International Business Machines Corp Q4 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Amit Daryanani - Evercore ISI - Analyst : Thanks for taking my question. Good afternoon, everyone. Can you just talk a little bit about what they think about the count to 25 guidance you folks have provided if you could just provide some context around linearity and how that could play out. Maybe you can talk about H1 versus H2 perspective, given some of the Consulting and mainstream tailwinds could be a bit more back half. If you just touch on, kind of, pull us out with the second half weighted in the linear, that would be helpful as you think about '25. James Kavanaugh - International Business Machines Corp - Chief Financial Officer, Senior Vice President - Finance and Operations Amit, thank you very much. Appreciate the question overall. Obviously, we're very pleased, as we talked about in the prepared remarks about how we finished on a strong note over-delivering on revenue, profitability, earnings per share, free cash flow. That gives us the conviction and confidence as we guided in 2025 with above-street revenue growth at 5%-plus at constant currency and a very strong free cash flow engine, a $13.5 billion growing nicely and continuing to grow that free cash flow margin. But if you look underneath it, linearity, when you get to that point, yes, first half, I would tell you you got to answer this by segment. We've got a very strong portfolio, which is executing extremely well on software. We see a pretty normal history as we move through our first half, second half. Obviously, you do have seasonality between 1Q and 2Q versus 3Q and forth. But that is -- we got a very hard and we're going to continue to invest in innovation. Second, on Consulting, we feel pretty good about how we concluded the year with our highest recorded ever signings quarter up 23%. We entered the year with a backlog of plus 8%, a strong book-to-bill that at 1.21. We're still dealing with a very dynamic environment around client-prioritizing spend. And I think it's prudent for us right now, though we call Low single digit for the year, to see that accelerate as we move through the year. So I would see more of a second half play than a first half play. And then you get to infrastructure. We did extremely well at the end of a three-year cycle. Our most promising program and mainframe, ever overall, delivering 122%. Yes, first quarter, we expect about -- again about a similar point impact IBM's growth. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 29, 2025 / 10:00PM, IBM.N - Q4 2024 International Business Machines Corp Earnings Call But second quarter on, we're back to growth above our model through the year. And that's what gives us confidence in the guide that we called for the year. So a little bit of a mix shift, definitely strengthen software, which is going to drive this business being 45% IBM. But when you bring it all together, maybe it's a pointless first half on revenue versus industry versus second half. But from a free cash flow perspective, we're pretty similar to history overall.

Question: Wamsi Mohan - BofA Global Research - Analyst : Yes, thank you so much and congrats on a really strong free cash flow performance. Arvind, would love to get your thoughts around M&A, particularly as we may be entering a period of relatively low regulatory overhang at the same time, you are delivering record cash flows. And if I could, I would love to get some of your thoughts on [deep seek] and any implications that you see for the industry broadly or for IBM, in particular. Thank you.

Question: Jim Schneider - Goldman Sachs - Analyst : Good afternoon. Thanks for taking my question. I was wondering if you, maybe, highlight two topics, one on Consulting and one on the AI software side. On the Consulting side of things, it's good to see the bookings that you're seeing. But can you maybe give us, historically, and the context is IBM tends to lag the Consulting business relative to some of your peers. But what does the level of confidence you have in the revenue yield and revenue recovery you talked about for the back half of the year? And how do you feel about the revenue yield today versus a year ago? And then secondly, on the AI Software side, you mentioned the $1 billion book of business, particularly within software. That's pretty substantial. And while there's been moving parts in terms of which products have gotten traction, which are the products of the ones you mentioned, do you think are really going to be sort of stand out in the next couple of years from a software performance perspective? Thank you. James Kavanaugh - International Business Machines Corp - Chief Financial Officer, Senior Vice President - Finance and Operations Thank you, Jim. I'll take the first one and then Arvind can handle the second one around the products and software overall. We take a look at it from a consulting perspective, we've been talking about, we have been operating along with every other consulting company in a very dynamic macro-economic environment. As with any technological shift, there are going to be reprioritization of spending that is occurring. Clients, some are IBM, we are cutting back on discretionary-based spend so we can fuel investment into digital transformation GenAI overall. We've been seeing that play out throughout 2024. By the way, on top of our above market performance in gaining significant share over the last six quarters starting in 2023. Now, why have we been so maniacally focused on the GenAI ramp and are greater than $4 billion book of business right now coming out six quarters in, which we believe, by the way, we're in a very early leadership position around that. We're so maniacally focus because enterprise clients are making their strategic provider of choice decisions. And we are feeling very good about that greater than $4 billion book of business, which by the way, is already north of 5% of our total backlog, which is, as I told Amit in the first question, is up 8% coming into 2025. Why is that important? Because that is going to be a long-term future vector of growth for consulting for us to win that has a multiplier effect that will drag our software component of our business going forward. So we feel pretty good while right now early in the cycle, it has less yield, it has higher durations. But we think the TAM opportunity and that multiplier effect are going to grow into each other. And that's one of a couple of components and why we have conviction of inflecting back to growth in 2025 with Consulting overall.

Question: Ben Reitzes - Melius Research - Analyst : Yes, thanks a lot. A lot of the couple of questions were asked. So I'm going to ask about infrastructure, and I also wanted to congratulate you guys. Your mix shift towards software is really resonating. But I'm going to ask about infrastructure and two aspects. One is tied to it within software is TPP, super profitable on an 11%. I just wanted to see where that sit in terms of your guidance for the year and how sustainable that is. And I think that the AI system is having a big impact on that. And so changing the way we may be thinking on that. And then with regard to infrastructure, which is a little bit tied to that segment, maybe I'm wrong, in terms of the mainframe and that delta and growth, if you could just be a little more prescriptive there and talk about why you have confidence that this will be well-received cycle. Really appreciate it. Thank you. James Kavanaugh - International Business Machines Corp - Chief Financial Officer, Senior Vice President - Finance and Operations Okay. Thanks, Ben. This is Jim, I'll take this. First of all, thank you for the compliments. Team has worked extremely hard. We laid out a very ambitious three-year road map a few years ago when we spun off Kyndryl that repositioned IBM. And as we talked about in prepared remarks, team is executed and met or exceeded every single one of those targets that we put out to the street. So a lot of hard work here. But the beauty is we got a lot more to go, which we're extremely excited about will talk about that next week at Investor Day. But let's talk about TPP. First of all, I can't talk about TPP. to the heart of your question without talking about the absolute tremendous execution of what's been happening, what our mainframe cycle. You know, this has been one of the longest programs and most consistent in terms of revenue growth that we've ever seen. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 29, 2025 / 10:00PM, IBM.N - Q4 2024 International Business Machines Corp Earnings Call And I think it's an association of the value of our enduring platform and a hybrid cloud era overall. 120%-plus prior program, 70% of the clients on mainframe are growing MIPS. That is a very different profile than where we were 10 years ago. And the install MIPS are up 3x over the last few cycles. Now why is that important? We run mainframe, yes, mission critical workloads for what, 97% of the mission critical transactional processing around all of -- many of the different industries banking, retail, airlines, you name it, but we run it as a stack economic platform play. TP is the mission-critical software on top of that. It is a key growth contributor, capitalizing on those mainframe stack economics, high source of revenue, high source of profit to fuel investment flexibility of us continuing this engine of innovation and software, and it also provides a solid incumbency based on multiplier effect. We grew our transaction processing 10% in 2024, exiting at 11%. The underlying dynamics of that, I would say about four points of that growth, is due to the capitalization of the underlying workloads that are driving mainframe. About three points of that is the investment in the new innovation that we've been bringing to the mainframe platform call that Watson Coda system for Z and how we monetize the value of GenAI. And then about three points of that is back to historical price optimization. If you look at 2025, our guidance where we called software continuing to accelerate approaching double digit, I will say, prudently right now between Arvind and I, a consistent mid-size, single-digit growth in TP., and we'll see how that plays out with the new cycle of mainframe in '25.

Question: Brent Thill - Jefferies - Analyst : Thanks. This is Bo on for Brent. Arvind, it would be great to get your view of the business climate, more specifically on the software side, but also more generally across business segments. What are you hearing from customers? And how are they thinking about their software budget in 2025?

Question: Erik Woodring - Morgan Stanley - Analyst : Yes. Thank you so much for taking my questions and congrats on a really strong free cash flow, performance and guide. One clarification quickly what was just --Jim, just want to make sure when we think about the 2025 outlook, is that inclusive or excluding how HashiCorp? And then my broader question again for you, Jim, is just if you could walk through and quantify a bit more detail some of the free cash flow puts and takes as we as we go into 2025, just between the cash taxes, the CapEx, the EBITDA growth, any more detail would be super helpful to us as we think about our model. Thanks so much. James Kavanaugh - International Business Machines Corp - Chief Financial Officer, Senior Vice President - Finance and Operations Thanks, Erik. And again, thanks for the compliments to the team here collectively around the world. Means a lot. Yes, short answer on Hashi, as always, we guide all. So we fully expect to close the Hashi transaction in a relatively soon period of time. As we saw in the K that was issued by HashiCorp overall, we fully expect that in this new administration environment. So all in, revenue growth, profit margin guidance that we gave, and free cash flow, which by the way is growing faster than revenue. When you take a look underneath, we're extremely pleased on how we finished the last couple of years overall. Highest free cash flow margin in the history of our great company for 115 years. And oh, by the way, we exited 2024 with a free cash flow run rate above our mid-term model of what we laid out three years ago, consistently growing free cash flow well in excess of revenue overall. So that's what gives us the confidence and conviction that all of the tough work on our portfolio optimization that has shifted much more to a software-centric-lead hybrid-cloud platform company, the productivity, which by the way, executing north of $3.5 billion exit run rate. We got out in front of that. I would call that discipline; I would call that execution of a company. Gives us the conviction and confidence in our guide in 2025. That takes into account that dilution effect. Hashi in itself is probably about a point of revenue growth IBM in the year. And it's probably, many of you have done the math, in all $300 million, give or take of dilution, by the way, still a very attractive financial model, coupled with the strategic fit and synergy because we do believe adjusted EBITDA were well on our path of a within 12 months accretive and free cash flow within two years accretive. Overall, if you've been following Hashi's results. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 29, 2025 / 10:00PM, IBM.N - Q4 2024 International Business Machines Corp Earnings Call But the underlying dynamics of our free cash flow drive, over 100% of it's going to be delivered by high-quality, sustainable, adjusted EBIT growth that is driving this company to a sustainable, durable mid-single digit growth, now 5%-plus. The underlying operating leverage we continue to generate in this business will drive double-digit adjusted EBITDA growth in 2025 that just to put some dollar amounts around it. That's probably over $1.5 billion in itself. Now mitigating some of that, one, we are going to continue to invest in this business and that CapEx number is going to go up a couple hundred million dollars as we invest in our software, our GenAI, our next generation, our mainframe, et cetera, Quantum, by the way, we continue to invest in. Two. with that incremental profit dollar, we're going to pay more cash tax. That's a couple of hundred million more of their and, three, to the heart of your question, the net interest opportunity loss overall will probably be another couple of hundred million dollars overall. So when you put those pieces together, the way I would kind of qualify it high-quality, sustainable free cash flow generation engine that's going to deliver faster and revenue growth.