James Kavanaugh
Senior Vice President and Chief Financial Officer at International Business Machines
Thanks, Arvind. For the full year, we delivered about $63 billion in revenue, $11.2 billion of operating pre-tax income and operating earnings per share of $10.33. And we generated $12.7 billion of free-cash flow, our strongest level of free-cash flow generation in many years and our highest reported free-cash flow margin in history. Revenue growth combined with 120 basis-points of operating pre-tax margin expansion drove 9% operating pre-tax profit growth, 14% free-cash flow growth and 7% operating diluted earnings per share growth. We are pleased with these results, delivering durable revenue growth in our repositioned business and exceeding our expectations on profitability, free-cash flow and earnings per share. Revenue performance for the year was led by software, up 9%, with strength across our portfolio. We achieved Rule of 40, driven by the combination of accelerating growth and margin expansion throughout the year. Consulting revenue was up 1% and continue to be impacted by a dynamic market environment as clients reprioritize spending. While infrastructure was down 3%, reflecting product cycle dynamics, we delivered more than 120% program-to-program growth for Z16, our most successful program in history. Our portfolio mix, operating leverage and yield from productivity initiatives generated strong operating gross margin and operating profit performance. For the full year, we expanded operating gross profit margin by 130 basis-points. Our operating pre-tax margin expanded by 120 basis-points, ahead of our expectations and well-above our model. These results represent our highest-level of operating gross margin and operating pre-tax margin in many years. Now turning to a deeper dive on the quarter, we generated $17.6 billion of revenue, up over 2% at constant-currency and ahead of our expectation. Software growth accelerated to 11% with strength across our key categories of Red Hat, automation, data and AI and transaction processing. Consulting was down 1%. This quarter, we achieved record levels of signings and strong sequential growth in our generative AI book of business, reflecting our early leadership in the areas our clients are prioritizing. Infrastructure was down 6%, reflecting product cycle dynamics in our 11th quarter of Z16. Looking at our profit metrics, in the fourth quarter, we expanded operating gross margin by 50 basis-points and operating pre-tax margin by-40 basis-points. We are pleased with this strong performance, driven by our portfolio mix, operating leverage and ongoing productivity initiatives, similar to the full-year. This allowed for continued investments to drive innovation in our portfolio, which you can see in our higher R&D expense, up 13%. Our operating tax-rate was 14%, which is flat versus last year. And our operating earnings per share of $3.92 was up 1%. For the full-year, we generated $12.7 billion of free-cash flow, up $1.5 billion and growing 14%. The largest driver of this growth comes from adjusted EBITDA, up about $900 million year-over-year. We realized $500 million in proceeds from the Palo Alto QRadar transaction, which was a small contribution to free-cash flow given the payout of structural actions and foregone profit. We also delivered sustainable lower cash requirements through changes in our retirement plans. As we close-out the mid-term model we introduced in 2021, we've grown free-cash flow faster than revenue in each of the last three years, have exited 2024 with our highest free-cash flow margin in reported history and our free-cash flow run-rate is above our mid-term model. In terms of cash uses for the year, we invested over $3 billion on acquisitions 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 $14.8 billion, which is up $1.3 billion year-over-year. Our debt balance ended the year down $1.6 billion at $55 billion, including approximately $12 billion of debt associated with our financing business. Turning to the segments. Software revenue growth accelerated to 11% in the fourth quarter, driven by strength across the portfolio, with growth of 17% for Red Hat, 16% for automation, 11% for transaction processing and 5% for both data and AI and security. We are pleased with how we finished the year, exceeding the Rule of 40 and the growth driver expectations we set back-in January. Let me dive in a little deeper on each of these growth drivers. We continue to see momentum in Red Hat with fourth quarter revenue growth of 17%, fueled by six consecutive quarters of double-digit bookings growth. This performance reflects the continued demand for our hybrid cloud solutions as clients are prioritizing application modernization on open-shift containers and answable automation to optimize their IT spend and reduce operational complexity. OpenShift is now $1.4 billion ARR business, growing about 25%, and we continue to see increased volume in virtualization engagements. In addition to the strength in subscriptions, we saw a recovery in the consumption-based services business. Looking-forward, Red Hat's six-month revenue under contract, a reflection of the strong bookings performance mentioned continues to grow in the mid-teens. We delivered strong results in our recurring revenue base and are seeing momentum from innovation across our portfolio. Our hybrid platform and solutions ARR was $15.3 billion, up 11%. Transaction processing delivered another strong quarter, driven by growing capacity demands, solid renewal rates and increasing contribution from our generative AI product Watson X system for Z. We continue to introduce new products, which are making a meaningful impact on software's results. We have confidence in our portfolio with our market-leading businesses centered around hybrid cloud, automation, data and transaction processing. In the quarter, about 8 points of our growth was organic, led by demand for our generative AI products like Concert and our AI assistance. We launched new products such as next-generation of Watson X Code Assistant that provides coding support for multiple languages and Guardium Quantum Safe that helps organization monitor and manage their cryptographic security to fix vulnerabilities. And these investments in generative AI are paying-off with the software AI book of business reaching about $1 billion inception-to-date in the fourth quarter. Our performance continues to benefit from our recent acquisitions. We are seeing growing contribution from the stream sets and web methods assets acquired in the second-quarter. And at the end of 2024, we closed the acquisition of Neuromagik, which strengthens our AI capabilities in performance engineering and model optimization. And we are looking-forward to the opportunities that the pending HashiCorp acquisition will bring. Looking at software profit for the quarter, gross margin expanded and segment profit was up over 220 basis-points year-to-year, reflecting operating leverage driven by our revenue performance. In Consulting, revenue was down 1%. Throughout the year, we have operated in a dynamic macroeconomic environment. We continue to see clients reprioritizing their IT spending towards digital transformation and AI initiatives for cost optimization and operational efficiency as we wrap on a strong above-market performance in 2023. Our focus remains on rapidly evolving our offerings and enhancing investments in skills and capabilities to align with these priorities. Our ability to address client demands drove signings growth of 23% in the quarter, our highest fourth quarter signings in recent history. Generative AI contributed about $1.5 billion of new bookings in the quarter as clients see the value our extensive industry and enterprise AI expertise can bring to accelerating their digital transformations. This strong signings performance takes our book-to-bill ratio up to 1.21 over the last 12 months. Our overall backlog remains healthy, up 8% year-over-year and our backlog erosion levels remained stable. Our Red Hat practice delivered another record-breaking quarter of signings and double-digit revenue growth and we now have an annual revenue of nearly $3 billion. In the quarter, strategic partnerships were a growth contributor, both in signings and revenue with solid performance from partnerships with AWS and Azure. We are actively investing to enhance our skills and capabilities to address our clients' top priorities with acquisitions like Excel Alpha, a global Oracle services provider, which closed in the fourth quarter. And earlier this month, we announced our intent to acquire applications technology software, a consultancy known for driving business transformation with Oracle cloud applications. Turning to our lines of business, business transformation revenue grew 2%, driven by continued strength in transformational projects for data, finance and supply-chain. Both technology consulting and application operations declined in the quarter. Similar last quarter, there was strength in cloud-based application services across modernization, development and management. But we continue to see clients reprioritize spending away from on-prem customized services. Looking at consulting profit, we delivered segment profit margin of nearly 12%, a sequential expansion of almost one point as we continue to realize the benefits of our productivity actions. Moving to the Infrastructure segment, revenue was down 6%, reflecting product cycle dynamics. Hybrid infrastructure was down 8% and infrastructure support was flat. Within hybrid infrastructure, IBMZ revenue is down 20% in the quarter. This is the 11th quarter of Z16 availability and the combination of resiliency, reliability and security continues to resonate with clients. Nearly three years in, this product cycle has outpaced prior cycles and program-to-date install MIPs have increased over 30% as clients' capacity needs continue to grow. IBMZ remains an enduring platform for mission-critical workloads, driving not just hardware adoption, but also the related software, storage and services. Distributed infrastructure revenue grew 2%. This performance was fueled by double-digit growth in storage as we introduced new innovation in-quarter designed to give clients the ability to scale storage capacity to meet growing data demands to support the next-generation of AI workloads and projects. For infrastructure profit, we expanded gross profit margin nearly two points sequentially. Our segment profit margin was down 320 basis-points in the quarter, reflecting where we are in the product cycle and continued investments in innovation. For the full-year, our segment profit margin was 17.5%. Now let me bring it back up to the IBM level to wrap-up. As Arvind mentioned, we met or exceeded our mid-term model target metrics for revenue growth, profitability and free-cash flow growth. And we have fundamentally repositioned our business to a software-led integrated platform. Let me now turn to 2025 guidance on our two key measures of success, revenue growth and free-cash flow. We expect constant-currency revenue growth inflecting higher to 5% plus, and we expect to grow free-cash flow faster than revenue growth with about $13.5 billion of free-cash flow. Given the continued strengthening of the dollar, we expect currency to be about a two-point headwind to revenue growth for the year. Our revenue expectations are underpinned by accelerating growth across our businesses. In software, given the strength of our portfolio, investment in innovation and the contribution from acquisitions, we expect revenue growth approaching double-digits. We continue to see the strength in Red Hat with mid-teens growth for the year. In Consulting, the combination of our backlog levels, record signings in the fourth quarter and our book of business in Gen AI support an acceleration in growth to low-single digits. And with our new mainframe launch in mid-2025, we expect infrastructure to be about a point contribution to IBM's overall revenue growth. For the full-year, we expect IBM's operating pre-tax margin to expand by over half a point. Portfolio mix and ongoing productivity initiatives continue to drive margin expansion, mitigated by the impact of dilution from acquisitions. Our tax-rate for the year should be in the mid-teens. And as always, the timing of discrete items can cause the rate to vary within the year. For free-cash flow, we expect to generate about $13.5 billion in 2025. Given the strong fundamentals of our business, we expect double-digit adjusted EBITDA growth, which is the primary driver of our free-cash flow. This will be offset by cash tax headwinds and higher capex. Our productivity initiatives have enabled investments in innovation, skills and go-to-market capabilities, including our ecosystem. We have accomplished this while simultaneously growing our operating profit margin and free-cash flow, which in-turn has increased our financial flexibility. This remains our playbook going-forward, having executed on $3.5 billion of annual run-rate savings exiting 2024, supporting our strong free-cash flow growing in excess of revenue. Looking to the first-quarter, I expect our constant-currency revenue growth rate to be similar to the fourth quarter. We expect workforce rebalancing fairly consistent with prior year. We are also wrapping on the $241 million gain from the divestiture of the Weather Company. Excluding the year-over-year impact of the gain, we expect about 50 basis-points of operating pre-tax margin expansion. It is hard to predict discrete events, but our best view is that the first-quarter tax-rate could be a few points lower than the full-year rate, but still a headwind over last year. In summary, we have delivered durable growth over the mid-term model and expect to drive an upwards inflection. We have repositioned our business and are excited about 2025 and beyond. We look-forward to discussing more details at our upcoming Investor Day on February 4. Arvind and I are now happy to take your questions. Olympia, let's get started.
