James J. Kavanaugh
Senior Vice President and Chief Financial Officer at International Business Machines
Thanks, Arvind. I'll get right into the financial highlights of the quarter. We delivered $14.8 billion of revenue, $2.3 billion of operating pre-tax income and $2.20 of operating earnings per share. Through the first three quarters of the year, we generated $5.1 billion of free cash flow.
Reported revenue growth was 4.6%. This includes just over one point of growth from currency translation, which is significantly less than the currency rate suggested in July. In fact, currency movements over the last 90 days impacted our third quarter revenue by about $250 million. At constant currency, our revenue was up 3.5%. As is typical, I'll focus the discussion on constant currency.
Arvind talked about clients' priorities in today's environment, which are driving solid growth in our software and consulting offerings. I'll remind you, software and consulting are our two growth vectors, and together make up about three quarters of our revenue base.
Software revenue was up 6% as clients leverage their data for insights and automate their IT in a hybrid environment. We had good growth in both Hybrid Platform & Solutions and Transaction Processing revenue.
Our Consulting business had another solid quarter with 5% revenue growth, strong signings performance and a book-to-bill ratio greater than 1.15 over the last year. We are capitalizing on our continued momentum in the market as we help clients get value from hybrid cloud and AI and leverage our strategic partnerships.
Our Infrastructure revenue was down 3% with growth in zSystems. More and more, we are seeing clients embrace IBM Z in their hybrid cloud environments, especially in regulated industries. This growth was offset by declines in Distributed Infrastructure and Infrastructure Support.
IBM's revenue growth, together with the good portfolio mix and yield from our productivity initiatives, generated strong margin, profit and free cash flow performance. Operating gross margin expanded 160 basis points, and operating pretax margin expanded 170 basis points. Within that PTI margin, we absorbed a year-to-year currency impact of over 150 basis points. Despite that headwind, our margin expansion was broad-based with improvements in every business segment.
Driving efficiency and productivity has always been part of our operating and financial models. These ongoing productivity initiatives enable reinvestment in the business, increase financial flexibility and contribute to margin expansion. Our activities range from simplifying our application environment to digitally transforming our business processes by applying AI at scale. We are ahead of pace to achieve our target of $2 billion in annual run rate savings by the end of 2024. While there is still more to do, I am pleased with our progress.
The combination of our revenue and margin performance yielded strong profit growth. Operating pretax profit was up 17% to $2.3 billion. We generated $1.7 billion of free cash flow in the quarter and over $5 billion year-to-date, which is up $1 billion versus last year. Free cash flow growth through the first three quarters was primarily driven by cash sourced from our operating profit performance. We also had working capital efficiencies driven by solid collections. These growth drivers were partially offset by higher performance-based compensation payments earlier in the year.
In terms of cash uses, year-to-date, we spent about $5 billion in acquisitions and returned $4.5 billion to shareholders through dividends. Our resulting cash balance at the end of September was $11 billion. That's up over $2 billion from year-end, but with the acquisition of Apptio in the third quarter, cash is down over $5 billion from June. Our debt balance is now $55 billion, also down from June.
Putting this all together, our business fundamentals are solid with sustainable revenue growth, margin expansion, solid cash generation and a strong balance sheet with financial flexibility to support our business into the future.
Turning to the segments. Software revenue grew 6% with contribution from Hybrid Platform & Solutions and Transaction Processing. This performance reflects growth in both our transactional revenue and our recurring revenue base, which is about 80% of our annual software revenue.
In Hybrid Platform & Solutions, revenue was up 7% with growth across Red Hat, Automation and Data & AI as we execute our platform-based approach to hybrid cloud and AI.
Red Hat revenue was up 8%. We continue to deliver good growth in OpenShift and Ansible, both gaining share again this quarter. Clients are committing to our hybrid cloud approach with annual bookings up 14% in the quarter. This includes double-digit growth across RHEL, OpenShift and Ansible partially offset by headwinds in consumption-based services.
IT and business automation are top client priorities, and we've been investing to capture the opportunity. This quarter, our Automation revenue grew 13% with pervasive growth across all business areas. We had strength in AI ops and management driven by good performance in Instana, Turbonomic and now Apptio as clients look to optimize business outcomes and boost productivity.
Data & AI revenue was up 6%. Growth areas include data fabric and customer care as enterprise clients are both preparing for and adopting generative AI solutions, leveraging watsonx. We also grew in asset and supply chain management as we help enterprises run sustainable operations.
Security revenue declined 3%. We delivered growth in security software driven by data security and identity and access management. This was more than offset by declines in managed security services. Looking across these businesses, our Hybrid Platform & Solutions ARR has grown to $14 billion, up 7% since last year.
In Transaction Processing, revenue was up 5%. Throughout this year, we've been talking about how the success of the last couple of zSystems cycles is driving demand for this mission-critical software. This, together with price increases, contributed to year-to-date growth in both recurring and transactional software revenue in Transaction Processing.
Moving to profit for the Software segment. We expanded gross and pretax margins. Our pretax margin was up 120 basis points, even while absorbing over two points of impact from currency. We continue to deliver operating leverage driven by our revenue scale and mix this quarter.
Our Consulting revenue was up 5% with growth across all three lines of business and geographies. With another quarter of strong signings, as I said, our trailing 12-month book-to-bill ratio is now over 1.15. Clients continue to prioritize transformation projects that enable cost savings and productivity. These results are a proof point that we are well positioned to meet these needs in today's complex environment.
IBM's focused hybrid cloud and AI strategy has become even more of a differentiator as clients' interest in generative AI continues to ramp. We are helping clients understand how AI can be used to automate tasks, make better decisions with speed and improve customer experiences. We made a series of AI announcements over the last few months, demonstrated continued advancement of our strategic partnerships. We're providing clients with the opportunity to accelerate their transformation and deploy generative AI responsibly, whether that be leveraging AI capabilities of IBM, our partners or a combination.
Today, our strategic partnerships account for about 40% of Consulting revenue and have continued to grow double digits across revenue and signings. In aggregate, our hyperscaler partnership revenue was up over 40%, and signings essentially doubled year-to-year. Additionally, our Red Hat practice, which helps clients optimize how they build, deploy and manage applications for a hybrid cloud environment, has continued to grow at a double-digit rate, with over $1 billion of signings in the quarter.
All of what I just mentioned, from market demand, to how we're positioned and partnering, to our investments to drive growth is reflected in our overall consulting revenue performance. You can see that play out across our three lines of business. In Business Transformation, revenue grew 5%, again, led by data and technology transformations, including AI and analytics-focused projects. Finance and supply chain transformations also contributed to growth. In Technology Consulting, revenue was up 1%. Growth in cloud-based application development and modernization work was partially offset by declines in on-prem application-focused projects. In Application Operations, revenue grew 7%, driven by both cloud application management and platform engineering services. In platform engineering, we help clients design an application environment that runs securely and smoothly at scale.
Moving to Consulting profit. We expanded gross margin 150 basis points. Pretax margin expanded 40 basis points to just over 10%. Our year-to-year margin performance reflects productivity actions we've taken, mitigated by increased labor costs and about one point of pretax margin impact from currency.
Moving to the Infrastructure segment. Revenue was down 3%. Hybrid Infrastructure revenue was flat, while Infrastructure Support declined 7%.
Within Hybrid Infrastructure, zSystems grew 9% in the seasonally smaller revenue quarter. z16 revenue remains well ahead of prior cycles after six quarters of availability. The program strength reflects both growing enterprise workload requirements and the economic value-add scale of the platform in traditional processing and Linux consolidation. In fact, installed MIPS capacity for Linux on Z has grown more than fourfold over the last decade. Clients continue to value the security, resiliency and hybrid cloud capabilities of the zSystems platform.
Distributed Infrastructure revenue was down 6% as compared to a strong growth in last year of 21% as we introduced innovation across storage and Power10. This quarter, we had growth in Power, offset by declines in storage.
In the Infrastructure segment, we had strong gross and pretax margin performance. Pretax margin expanded 350 basis points, reflecting benefits from portfolio mix with our zSystems performance and productivity while absorbing over a point of impact from currency.
Now let me bring it back up to the IBM level to talk about our expectations before we go to Q&A. Just about two years ago, we introduced today's IBM, a more focused business with a platform-based approach to hybrid cloud and AI. Since then, we've continued to invest organically and inorganically, bring new products and innovation to market, expand our ecosystem and our talent base and drive productivity across our business. The result is a business that addresses today's client needs with a stronger financial profile.
Our third quarter performance reinforces this progress with 3.5% revenue growth, gross and pretax margin expansion and strong free cash flow generation. Now with three quarters of the year behind us, we are holding our full year view of our two primary financial metrics: revenue growth and free cash flow. We continue to expect constant currency revenue growth of 3% to 5% and free cash flow of about $10.5 billion, that's up $1.2 billion over last year.
We've had solid revenue performance all year in our growth vectors of software and consulting. We still expect Software revenue growth at the high end of its mid-single-digit model and Consulting revenue in the 6% to 8% range. Infrastructure revenue, of course, reflects product cycle dynamics. In total, with one quarter to go, it's prudent to assume the low end of IBM's 3% to 5% range.
We are making great progress in our productivity initiatives. The work we are doing to digitally transform our business not only makes us more nimble by simplifying and streamlining our processes and operations, but it also frees up spend for reinvestment, provides financial flexibility and delivers operating leverage. This contributes to solid margin and free cash flow performance.
We continue to expect about a half a point of operating pretax margin improvement, and we see a mid-teens tax rate for the year. Our free cash flow performance has been driven primarily from our profit performance. Through the first three quarters, we're up $1 billion year-to-year, and we delivered nearly 50% of our full year expectation, which is ahead of our historical attainment. While as always, we are relying on a seasonally strong fourth quarter, we're on track to achieve about $10.5 billion for the year.
As I look specifically at the fourth quarter, with the recent currency movements, we now see currency to be neutral to a one point headwind to revenue growth. That's nearly $600 million worse than 90 days ago. I'd expect constant currency revenue growth in the fourth quarter to be similar to the third. That's despite a tough compare from last year's strong ELA contribution in software and the large z16 transactional performance in infrastructure. This demonstrates continued momentum in our underlying business.
Bringing it all together, we've clearly got a higher growth, higher value business with strong cash generation, a business well positioned for the future.
Arvind and I are now happy to take your questions. Patricia, let's get started.
