and how you get to 12 billion in free cash flow not from 2023 levels but from net income levels and maybe in that can you just clarify how much do you expect appreciation Expense to be and how much do you expect capex to be and how big uh uh a
contributor is that and then secondly on the AI book of business I think you said low hundreds of millions that doubled so we should we be thinking 3 to 400 million and it sounds like a third was and software was that Revenue recognized during the quarter and then the other couple hundred millions were were Consulting signings um can you just elaborate specifically on exactly uh What the book of business means thank you okay Tony let me take the first piece and I appreciate the question as always and then Arvin can talk about the AI overall
you know for increased transparency by the way coming out of third quarter where we deliver free cash flow a billion dollars up year over-year Arvin and I and many other of the senior leaders we've spent a tremendous amount of time with our investors and our investors were actually uh guiding us Coaching us around giving increased transparency about the drivers right at the heart of your question that's why we put in in both the press release and in the supplemental earnings chart a bridge down from operating pre-tax income down to adjusted PTI why as I stated
in wy's question for the depicting the quality and sustainability of our free cash flow so when you look at 2024 so to your point I'll leave 23 aside when you look at 24 it's entirely going to be driven And more by the growth and adjusted iida and when you look at net income and you break break it down um there's not that much difference between net income overall and the adjusted evid overall so the $900 million is purely a function of the confidence we have in the portfolio the mix the scale the operating leverage and
the productivity which you heard on the prepared remarks we took up the $3 billion here as an annual exit run rate by the end of 2024 so it's an entirely Driven balance sheet we have Dynamics going one way or the other cash tax modest headwind but those all kind of wash out it's going to be entirely driven by the business fundamentals thanks Jim attorney on the AI book of business this is not all revenue in the quarter I should just begin with that statement to set it straight at this stage we wanted to start looking
at what is our momentum what is the sentiment from our clients So we went to a measure that is more reflective of I'll use the word signings what is the what are the commitments the clients are making to us Consulting is straightforward it is the signings Consulting signings are anywhere from 12 to 24 months on average is how much time they play out over there and on software it's what they're committing to and we are using SAS ACV so it's a 12 month commitment which is typical for as a service as well as since we
do offer our Portfolio both ways as license or as a service it includes the license piece as well now over a long term let's call it a couple of years or more yes the book of business should turn into a amount of Revenue in a quarter but that's going to take a bit of time to catch up but we felt that this gave the better uh indicator right now of what is our traction and what is our acceleration in that part of the business operator let's go to the next Question our next question comes from
Ben rites with melus research please St your question yeah uh great hey thanks a lot um wanted to ask about Consulting and uh Jim you know you mentioned uh and disclosed High single high teen sorry uh bookings growth in 2023 and just did 8% off a pretty difficult comp I was wondering how that's going to play out in terms of Revenue yields in 24 and into 25 does That give you more comp confidence that the second half by 24 is going to have a pickup and Consulting Revenue reported and then for Arvin if I could
just sneak more on Consulting um your one of your top competitors your top competitor has much easier comps in terms of bookings and revenue over the next 12 months do you think you can can continue to outperform them um in the next year thanks thanks Ben really appreciate the question I'm glad we Consulting based Question I think the team is executing extremely well in the marketplace and as we talked about in prepared remarks There's real synergistic value of Consulting in a hybrid cloud and AI platform Centric company I think you've seen that play out when
you look at it yes we had a very strong year relatively speaking in the marketplace around Consulting in 2023 uh signings grow 177% booked the bill uh over 1.15 5 our absolute backlog Is up 8% the strongest we've had in quite some time by the way stable erosion uh and you know duration is up slightly uh which we expect as clients do more and more application monitorization those are long tals so when you look at that profile and you look at how we enter 2024 we take a look at that backlog we do our backlog
runouts we look at how much of that comes out of our Wall Waterfall of the backlog realization and How much actual sell and Bill activity you got to do in the year and that gives us confidence we guided full year to six to 8% we also said that we expect just based on that those backlog realization Trends albeit a lot of work still to get done in 24 but based on those backlog realization Trends we see an acceleration growth path throughout 2024 and that tail end into 2025 we're well in front of our skis now
but when you just look at backlog and by the way Backlog when you look at 2025 the predictor indicator is only about a third of that backlog sits in 25 as we enter right now in 24 about 2third is backlog driven so and and that still looks pretty Healthy Growth compared to what our model looks like so we feel pretty good about our book of business and the Strategic partnership velocity the red hat velocity um so I would leave it at that let me turn it over to Irvin thanks Jim so Ben as opposed to
trying To directly compare with one other or two other people can I take it back to the market if you don't mind the overall Consulting Market seems to be in the 4 to 6% range so we Benchmark there to make sure that we're trying to take share and that we have the offerings which appeal to clients which also allow us to keep a a healthy margin in the business so when we look at it from those two lenses we are going to be absolutely focused on taking share which Is why we are guiding to a
higher 6 to 8% number is where we feel it'll be then we go back to do we have the bookings that justify that yes the bookings Justified but as you all know that is some but not all of the revenue in the year so we feel it's prudent to then guide it into the 6 to8 uh not not higher so you combine it with the offerings we have we are also very very focused compared to many of the players out there who are much larger we are Very focused on our strategic partners and we are
very focused on digital transformation and data and AI as opposed to a much broader swwa of offerings that other people have that gives us confidence in our growth rate as Jim pointed out for our Consulting business let's go to the next question our next question question comes from Brent Phil with Jeff please State your question thanks uh Arvin I'm just Curious if you could just give us your view of the business climate just how things are feeling you know in the last quarter versus you know quarters before we're continuing to hear of of a DEA
and some of the software budgets from CI and I'm just curious if you're you're hearing and seeing the same thing that we're we're seeing in our work yeah Brent so let me address that I'll begin by saying I see 24 playing out quite similar to 23 while there has been a lot of talk about reduced software budgets and reduced technology budgets overall we are not seeing that we are seeing that people are a bit more discriminating in what they're spending on but that is as they're spending more on AI more on digital transformation and I'll
come to why it might mean that they are sort of focusing Less on some other areas so so why is that we see that there is a remarkably resilient economy we can see That across South Asia from India to Japan to the Middle East Europe has kept remarkably resilient displ the conflict in Eastern Europe then when we come to North America the economy here is resilient Latin America despite some early predictions has actually done quite well you put that all together look we don't forast GDP we just look at what other people forecast and all
of them are forecasting in the 2% range 2 2.3 same difference from our perspective Then if you look at some of the pressures our CEO clients face whether it's interest rates whether it's inflation whether it's supply chain whether it's the demographic shifts on population whether it's geopolitical conflicts or uncertainty one answer that lets them grow without taking on fixed costs of either labor or physical infrastructure is technology so we see every one of them leaning into technology as a Potential answer that helps them against all of those uh potential headwinds and so we feel pretty
good that technology budget should stay in line with 2023 going into 24 let's go to the next question our next question comes from Eric Woodring with Morgan Stanley please State your question hey good after guys thank you for taking my question um I I just wanted to dig into the software results a bit and and that was you know if we Maybe set aside red hat which which we've spoken about you know some of the other businesses continue to decelerate um especially you know looking at something like a data in AI or automation especially in
this climate of of AI and a focus on on spending there I I'm just curious what is driving the confidence that that those businesses re accelerate is it customer conversations I'd love if you could just give a bit more detail one on again what Happened in forq and and and kind of how you parse through some of that deceleration across those businesses and then two again what's what's underscoring the confidence that some of these businesses then re accelerate into next year thanks so much I'll [Music] take and let's start with the bigger picture all we
laid out a midterm model we set Our software portfolio we grow mid digits by the way coming from a prior cycle that we were very low single digits overall and we finished this year up over 5% we finished a 2-year CGR already twoth thirds into our model at the high end of the model at 6% is that our aspiration absolutely not is is what's Arvin has the entire team focused on and that's why we continue to fuel investment into new innovation both Organically and organically but let's take a step back how we set the year
up we set the year up we said the year was going to be predominantly driven by the strength of our recurring Revenue annuity portfolio which by the way high value 80% of our software Revenue that's our subscription based models our SAS models our DP software Etc and we said that was going to grow mid- single digit we actually delivered on that we said then second prudently coming off of a Peak Ela cycle and you understand our Ela cycle extremely well in 4 q22 that we expected a headwind now let's go back 90 days ago 90
days ago we were sitting year-to dat 65% total software segment which gave us us the confidence of taking up our guidance to the highend of the mid single digigit model what was driving that both hpns was up 7% TP was up six and underneath that we were seeing very solid growth in our Transactional business both volume and nrr with new clients now we get the fourth quarter and the ELA WP hit us by the way the ELA Cycles give or take there in these ranges you know they're on average about 3 years they get probably
somewhere around 40 to 50 plus perc in year one and then it tails off so it's the biggest impact we'll see we got through that in the fourth quarter and we still delivered over 5% and our 2-year CGR We're at the high end of the model now when you look at full year performance you know redhead Up N um uh automation I'm directionally correct four or five data and AI four or five security yes we got an execution gap on security we got an opportunity to go fix in 2024 so I think it's actually glass
half full The Innovation we're we're fueling in organically the uh uh m&a portfolio which is scaling nicely with a strategic fit that gives us the confidence and on Why we're actually taking up and accelerating our growth uh in light of Brent's question and 2024 operator let's go to the next question our next question comes from Matt Swanson with RBC Capital markets please to your question yeah thank you guys so much for taking my questions and congratulations on both the free cash flow and then also obviously the free cash flow going into next year um maybe
focusing even more so On the software side and just thinking solely on that two and a half points of growth that's expected to come from the red hat I mean you've talked about the Consulting strength that you're hearing around both cloud and application modernization are there any other signs you're hearing specifically from like pipeline or customer conversations about an improving demand environment for Red Hat specifically and then maybe just to like a caveat how maybe some of the Cloud cost optimizations impacted red hat in 2023 yeah Matt uh let me take that so when we
look at Red Hat um while there are many products in the portfolio three are the buls that drive the forward performance Red Hat Linux as we look at the overall usage of Linux as we look at uh customers being even more concerned about patching security and making sure that hackers can't break into their Infrastructure and we look at the sheer volatility that happens I'll call it in the unfettered open Source World it drives a lot of demand for red hat and we beginning to see not just Enterprise customers but even many isvs begin to embrace
that as we look at open shift I go back to a fundamental I think most of our clients have now acknowledged that a hybrid environment is their reality meaning multiple public clouds and their own data centers or private in that Environment open shift is is the leading platform that gives them the flexibility to take an application and run it across all of those and in this day and age and people have thousands of applications and they want the ability to deploy without having thousands of people the anible gives them the platform to go do that
those three combined roll up into the 177% increase in bookings that Jim referenced on the call so that's not a leading indicator that is actually Already done now uh with 14 in the previous quarter that tells us there's acceleration happening on that side and we feel confident given the client conversations that these are all going to lead to Red hard growth putting aside The Innovation that's coming from the edge platforms from embedded uh red hat and from other markets that as the edge opens up we'll create yet again another additional Market that has to come
this gives us confidence that red hat will Grow and provide that two to two and a half points for overall software operator let's take one last question thank you our last question comes from Brian Essex with JP Morgan please St your question hi good afternoon and thank you for taking the question um maybe maybe for Jim um with regard to Acquisitions uh could you maybe provide some color or an update on your pipeline and offer uh maybe an update on your philosophy Behind m&a how you assess transactions with regard to the level of appreci you
might require acire what they might contribute to Topline Revenue growth or how they might improve roic long term yeah sure I appreciate that Brian thank you very much I mean I think arvin's been very clear uh for the last three and a half four years since he's come on you know first of all let's talk criteria right we always get asked size this size that size is not a criteria it Is entirely and and and I compliment him and the entire team very focused on strategic fit to a hybrid cloud and AI platform Centric company
those targeted areas are always centered around hybrid cloud data automation security and oh by the way both software IP asset and Consulting expertise on both sides so strategic fit second we run this platform Centric model to create a synergistic mult multiplier effect in our business so When we look at every single week a set of targeted candidates we're looking at the synergistic effect because as a CFO when we deploy $ one do we're looking for a multiplier of Hardware software services on top of that and in third Financial um attractiveness it has to be um
high growth recurring Revenue highly profitable and free cash flow of in a quick period of time that will vary based on software that will vary based on Consulting but I think you're going To continue to see us uh be opportunistic in the marketplace we've got the right capital structure we've got the right fin Flex We ended with what 13.5 billion dollars of cash on the balance sheet so uh we feel pretty good about our position and we will capitalize on that to the extent it hits and fits those criteria so thank you for the question
thanks Jim let me now wrap up the call in 2023 we executed on our strategy to Deliver sustained Revenue growth and cash generation the changes we have made to our business over the last couple of years and our performance reinforce my confidence as we move into 2024 I look forward to continuing this dialogue through the year Diego let me turn it back to you to close out the call thank you for participating on today's call the conference is now ended you may disconnect at this time
