International Business Machines Corporation — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time.
Thank you. I'd like to welcome you to IBM's First Quarter 2024 Earnings Presentation.
Thank you for joining us. In the first quarter, we had solid performance across revenue and cash flow. These results are further proof of the quality of our portfolio and our hybrid cloud and AI strategy. We had good performance in Software, at the high end of our model; continued strength in Infrastructure, above our model; while Consulting was below model. On a relative basis, Consulting outperformed the market.
Thank you, Arvind. Let me start with the details of the transaction. We have agreed to acquire HashiCorp for $6.4 billion in enterprise value to be funded by cash on hand. The transaction was approved by HashiCorp's Board of Directors. Closing is anticipated by the end of 2024, subject to approval by HashiCorp's shareholders, regulatory approvals and other customary closing conditions.
Now turning back to the quarter. Let me start with a few comments on the macroeconomic environment.
Thanks, Arvind. In the first quarter, we delivered $14.5 billion in revenue; $3 billion of adjusted EBITDA; $1.7 billion of operating pretax income; $1.68 operating earnings per share; and we generated free cash flow of $1.9 billion, up approximately $600 million year-over-year.
RHEL, OpenShift and Ansible. Annual bookings growth was again in the mid-teens, with OpenShift up over 40% this quarter and RHEL and Ansible each up double digits.
revenue and free cash flow. We see full year constant currency revenue growth in line with our mid-single-digit model, still prudently at the low end. And for free cash flow, we expect to generate about $12 billion driven primarily by growth in adjusted EBITDA.
Thank you, Jim. Before we begin the Q&A, I'd like to mention a couple of items. First, supplemental information is provided at the end of the presentation. And then second, as always, I'd ask you to refrain from multipart questions.
[Operator Instructions] Our first question comes from Amit Daryanani with Evercore.
I guess I was hoping you could talk a bit more on the Consulting side of the business because revenues did decelerate rather notably in March quarter, but I think, on the other side, your AI-centric backlog at over $1 billion is doing extremely well. So I'm hoping you'd touch on the near-term side, what are you hearing from your customers? What are they telling you around the duration of this pause? Because I think the expectation of mid-single-digit growth would imply this business will recover rather quickly. So I'd just love to get a sense on what are customers' view on Consulting, in terms of the duration of the pause? And then longer term, what does the opportunity look like given the AI-centric backlog appears a lot more robust versus what I think folks have expected beyond '24?
Thanks, Amit. I appreciate the question. Let's take a step back because I think you're seeing some interesting dynamics in the consulting industry overall. And let's bifurcate it between how you asked the question. Let's look at real demand that's being measured in bookings, and then let's talk about what's happening with the revenue realization.
The next question comes from Wamsi Mohan with Bank of America.
Arvind would love to get a little bit more of sort of a macro demand backdrop. I mean I know Jim mentioned the tightened discretionary spending in some areas. How do you think about the risk of that sort of filtering more broadly as you go through the course of the year, especially given your guidance calls for an accelerating trend here?
Thanks, Wamsi. So let me address your thought about the demand profile globally. So if I look at where we are right now and where we project for the rest of the year, demand is actually quite strong. I would put it as very similar to 2023. This is backed up by IMF GDP estimates, which are now north of 3% for the global business.
Okay. Thank you. Thanks, Wamsi, for the question. As Arvind indicated in the prepared remarks, we couldn't be more excited about the powerful combination of HashiCorp with IBM and Red Hat together. We talked about it in the prepared remarks, we've been very disciplined in our set of criteria around M&A. And this fits strategically. It has tremendous synergistic value to our hybrid cloud and AI portfolio and it has an attractive financial return overall.
One, it's a higher revenue growth profile company, so it accelerates IBM's revenue growth over time; two, to your question, adjusted EBITDA accretive in the first 12 months; and three, levered free cash flow accretive by the end of year 2. We think there are a potential for meaningful synergies overall and, when we look at it, significant near-term operating efficiencies, cost synergies. And to put that in perspective, we see this business profile moving from about a mid-single-digit free cash flow margin business to about a 30% to 40% free cash flow margin business in a handful of years, free cash flow accretive by the end of year 2.
Our next question comes from Toni Sacconaghi with Bernstein.
Jim, just to clarify, you've taken down your consulting outlook for the year from 6% to 8% to 5%. I think that's about 60 basis points to company growth. Is there anything offsetting that? Or is that just kind of a rounding error, in the low single-digit guidance?
Okay, Toni. Many questions here, let me see if I can get through them quick. You look at full year, full year, as Arvind indicated, we're maintaining our guidance on our model mid-single digit, I think, prudently just coming out of a first quarter. We've got a lot of work to do in the next 3 quarters, but I think prudently, at the low end of that model. By the way, that was very consistent with what we said 90 days ago.
Our next question comes from Ben Reitzes with Melius Research.
I wanted to ask about Red Hat. You accelerated it to 9% in the quarter from 7%. What is your confidence level you get to the mid-teens, which kind of equals your bookings growth? And then on Red Hat, the follow-up would be, how much can HashiCorp augment that growth rate? And can you clarify the synergies a little bit more between Red Hat and Hashi? And was Hashi needed to help grow Red Hat? Or is it a bonus? How do you see that?
Ben, let me take the first part of those questions. We are very, very pleased with Red Hat. If I look at Red Hat now, we have had mid-teens or better bookings growth for the last 3 quarters, third quarter, fourth quarter and first quarter. That, combined with the growth we are seeing in OpenShift as well as in both Ansible and RHEL, OpenShift growing almost 40%, gives us a lot of confidence. So bookings growth plus OpenShift plus what we're seeing in the revenue now at 9% tells us that we should see that Red Hat growth continue or accelerate through the year.
Yes, I would just add one other point, Ben. As you and I and many of the investors have talked about since first quarter earnings, we've kind of bifurcated this business when we saw the slowdown happen in second half last year between our subscription-based business within Red Hat versus our consumption-based services and offerings, the former being about 80% of our portfolio, the latter being about 20%.
Next question comes from Erik Woodring with Morgan Stanley.
Arvind, maybe this one is for you. If we include the Software AG assets and now HashiCorp, I think you spent about $16 billion on acquisitions since your 2021 Analyst Day. Back then, you talked about kind of having $20 billion to $25 billion of M&A firepower you could leverage through 2024. Just curious, as we sit here today, your willingness or desire to go after more M&A for the rest of this year, would you be willing to go kind of above and beyond that total that you had laid out almost 3 years ago? And just as we think about the potential targets in the future, where do you believe you have gaps that you can still fill within your portfolio?
Erik, let me just maybe address the macro points on it, and I'll let Jim talk to some of the numbers here. We are going to remain incredibly disciplined on our M&A strategy. We kind of said it, but I just want to repeat, we've got to find things that meet our strategy, we've got to have some synergy opportunities at IBM, and it has to be financially accretive within the second year. So if we find things that meet that and we are committed, I'll say, to both our dividend and our investment-grade ratings, then that is kind of the picture we go in. Now within that, we believe we have some level of flexibility and that is what we will operate in. So that gives you a sense there.
Yes. Arvind, just building on your point, we are very confident in the capital structure of this company. We are committed to maintain a very solid investment-grade balance sheet. We are focused on debt leverage, obviously. But our primary capital allocation is to invest in our business, both organically and inorganically, and to maintain an attractive return to shareholder program with our dividend policy. So with all that said, just to reaffirm what Arvind indicated, we will remain in the market prudently evaluating complementary tuck-in opportunities that fit our M&A strategy, and we got the capability of doing that.
Our next question comes from Brent Thill with Jefferies.
Arvind, on the Software business, I mean, you've been ranging somewhere between 3% to 8%, 9% growth. Many have asked, it seems like the overall market is growing faster. What's going to take to unlock this incredible portfolio you've built to effectively maybe monetize at the rate the industry is growing out? Is there something that's causing friction to unlock that true potential of the Software business? Or are we just being too focused on the short term? What do you think unlocks that value in getting you to your closer TAM of the growth?
So Brent, as you can imagine, we are very, very focused on that question. If I just want to lay out a 4-year trajectory, if you'll indulge me with just a minute, we began with a software portfolio that was, let's call it, flat, it would be a kind way of putting it, about 5 years ago. We've gone from flat to, as you said, some volatility. But we are now seeing that we can be north of 6% for this year, whether you want to call that 6.5% or 7%, and we are very confident in that. As we do organic innovation and as we do M&A, we will find that, that number will keep improving year-over-year. And I'm pointing to a very consistent 4-year trajectory of having achieved that.
Our next question comes from Brian Essex with JPMorgan.
Another Red Hat one. Maybe, Arvind, if you could maybe give us a little bit of sense of what's going on in the pipeline there and whether or not you're seeing a substantial benefit in the Red Hat pipeline from the VMware acquisition, both on the consulting side as well as the software side. Are you seeing a lot of migration? And how much of an opportunity do you think might be there longer term to capture more share of that market?
Brian, great question. So let me talk to some of the Red Hat dynamics. It's not so much directly related to VMware per se, but clients are all beginning to say, they're asking the question, which is the platform they want to bet on for the next 10 to 20 years on which they will write their applications, deploy them both in their own data centers and on public cloud. We find an incredible amount of interest in that question. And as we have built out the Red Hat portfolio not just for containers, because many people know OpenShift as a great container platform, but also for virtualization with both container-native virtualization and with the KVM hypervisor, we are finding a lot of interest around those topics.
Our next question comes from Matt Swanson with RBC Capital Markets.
I think I might try a qualitative version of an earlier question around gen AI. And I think just we see so much of the news feed being around kind of the hype cycle, and obviously, growing $1 billion book of business shows you're monetizing it. Can you just talk about maybe the pain points that enterprises are looking to address when they first come to you or when those consulting relationships start? Like, how much of a plan is in place versus how much they're looking to you to kind of hold their hand in terms of this gen AI journey?
I think, Matt, that's a great question. So let me maybe take that, and I'll address it from both the consulting side and the software side. If we look 12 months ago, I would say that there was a lot of excitement and there was a lot of experimentation that we're starting, and people were not thinking through what does this mean for my overall ROI, what are the economics of running gen AI, how do I get the people changes done so that the ROI can actually be realized.
Thank you, Arvind. Operator, let me turn it back to you to close out the call.
Thank you. Thank you all for participating on today's call. The conference has now ended. You may disconnect at this time.