Worldwide Enterprise Machines Company (NYSE:IBM) This fall 2022 Earnings Name Transcript
Worldwide Enterprise Machines Company (NYSE:IBM) This fall 2022 Earnings Name Transcript January 25, 2023
Operator: Welcome, and thanks for standing by. Presently, all individuals are in a listen-only mode. In the present day’s convention is being recorded. If in case you have any objections, you might disconnect at the moment. Now, I’ll flip the assembly over to Ms. Patricia Murphy with IBM. Ma’am, you might start.
Patricia Murphy: Thanks. That is Patricia Murphy and I would wish to welcome you to IBM’s Fourth Quarter 2022 Earnings Presentation. I am right here at this time with Arvind Krishna, IBM’s Chairman and Chief Govt Officer and Jim Kavanaugh, IBM’s Senior Vice President and Chief Monetary Officer. We’ll put up at this time’s ready remarks on the IBM investor web site inside a few hours, and a replay can be obtainable by this time tomorrow. Supplied further info to our buyers, our presentation consists of sure non-GAAP measures. For instance, all of our references to income development are at fixed forex. We have now offered reconciliation charts for and different non-GAAP measures on the finish of the presentation, which is posted to our investor web site.
Lastly, some feedback made on this presentation could also be thought of forward-looking below the Personal Securities Litigation Reform Act of 1995. These statements contain elements that would trigger our precise outcomes to vary materially. Extra details about these elements is included within the firm’s SEC filings. So, with that, I will flip the decision over to Arvind.
Arvind Krishna: Thanks for becoming a member of us. Our fourth quarter and full yr outcomes reveal the execution of our hybrid cloud and AI technique. We delivered sturdy income development in our enterprise. The expansion was broad-based throughout our software program, consulting, and infrastructure segments in addition to throughout geographies. Our shoppers acknowledge that know-how continues to be a basic supply of aggressive benefit. Over the past a number of quarters, it has grow to be clear that know-how is enjoying a big position in boosting productiveness within the face of inflation, demographic shifts, provide chain challenges and sustainability necessities. We entered 2022, a extra targeted firm and took steps to strengthen our place. We strengthened our consulting experience and expanded strategic partnerships.
To bolster our software program portfolio, we invested in hybrid cloud and AI capabilities. We additionally delivered important improvements in infrastructure with our z16 and Energy platforms. All of this was dropped at market with a extra technical and experiential gross sales method. Trying again on the yr, we’re happy with the progress we made. We delivered income development above our mid-single-digit mannequin and we delivered strong free money circulate. However I will acknowledge there may be extra to do. This yr, we’ll unlock extra productiveness, broaden our strategic partnerships, and put extra funding in particular development markets. For 2023, we see income development in keeping with our mid-single-digit mannequin vary and about $10.5 billion of free money circulate. This retains us on a path of sustainable development.
I’ll now present some colour on the progress we’re making within the execution of our technique. Our perspective is obvious. Hybrid cloud and AI are the 2 most transformative applied sciences for enterprise at this time. These applied sciences work collectively to drive enterprise outcomes. Hybrid cloud is the place the world goes. Containers are the popular vacation spot for functions. Hybrid cloud affords extra worth than counting on a singular public cloud. It allows organizations to drive enterprise worth throughout a number of clouds, on-premise or on the edge. This consists of scale, safety, ease of use, flexibility of deployment, seamless experiences and sooner innovation cycles. Our platform, constructed on Crimson Hat, is the main container platform, permitting shoppers to harness the ability of open supply software program improvements.
IBM software program and infrastructure applied sciences have been optimized for this platform. Our consultants and others leverage their in depth technical and enterprise experience to speed up shoppers’ digital transformation journeys. Purchasers realizing actual worth from working with IBM’s hybrid cloud platform method. For instance, we labored with the Canadian Imperial Financial institution of Commerce, CIBC, to undertake a hybrid cloud method. Utilizing Crimson Hat know-how, CIBC manages and abilities its infrastructure with larger pace and adaptability. They’ll now develop functions in a non-public cloud and rapidly deploy them to a public cloud. They ship a whole lot of latest functions and lowered — provisioning time by 95% and deployment time by 50%. We’re serving to Delta Airways leverage hybrid cloud to modernize choices, automate operations and combine safety.
IBM Consulting deployed Crimson Hat on Amazon Internet Companies and IBM Cloud Packs to offer a constant platform. Delta now has extra levers that may use to spice up developer productiveness, cut back time to market and enhance worker satisfaction. CIBC and Delta are each nice examples of the worth hybrid cloud can present. Let’s now speak about synthetic intelligence, or AI. AI is projected to contribute $16 trillion to the worldwide financial system by 2030, together with a large increase in productiveness by infusing AI into each enterprise course of. We have now been co-creating with many purchasers to deploy AI at scale. We automated the drive-through expertise for quick-serve eating places. We accelerated the rollout of COVID-19 vaccines by automating the processes that help tens of millions of consumers with inquiries and appointments.
By making use of AI and automation we’ve got helped safety analysts to make use of the time to answer threats from hours or days, to minutes. Not too long ago, the U.S. Patent and Trademark Workplace partnered with IBM to leverage a number of AI capabilities that make it simpler for individuals to glean insights from their huge database of patents. The BBC is now utilizing our AIOps software program to automate the administration of its IT infrastructure. For companies, deploying AI may be difficult as a result of it takes time to coach every mannequin. However by utilizing massive language fashions, corporations can now create a number of fashions utilizing the identical knowledge set. This implies companies can deploy AI with a fraction of the time and sources. That’s the reason we’re investing in massive language, our basis fashions for our shoppers and have infused these capabilities throughout our AI portfolio.
Our associate ecosystem performs a crucial position within the execution of our technique. Within the fourth quarter, we made a sequence of latest IBM software program choices obtainable as-a-Service within the AWS market. Likewise, Crimson Hat continued the growth of its choices in hyperscaler marketplaces, making Ansible Automation Platform obtainable on each Azure and AWS. Adobe and Salesforce are additionally leveraging open supply innovation primarily based on Crimson Hat applied sciences of their choices. Enterprise with our strategic companions continues to develop with SAP, Microsoft and AWS, throughout $1 billion in income for the yr. We have had nice success with our strategic companions and as we enter the New 12 months, we’re increasing and higher enabling our broader ecosystem. Not too long ago launched Companion Plus, a brand new simplified program that will increase our attain and scale by new and present IBM companions.
We stay targeted on delivering new improvements that matter to our shoppers. Within the fourth quarter, we launched Crimson Hat Machine Edge, a light-weight answer to flexibly deploy conventional or containerized workloads on small units reminiscent of robots, IoT gateways, point-of-sale and public transport. We additionally shaped a collaboration with the Japanese consortium, Rapidus to leverage the depth of our mental property on superior semiconductors. We unveiled Osprey, a 433-qubit quantum processor, that brings us nearer to delivering our purpose of constructing a 1,000 qubit system later this yr. On the similar time, we proceed to accumulate corporations to enrich our natural innovation. Within the fourth quarter, we acquired Octo, which improves our footprint within the US federal market.
This caps the yr with eight acquisitions throughout software program and consulting. As sustainability turns into extra of a precedence, corporations want digital applied sciences to research knowledge, making a baseline and enhance the best way they function. Our software program has helped IBM cut back its personal carbon footprint. Throughout IBM’s international actual property presence, we have been capable of cut back carbon emissions by over 61% when in comparison with 2010. Utilizing IBM sustainability software program, we’ve got simplified and automatic our sustainability reporting processes and lowered reporting prices by 30%. Let me wrap by saying I am happy with the progress we’ve got made with our portfolio, our go-to-market and our ecosystem. I am assured in our means to leverage hybrid cloud and AI to assist shoppers flip enterprise challenges into alternatives.
Our technique continues to strongly resonate with shoppers and companions, and this offers us a strong basis to construct upon on this yr. Whereas there may be extra to be accomplished, we enter the New 12 months as a extra succesful and nimble firm, well-equipped to fulfill our shoppers’ wants. I’ll now flip it over to Jim who provides you with extra detailed info on our efficiency and expectations.
Jim Kavanaugh: Thanks, Arvind. I will begin with the monetary highlights of the fourth quarter. We delivered $16.7 billion in income, $3.8 billion of working pre-tax revenue and working earnings per share of $3.60. In our seasonally strongest quarter, we generated $5.2 billion of free money circulate. Our income for the quarter was up over 6% at fixed forex. Whereas the greenback weakened a bit from 90 days in the past, it nonetheless impacted our reported income by over $1 billion and 6.3 factors of development. As all the time, I will focus my feedback on fixed forex. And I will remind you that we wrapped on the separation of Kyndryl in the beginning of November. The one-month contribution to our fourth quarter income development was offset by the impression of our divested well being enterprise.
Income development this quarter was once more broad-based. Software program income was up 8% and consulting up 9%. These are our development vectors and characterize over 70% of our income. Infrastructure was up 7%. Inside every of those segments, our development was pervasive. We additionally had good development throughout our geographies, with mid single-digit development are higher in Americas, EMEA and Asia Pacific. And for the yr, we gained share general. We had sturdy transactional development in software program and {hardware} to shut the yr. On the similar time, our recurring income, which gives a strong base of income and revenue additionally grew, led by software program. I will remind you that on an annual foundation, about half of our income is recurring. Over the past yr, we have seen the outcomes of a extra targeted hybrid cloud and AI technique.
Our method to hybrid cloud is platform-centric. As we land a platform, we get a multiplier impact throughout software program, consulting and infrastructure. For the yr, our hybrid cloud income was over $22 billion, up 17% from 2021. our revenue metrics for the quarter, we expanded working pre-tax margin by 170 foundation factors. This displays a robust portfolio combine and enhancing software program and consulting margins. These similar dynamics drove a 60 foundation level improve in working gross margin. Our expense was down year-to-year pushed by forex dynamics. Inside our base expense, the work we’re doing to digitally rework our operations gives flexibility to proceed to spend money on innovation and in expertise. Our working tax charge was 14% which is flat versus final yr.
And our working earnings per share of $3.60 was up over 7%. Turning to free money circulate. We generated $5.2 billion within the quarter and $9.3 billion for the yr. Our full yr free money circulate is up $2.8 billion from 2021. As we talked about all yr, we’ve got a couple of drivers of our free money circulate development. First, I will remind you, 2021’s money circulate outcomes included Kyndryl associated exercise together with the impression of spin expenses and CapEx; second, we had working capital enhancements pushed by efficiencies in our collections and mainframe cycle dynamics. Regardless of sturdy collections, the mixture of income efficiency above our mannequin and the timing of the transactions within the quarter led to higher-than-expected working capital on the finish of the yr. This impacted our free money circulate efficiency versus expectations.
Our year-to-year free money circulate development additionally features a modest tailwind from money tax funds and decrease funds for structural actions, partially offset by elevated CapEx funding for at this time’s IBM. When it comes to money makes use of for the yr, we invested $2.3 billion to accumulate eight corporations throughout software program and consulting, mitigated by over $1 billion in proceeds from divested companies, and we returned almost $6 billion to shareholders within the type of dividends. From a stability sheet perspective, we ended the yr in a robust liquidity place with money of $8.8 billion, that is up over $1 billion year-to-year and our debt stability is down almost $1 billion. Our stability sheet stays sturdy, and I say the identical for our retirement-related plans. At year-end, our worldwide tax certified plans are funded at 114%, with the US at 125%.
Each are up year-to-year. You will recall, again in September, we took one other step to scale back the danger profile of our plans. We transferred a portion of our U.S. certified outlined profit plan obligations to insurers, with out altering the advantages payable to plan individuals. This resulted in a big non-cash cost in our GAAP leads to the third quarter, and we’ll see a profit in our non-operating expenses going ahead. You’ll be able to see the advantage of this and different pension assumptions to the 2023 retirement-related prices in our supplemental charts. Turning to the segments. Software program income grew 8%, fueled by development in each hybrid platform and options and transaction processing. We concluded the yr with seasonally sturdy transactional efficiency in addition to a strong and rising recurring income base in software program.
In hybrid platform and options, income was up 10%, with pervasive development throughout our enterprise areas: Crimson Hat, automation, knowledge and AI and safety. Our platform-based method to hybrid cloud and AI is resonating with shoppers. As a proof level, OpenShift, our industry-leading hybrid cloud platform now has $1 billion in annual recurring income, and we modernize and optimize our software program capabilities, together with by cloud packs throughout automation, knowledge and AI and safety for that platform. Crimson Hat income grew 15% within the quarter, led by energy in OpenShift and Ansible, each rising double digits and gaining market share. Automation income was up 9%. Development was led by enterprise automation, software servers and integration as shoppers look to automate enterprise workflows and enhance functions.
Information and AI income grew 8% with enterprise wants to arrange, retailer and handle their knowledge. This efficiency displays demand in areas together with knowledge administration, knowledge cloth and asset and provide chain administration. Safety delivered 10% income development. We’re serving to shoppers detect, stop and reply to safety incidents, which led to energy throughout menace administration, knowledge safety and id. Throughout these companies, the annual recurring income or ARR for hybrid platform and options is $13.3 billion. And for all of software program, hybrid cloud income is now greater than $9.3 billion over the past yr, up 16%. In transaction processing, income was up 3%. Demand for this mission-critical software program has adopted will increase in Z Programs put in base capability over the past couple of product cycles and robust renewal charges continued this quarter.
Each are proof of the significance of this platform in a hybrid cloud surroundings. Shifting to software program revenue. Our pre-tax margin was up 2 factors this quarter, contributing to a full yr margin of almost 25%. Consulting income grew 9%. Purchasers are leveraging IBM’s hybrid cloud management and deep {industry} experience to navigate the complexity of their digital transformation journeys. Income development was broad-based throughout all enterprise strains and geographies. And I will remind you that that is on high of the 16% development consulting delivered within the fourth quarter of 2021. Sturdy demand for our choices led to signings development of 17%. With this, fourth quarter had the perfect quarterly book-to-bill of the yr, and we sequentially improved our trailing 12-month book-to-bill ratio to 1.1. Purchasers are partnering with IBM Consulting as they resolve what functions to modernize and methods to migrate these functions throughout hybrid, multi-cloud environments.
Over the past 12 months, consulting delivered $9 billion in hybrid cloud income, which is up 23%. This quarter, our Crimson Hat follow was once more a significant contributor to this development. Income from strategic partnerships additionally grew at a robust double-digit charge. We proceed to see momentum on this house. In mixture, our strategic partnership bookings have been up over 50% with Azure and AWS greater than doubling. Turning to our strains of enterprise. Enterprise transformation income grew 7%. Development in enterprise transformation was as soon as once more pushed by knowledge and shopper expertise transformation together with provide chain and finance optimization. Our partnerships with key ISV companions like SAP, Salesforce and Adobe allow IBM Consulting to remodel crucial workloads at scale.
In know-how consulting, the place we architect and implement shoppers cloud platforms and techniques, income was up 10%. Development was led by cloud software growth practices. Crimson Hat engagements together with our strategic hyperscaler partnerships contributed to the expansion. Utility operations income grew 12%. We assist shoppers to optimize their operations and cut back prices by taking on the administration of functions in hybrid and multi-cloud surroundings. Our incumbency and understanding of shoppers’ functions are key differentiators. Shifting to consulting revenue. Our pre-tax margin was 11% for the quarter and almost 9% for the yr. The fourth quarter margin is up almost 2 factors year-to-year and over 1 level sequentially. We’re beginning to see the profit from pricing actions and productiveness and our acquisitions have grow to be extra accretive.
Turning to Infrastructure section. Income grew 7% pushed by hybrid infrastructure, which was up 11%. Inside hybrid infrastructure, Z methods income grew 21% this quarter. Among the many new z16 capabilities, shoppers are leveraging cyber resiliency to adjust to enterprise rules and proactively keep away from outages of their operation and the brand new on-chip AI accelerator, for instance, has been serving to mitigate danger and detect fraud in bank card software processes. Our distributed infrastructure income was up 5%. This efficiency was fueled by energy in energy following the extension of Energy 10 innovation all through the product line. Infrastructure help efficiency was flat together with the impression from shopper adoption of latest {hardware} with the most recent z16 product cycle.
Credit score: IBM
Shifting to infrastructure revenue. Pre-tax margin was down lower than 1 level within the quarter. And for the complete yr, our pretax margin was almost 15%. Now let me deliver it again as much as the IBM degree to wrap up. At our investor briefing 15 months in the past, we laid out our hybrid cloud and AI technique and our priorities of income development and free money circulate era. Since then, we have been targeted on our portfolio, our go-to-market mannequin, our ecosystem and our capital allocation to execute that technique and create worth by focus. We now simply accomplished the primary yr as at this time’s IBM. Our 2022 income was up almost 12%, together with almost 4 factors of incremental Kyndryl contribution that is above our mannequin of mid-single-digit development. Over 70% of our income was in our development vectors of software program and consulting and about half of our income is recurring.
With this high-value combine and contribution from the incremental Kyndryl income, we expanded our full yr working pre-tax margin by 2.5 factors. And our free money circulate was $9.3 billion, up $2.8 billion from the prior yr. We invested organically and inorganically and return important worth to shareholders by dividends. Now there have been some exterior elements that we confronted this previous yr that impacted our revenue and money. We exited a worthwhile enterprise in Russia. We’re coping with a a lot stronger greenback, and we’re working in a extremely inflationary surroundings, which put strain on our margins, particularly in consulting. Placing all of it collectively, we’re happy with the basics of our enterprise and the progress we’ve got made in executing our technique.
Our 2022 efficiency demonstrates that we now have a better development, greater worth firm with greater return on invested capital and a robust and rising free money circulate. For 2023, we once more count on strong development in our two most vital measures of success; income and free money circulate. Arvind talked in regards to the vital position know-how performs on this surroundings and the way our options are carefully aligned to the wants of our shoppers. With this, we count on fixed forex income development for the yr to be in keeping with our mid-single-digit mannequin. As we enter this yr, I believe it is prudent to count on the low-end of the mid single-digit mannequin. And totally free money circulate, we might count on to generate about $10.5 billion in 2023, which is up over $1 billion year-to-year.
Let me spend a minute on our expectations for fixed forex income and pre-tax revenue efficiency by section. In software program, with continued momentum in our recurring income stream in each hybrid platform and options and transaction processing, we count on income development in keeping with software program’s mid single-digit mannequin. This income development generates working leverage, and we might count on software program pre-tax margin to broaden by about 2 factors year-to-year. Consulting’s mannequin is to ship excessive single-digit income. We’re coming off a robust yr with income development of 15% as we assist shoppers with their digital transformations. This momentum and robust book-to-bill ratio help consulting income development on the high-end of its mannequin regardless of the powerful examine.
We count on to broaden consulting pre-tax margin by a minimum of 1 level as we proceed to appreciate extra of the value will increase and improved utilization. Infrastructure income is roughly flat over the midterm mannequin horizon, with efficiency in any yr reflecting product cycle dynamics. We’re coming into the yr three quarters into the z16 cycle, and also will ramp on Energy 10. Consequently, we count on 2023 infrastructure income beneath its mannequin and pre-tax margin within the low-teens. For perspective, infrastructure ought to impression IBM’s general income development by over 1 level. With these section dynamics, we’d count on IBM’s working pretax margin to broaden by about 0.5 level. That is in keeping with our mannequin and our tax charge must be within the mid- to high-teens vary.
Let me touch upon a couple of gadgets inside our expectations. First, as I stated, forex was a big headwind in 2022, impacting income by $3.5 billion. With the motion of spot charges over the past 90 days, forex translation could be pretty impartial to income in 2023 with a headwind within the first half, flipping to a tailwind within the second. However I will remind you that we had over $650 million of hedging good points in 2022, which is not going to repeat in 2023, leading to an impression to our revenue and money on a year-to-year foundation. Second, as you recognize, we have taken plenty of important portfolio actions over the past couple of years, which has resulted in some stranded price in our enterprise. We count on to handle these remaining stranded prices early within the yr and anticipate a cost of about $300 million within the first quarter.
We might begin to see advantages within the second half and pay again by the top of the yr. After which third, we often assessment the helpful lives of our belongings. On account of advances in know-how, we’re making an accounting change to increase the helpful lifetime of our server and networking tools efficient the first of January. Based mostly on our year-end asset base, we count on this transformation to learn 2023 pre-tax revenue by over $200 million, primarily in our Infrastructure section. Given it is a change to the depreciation, there is no profit to money. Trying on the first quarter, our fixed forex income development must be pretty in step with the complete yr. Reported development can even embrace a couple of three-point forex headwind at present spot charges. With working leverage, we might count on working pre-tax margin to broaden 50 to 100 foundation factors within the first quarter.
And that is earlier than the cost I simply talked about for the remaining stranded prices. Given the timing of forex and stranded price dynamics, we might count on about one-third of our internet revenue within the first half and about two-thirds within the second half. To sum all of it up, we’ve got made plenty of progress this previous yr. Whereas there’s all the time extra work to do, we’re assured within the fundamentals of our enterprise, and the way we’re positioned as we enter the New 12 months. Patricia, let’s go to the Q&A.
Patricia Murphy : Thanks, Jim. Earlier than we start the Q&A, I would like to say a few gadgets. First, supplemental info for the quarter and the yr is offered on the finish of the presentation. After which second, as all the time, I would ask you to chorus from multi-part questions. Operator, let’s please open it up for questions.
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