Jim Kavanaugh
Senior Vice President and Chief Financial Officer at International Business Machines
Thanks, Arvind.
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 $3.87, 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 expectation 90 days ago. We generated $10.3 billion of operating pre-tax income and operating earnings per share of $9.62. Our free cash flow was $11.2 billion, our strongest level of cash generation since 2019.
Revenue performance for the year was again led by Software and Consulting. Software grew by over 5%, with good growth across Hybrid Platform & 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 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 5.5% revenue growth, which is a sequential improvement in the growth rate. We had good signings performance and a trailing 12-month book-to-bill ratio over 1.15. This continued momentum in 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 zSystems and Distributed Infrastructure. This performance is particularly notable given it's the seventh quarter of the z16 cycle. And 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 to pre-tax margin. Currency impacted operating pre-tax profit growth in the 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 $3.87 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 infrastructure 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 AI-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. 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 result in a 9% growth in our operating pre-tax 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 EBITDA. For better transparency, we have included a view of our adjusted EBITDA 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 capex, although it had limited benefit to our profit performance. In terms of cash uses for the year, we invested over $5 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 U.S. at 123%.
Turning to our segments. Software grew 2%, with growth across both Hybrid Platform & 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 zSystems. This, together with price increases, contributed to growth in both recurring and transactional software revenue in Transaction Processing for the year.
Hybrid Platform & Solutions revenue was up 1%. Within this performance, Red Hat revenue was up 7%, automation was flat, data and AI was up 1%, and security declined. Looking across Hybrid Platform & Solutions, the strength of our recurring base of business is evident in our ARR, now $14.4 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 the 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-to-year a little more than expected.
In Red Hat, revenue performance was similar to last quarter, as we continue to see dampened growth in consumption-based services. Our future growth indicators are encouraging. Red Hat annual bookings were up 17%, including double-digit bookings growth across all three key offerings, REL, OpenShift, and Ansible. Renewals have been strong this quarter with our NRR up well over 100% and up six points over last year. And OpenShift continued its strong performance with annual recurring revenue of $1.2 billion.
Beyond OpenShift, our platform-based approach is resonating with clients. We're seeing growing interest in our generative AI platform, watsonx, as Arvind touched on earlier. And we've been investing to both extend and expand our hybrid cloud and AI capabilities in software. From new offerings in Ansible, to the launch of watsonx.governance, to the announced acquisition of StreamSets and webMethods.
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 5.5%. 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-month book-to-bill ratio remains over 1.15.
There has been significant interest this year 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-digit growth in both signings and revenue for the full year. Within this performance, our AWS and Azure 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 in 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 11.5%, which is up 50 basis points year-to-year. Our pre-tax margin performance continues to reflect the pricing and productivity actions we have taken, offsetting increased labor costs 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, zSystems revenue was up 8%. Now seven quarters into the product cycle, z16 revenue performance has significantly outperformed prior cycles, including the successful 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-resilient security, energy efficiency, and strong reliability and scalability.
Clients are increasingly leveraging zSystems for more and more workloads, and that translates to demand for more capacity, which we described in terms of MIPS. In fact, installed MIPS have roughly doubled over the last two cycles. Putting this all together, zSystems 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 Power10, 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 delivered gross profit and pre-tax margin expansion. Pre-tax margin expanded 280 basis 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 Arvind mentioned, we are now two-thirds of the way through our mid-term 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 opened 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 represent 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 Arvind said, our two-year average revenue growth is in line with our mid-single-digit 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-single-digit 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 $12 billion.
Our revenue expectations are underpinned by solid growth in both Software and Consulting. In Software, given our pipeline of business, investment and innovation, and the contribution of acquisitions, we expect revenue growth slightly above the high-end of our mid-single-digit model. In Consulting, our solid signings and book-to-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 to 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-tax margin to be lower year-over-year.
Bringing it all together with these segment dynamics, we expect IBM's operating pre-tax 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 discrete 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 in adjusted EBITDA. 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 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, the second half skew of net income to be fairly consistent with history, and first quarter to be a couple of 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. Arvind and I are now happy to take your questions. Olympia, let's get started.
