James J. Kavanaugh
Senior Vice President and Chief Financial Officer at International Business Machines
Thanks, Arvind. Let me start out with a few of the headline numbers. We delivered $14.2 billion in revenue, $1.5 billion of operating pre-tax income, operating earnings per share of $1.40 and $1.2 billion of free cash flow.
90 days ago, I talked about the first quarter and the full year in the context of our medium term model, which is to deliver mid-single-digit revenue growth and about $35 billion of free cash flow from 2022 through 2024. These first quarter results are a solid step toward delivering on the year and that model. Our revenue was up 11%. This includes over 5 points of incremental revenue from the commercial relationship established with Kyndryl last November.
Our business entering 2022 reflects a higher growth, higher value mix. It is also a business with more recurring revenue, dominated by software. This quarter, software revenue was up 15% and consulting was up 17%. As we've discussed in the past, these are our two growth vectors, and together represent over 70% of our annual revenue. Infrastructure performance, which is influenced by product cycles, was flat as compared to last year. The software and infrastructure performance each include over 8 points from the commercial Kyndryl relationship. As a reminder, there is no incremental contribution to IBM Consulting's growth.
Our strategy, as Arvind said, is based on a platform-centric approach to hybrid cloud and AI. Not only do we benefit from the platform itself, but IBM and our partners also generate a multiple of software and consulting revenue on that platform. It's an attractive economic model. You can see our success in capturing that value in our hybrid cloud revenue, which was up 17% in the first quarter and over the last 12 months. Revenue from our full stack cloud capabilities from infrastructure up through consulting represents $20.8 billion of revenue over the last 12 months or 36% of our total.
Looking at our P&L metrics. We grew operating gross profit dollars though margin was down with improvement in software margin offset by consulting investments and infrastructure mix due to product cycles. For operating pre-tax income, we grew profit dollars and expanded margin by 280 basis points. This profit performance reflects that we're capturing demand in high value areas like software and profit contribution from incremental sales for the new commercial relationship.
We have taken actions to streamline our operations and simplify our go-to-market model consistent with our more focused platform-centric business. With the more streamlined business, we're getting operating leverage from strong revenue performance. Our profit dynamics also reflect increasing investments in innovation, our ecosystem and talent. We're increasing investments in R&D to deliver innovation in AI, hybrid cloud and emerging areas like Quantum.
We're investing in our ecosystem organically and inorganically. For example, one of the three acquisitions Arvind mentioned was Neudesic, which adds key hyperscaler capabilities to address hybrid multi-cloud demand. And as we've discussed over the last several quarters, we have been aggressively hiring. We're adding capabilities and skills to support our garages and client engineering centers, client success managers to help clients get the most of their IBM solutions and technical talent across our business.
Now, we're operating in an inflationary environment. And cost, especially the cost to attract and retain talent, are escalating. We're addressing this through pricing, which will help over time. The other item I mentioned is the impact of a strengthening dollar. We execute hedging programs. With the majority of our hedging gains reported in other income and expense, these gains mitigate the currency impact in revenue and gross profit. And then looking at net income, we expanded operating net income margin by 130 basis points. This reflects an operating tax rate of 16%, which was up significantly from last year.
Turning to free cash flow. We generated $1.2 billion in the quarter. I'll remind you, we've gone back to our traditional all-in free cash flow definition, which includes payments for the structural actions initiated at the end of 2020. The $1.2 billion is about 12% of our full year expected range consistent with history. The anomaly from that historic attainment was last year with 23% of our full year free cash flow realized in the first quarter due to the unique dynamics of the Kyndryl separation.
In terms of uses of cash for the quarter, we invested about $700 million in acquisitions and we returned $1.5 billion to shareholders in the form of dividends. We also issued $4 billion of debt in early February, which supports maturities later in the year. This results in a March cash position of $10.8 billion and debt of over $54 billion.
Turning to the segments. Software delivered strong revenue growth, up 15%. This includes over 8 points from the recurring Kyndryl software revenue in line with our expectations. Software performance was driven by good growth in both hybrid platform and solutions and transaction processing, the latter benefiting significantly from the Kyndryl content. Our Software is central to our hybrid cloud value proposition. Within this segment, hybrid cloud revenue is up 25%, now representing $8.8 billion over the last year. And subscription and support renewal rates grow again this quarter, contributing to a software-deferred income balance of over $11 billion.
Hybrid Platform & Solutions revenue grew 10% this quarter, inclusive of about 1.5 contribution from the Kyndryl commercial relationship. We've driven focus within this portfolio around the most strategic hybrid cloud and AI needs of our clients; Red Hat, data and AI, automation and security. Growth was pervasive across all business areas this quarter. Red Hat revenue, all-in, was up 21%. Revenue growth continues to be fueled by good performance across the Red Hat portfolio. And we again gained share across both RHEL and OpenShift, the foundational hybrid cloud offerings.
Red Hat's hybrid cloud offerings continue to transform enterprise IT and delivered new innovations. For example, this quarter we announced a new partnership with NVIDIA to accelerate AI applications. Automation delivered 5% revenue growth this quarter. Growth was led by AIOps and management and Integration. We've invested in AI-powered approach to automation. And our solutions are resonating with clients as they address growing complexity, digital shifts and skill shortages across their businesses. We extended this AI-powered automation strategy this quarter with the joint Flexera solution Arvind mentioned earlier.
Data & AI revenue grew 4%. These offerings help our clients accelerate data-driven agendas by connecting and governing all of their data and infusing AI to enhance decision-making. Performance this quarter reflects client demand across the portfolio, including continued adoption of Data Fabric, expansion of our Data Management footprint, a focus on sustainable operations with Asset & Supply Chain Management, and needs for reliable data sharing with Information Exchange. We had growth in solutions like Cloud Pak for Data, DB2 and Maximo Application Suite, just to name a few.
Security revenue grew 8%, building on strong performance in the first quarter of last year when we were up 14%. With the evolving cybersecurity environment, we delivered growth this quarter in Threat Management and Data Security. We continue to see good client demand for Cloud Pak for Security, an integrated and open security platform that advances client's zero trust strategy, while leaving data where it is. And we've been investing in security innovation, including a new SaaS endpoint solution following the ReaQta acquisition.
Looking across the performance of our Hybrid Platform & Solutions, our annual recurring revenue or ARR is up 9% year-to-year. Transaction Processing delivered 31% revenue growth this quarter, including 28 points from the Kyndryl content. The overall dynamics are much like last quarter. We wrapped on weak performance in the first quarter of last year, which was down 15%. And we continue to see strong renewals of these critical software offerings, building on the expanded zSystems capacity and traction we've gotten through the strong z15 program.
Looking at software profit, we delivered operating leverage given the strong and broad-based revenue performance this quarter. Our pre-tax margin was up 7 points and puts us on track for a full year software margin in the mid-20s. Just as in Software, Consulting is capitalizing on a strong demand profile, growing both revenue and signings at double-digit rates across all business lines and geographies. Revenue growth accelerated to 17%, while bookings were up over 40%. Our book-to-bill remains solid at 1.1 for the quarter and over the last year.
Clients trust IBM to execute their complex business transformations, leveraging our deep industry expertise and the investments we've been making in skills, capabilities, our ecosystem and in scaling our acquisitions. We are positioned to capture demand and drive adoption of our hybrid cloud platform. Consulting's hybrid cloud revenue grew 32% on trailing 12-month basis to $8.3 billion, which makes up 45% of the Consulting business. We continue to see strong demand and momentum in our Red Hat-related engagements this quarter, nearly doubling Red Hat-related signings year-to-year. Our strategic partnerships also contributed to our performance in the quarter. Revenue from these partnerships grew solid double-digits led by Salesforce, SAP, AWS and Azure.
And now, turning to our lines of business. Business Transformation revenue grew 19%, bringing together technology and strategic consulting to transform critical workflows at scale. The growth was broad-based with particularly strong growth in our practices centered around customer experience, talent and data transformations as well as supply chain and finance applications.
In Technology Consulting, where we architect and implement clients' cloud platform and strategies, revenue was up 19%. Growth was pervasive, led by our engagements around developing and modernizing applications for cloud deployments. Finally, Application Operations revenue grew 14%. This business line focuses on the management of applications and cloud platform services required to run hybrid cloud environments. Growth was broad-based in this space as well, led by cloud application management.
Moving to Consulting profit, our pre-tax margin expanded about 1 point, delivering operating leverage and benefitting from IBM's more streamlined G&A and go-to-market structure. Our Consulting gross margin reflects the significant investments we have made over the last year, fueling our revenue growth. We are investing in our partner ecosystem, expanding our reach. We continue to scale the 12 acquisitions we've made in the last 18 months, including two which closed in the first quarter. And we are investing in talent across our workforce, upskilling existing resources, adding certifications and bringing in technical skills in areas of hybrid cloud and AI. Consulting is where we are most impacted by the competitive and inflationary labor market, which puts pressure on profitability. We expect to capture value through price in our engagements and recognize it will take a few quarters to appear in our margin profile.
Turning to the Infrastructure segment. Revenue performance was flat versus last year. Hybrid Infrastructure revenue declined 2%, offset by growth of 4% in Infrastructure Support. The Kyndryl content contributed over 8 points to Infrastructure with consistent benefit across the two business areas. Within Hybrid Infrastructure, zSystems revenue was down 18%. We're now in the 11th quarter of z15 availability. z15 has been a very strong program, both in revenue performance and capacity. In fact, we've shipped more z15 MIPs than in any other program.
Building on that momentum, we've just announced our newest solution, IBM z16. Arvind commented on the three differentiated capabilities of z16; embedded AI at scale, cyber-resilient security and cloud-native development for hybrid cloud. Distributed Infrastructure delivered 8% revenue growth this quarter. Client demand for S/4 HANA data-intensive workloads on our newest Power10 high-end systems fueled this performance. Looking at Infrastructure profit, the pre-tax margin was down 3 points, reflecting where we are in our IBM Z product cycle.
Now let me take it back up to the IBM level. We've focused our business on a platform-centric, hybrid cloud and AI strategy. Over the last couple of years, we've been taking steps to optimize our portfolio, streamline our operations and allocate capital to execute that strategy and improve our financial profile. Our first quarter results reflect these very significant changes and put us on track to our full year expectations for our two key measures of revenue growth and free cash flow.
90 days ago, we expected to grow revenue at mid-single-digit rate at constant currency before the incremental Kyndryl sales. With a strong start to the year, we now see revenue growth at the high end of that mid-single-digit range. On top of that, we expect about 3.5 points of growth for the year from the commercial relationship with Kyndryl spread over the first three quarters. And then looking at currency, with the strengthening U.S. dollar, at mid-April spot rates, currency will now be a 3 to 4 point headwind to revenue growth for the year. For free cash flow, we continue to expect $10 billion to $10.5 billion in 2022. As I said earlier, this is an all-in free cash flow definition and includes the cash impact associated with our 2020 structural actions.
Before getting into the segments and color on the second quarter, I'll comment on the business impact of our Russian operations. Our business in Russia is not large, but it's concentrated in high-end infrastructure and software. Last year, business in the country contributed about $300 million of revenue and about $200 million of profit and cash. For this year, we expect no contribution from Russia, which puts us closer to the low end of our free cash flow range.
Now, let me provide some color on our expectations for segment performance for the year. In Software, we got off to a good start, and we haven't changed our view of constant currency revenue growth or the contribution from the external sales to Kyndryl. We also remain on track to a Software pre-tax margin in the mid-20s range for the year. In IBM Consulting, with our first quarter revenue and signings performance, we are taking up our view of Consulting revenue to a low-double-digit growth rate for the year. With continued investment in talent and a competitive labor environment, we now expect a pre-tax margin approaching 10%, which is up a couple of points year to year. This reflects improving performance in the second half as we realize price increases in our contracts.
Our Infrastructure revenue performance, as always, reflects product cycle dynamics. This year, we'd expect performance above the model given the launch of our z16 late in the second quarter. This will contribute the second quarter performance and ramp further in the second half. On top of that, we're planning for about 4 to 5 points from the external sales to Kyndryl in 2022. We see a mid to high-teens pre-tax margin for the full year. These segment revenue and margin dynamics would yield about a 4-point year-to-year improvement in IBM's pre-tax margin for the full year. In terms of tax, we continue to expect a mid to high-teens operating tax rate, which is a headwind to our profit growth.
Let me comment on a couple of items specific to the second quarter. At current spot rates, currency would be a 5-point headwind to revenue growth. We expect to close the sale of the healthcare software assets with the gain utilized to address stranded costs. And we expect a 4 to 5-point year-to-year improvement in operating pre-tax margin and a tax rate in the high-teens. Based on our solid first quarter performance and view of the year, we are on track to our midterm model.
And now, Patricia, let's go to the Q&A.
