International Business Machines Corporation (IBM) on Q1 2021 Results - Earnings Call Transcript

Operator: Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. Today’s conference is being recorded. If you have any objections you may disconnect at this time. Now, I will turn the meeting over to Ms. Patricia Murphy, with IBM. Ma’am, you may begin. Patricia Murphy: Thank you. This is Patricia Murphy and I’d like to welcome you to IBM’s First Quarter 2021 Earnings Presentation. I am here with Arvind Krishna, IBM’s Chairman and Chief Executive Officer; and Jim Kavanaugh, IBM’s Senior Vice President and Chief Financial Officer. We will post today’s prepared remarks on the IBM Investor website within a couple of hours, and a replay will be available by this time tomorrow. Arvind Krishna: Hello everyone. Thank you for joining us today. I am pleased to be speaking with all of you again. In our last call, we shared our financial expectations for the year, revenue growth and $11 billion to $12 billion of adjusted free cash flow. While it’s still early in the year and a lot remains to be done, we are confident enough to say that we are on track. Last quarter, I also talked about how the events of the last year have increased the needs for our clients to accelerate their digital transformations. This is continuing and the overall spend environment is improving, while there are some clear differences by geography and industry. With that as a backdrop, in the first quarter, we posted revenue growth at actual rates and grew free cash flow. We can see signs of progress in a number of areas. Our results in Cloud & Cognitive Software and Global Business Services revenue show that they are on an improved trajectory, including a return to growth in consulting. IBM Z again demonstrated its value as an enduring platform. Meanwhile, we improved margins in our Global Technology Services led by managed infrastructure services. As Jim will explain to you, all of this helped to deliver free cash flow improvement, which is a key focus area. As we move through the year, we will continue to execute on the important changes we are making to the company, from the acquisitions we are making, to the investments to expand our partner ecosystem, to the significant overhaul of our go-to-market model that we announced back in January, to the changes we are bringing to our culture to instill more of a growth mindset. Jim Kavanaugh: Thanks, Arvind. I will get right into the numbers. In the first quarter, our revenue of $17.7 billion grew 1% as reported. We expanded our gross profit margin and grew gross profit dollars. We reported operating earnings per share of $1.77. Our adjusted free cash flow was up, resulting in $11.6 billion over the last year and our balance sheet and liquidity position remain strong. As Arvind said, we made progress, but more to do. You can see this progress in our revenue with an improvement in the trajectory of our constant currency results. Our revenue was up in Cloud & Cognitive Software and in Systems, and consulting returned to growth. We are capitalizing on clients’ digital transformations and journeys to cloud. We take a platform approach to hybrid cloud and AI, with capabilities in infrastructure, software and cloud services. Across these, our cloud revenue was up 18% in the quarter and over the last twelve months, and now stands at over $26 billion for the last year. The fundamentals in our business model also continued to improve. We expanded operating gross profit margin this quarter by 110 basis points. I will remind you how we manage our business. We manage our services businesses at the gross margin level, while we look to capture the value of our product-based businesses at the pre-tax margin level. We had good margin expansion across our segments on those bases. This operating leverage enables a higher level of investment. We are investing in innovation, in skills and in our ecosystem as we execute on our hybrid cloud and AI strategy. Our hiring was up year-to-year, with thousands of people hired in the quarter. We closed six acquisitions since mid-December. We are building out pre-sales garages, adding go-to-market and delivery capabilities in GBS, and technical skills in Red Hat. And we are increasing R&D in areas like AI and quantum to drive innovation. Our year-to-year expense dynamics reflect this investment, though it was offset by lower workforce rebalancing charges year-to-year and lower travel expense in the current environment. Let me round out the financial highlights with some color on our strong free cash flow and balance sheet and liquidity position. We had a good start to the year with $2.2 billion of adjusted free cash flow, and $11.6 billion over the last year. This adjusted view excludes the cash impact of over $600 million for the structural actions initiated in the fourth quarter and transaction charges associated with the separation of our managed infrastructure services business. Patricia Murphy: Thank you. Before we begin the Q&A with Arvind and Jim, I’d like to mention a couple of items. First, we have included supplemental information at the end of the presentation. And finally, as always, I’d ask you to refrain from multi-part questions. So, Operator, let’s please open it up for questions. Operator: Thank you. Our first question comes from Matt Cabral with Credit Suisse. Your line is open. Matt Cabral: Yeah. Thank you very much. Good to see Cloud & Cognitive return to growth in the quarter. Just wondering if you could update us on, what you are seeing in terms of the underlying demand environment in software and just where you are in dealing with some of the issues that weighed on the more transactional side of the business in Q4? And then software going forward, just wondering how we should think about the cadence of revenue for the balance of the year from here? Arvind Krishna: Matt, thanks for the question. Look, I think, that the spend environment overall is improving, Matt. I think I can say that, definitely compared to the fourth quarter and we talked in the fourth quarter about various pauses in buying. We didn’t really see that in the first quarter. Now that said, I do have to acknowledge there are some differences by geography and industry. When you look in the underlying results, you can see the Americas was stronger. There are pockets in Asia that depends very much by country and we can all guess which ones are doing better, which ones are doing worse. It does depend on both COVID rates and the pauses that happened then due to business circumstances. We do sense a bit of caution in Europe and you can see that in the numbers. So you can sort of expect that. You can also see that there are going to be differences by industry. Those most impacted are the obvious ones, travel, tourism and all others that then get touched by those. So that’s a color of what’s happening. However, as I have iterated before, we do see our clients accelerate their digital transformation and as they accelerate their digital transformation, our hybrid cloud thesis comes to play very strongly. Our multi-Cloud, which is multiple public Clouds, as well as private come into play. All the reasons that I mentioned around sovereignty and choice come into play and you can see that then in our Red Hat results. So then explicitly addressing your Cloud & Cognitive Software, we expect Red Hat to maintain itself in the mid to high-teens. That will show through in the Cloud and Data platform results being strong. We expect our applications, our AI applications, to remain in the single-digit software growth, and we can see that, we talked about the strong demand for security in there. I do expect to see continued declines in our TPP software, but it doesn’t really worry us. I mean, those are things where if I look at a two-year or three-year CAGR, we expect to see mid-to-high single-digit declines. But in any given period, it can be a little bit lumpy and we see that there. And so we expect this to carry on through this year. Second quarter, I would be somewhat optimistic, but we have got to go deliver it, Matt. Patricia Murphy: Thanks, Matt. Can we go to the next question. Operator: Our next question will come from Katy Huberty with Morgan Stanley. You may proceed. Katy Huberty: Thank you. Good afternoon. Arvind, you talked about increased investments in sales resources, technical skills, R&D. We saw M&A pick up this quarter. And all of this is meant to drive that mid single-digit sustainable revenue growth that you have talked about, which I believe you have said that you can achieve next year. Can you just help us at a high level bridge how you get to the 4% to 5% revenue growth? What are the primary sources of growth acceleration at the segment level? How much M&A contribution should we be contemplating? And also in next year’s growth rate, are you baking in the revenue benefit that you will see as some of the internal revenue becomes reported as external post the spin? Thank you. Arvind Krishna: Thanks, Katy. It’s pretty clear you are a good student of what we say and publish. So let me try to unpack your question. Let me first talk about how do all these investments result in mid single-digit revenue growth. So if you look at it, we keep saying Red Hat at mid- to high-teens, leading to overall software in the mid-single digits. That will include the TPP mod decline but the overall will be mid single-digit. That could include I will call it any business as usual acquisitions. But the current market value, I don’t see acquisitions adding a significant amount to IBM’s topline. You can do the math with what we can put in. It will be well less than a point overall. We can just -- I think we can say that. Then if I look at our go to market investments, whether that’s technical resources, garages, client success managers, our segmentation, that is not yet really paying off. We see some early signals in the 200 clients doing this. I do expect that can contribute a couple of points maybe a bit more for next year. But you will see that inside our software and our GBS numbers. It’s not additive to those. We have also investing about $1 billion in our ecosystem. That will contribute to improving GBS growth rate to beyond the pre-pandemic rate. So that then takes me to GBS. We will this year come back to the pre-pandemic growth rates of $2 billion to $4 billion, but the mixture of the acquisitions and the go-to-market changes should take them higher than that by the end of the year into next year. Now, you asked also about will internal revenue contribute to this. Katy, the internal revenue is a one-time change. So we have talked about sustainable mid single-digit revenue growth not just for one year. So while it might help next year, we are not counting on that to be a contributor because it’s only once. It’s not every year. So, hopefully, Red Hat contributing together with the acquisitions of software in the mid-single digits, GBS with all the changes we are describing perhaps better than mid-single digits. Our systems if I take a two-year to three-year view kind of flattish, but in any given year it might increase or decrease but not by a whole lot. It doesn’t impact the topline a lot and that’s how sort of we get to the mid-single-digit sustainably. So you might get a one-year benefit from the -- from internal going to external, but not permanent. That’s why I don’t really count on that. Hopefully that gives you an answer to your different parts of the question. Jim Kavanaugh: And as we complete the Form 10 process, which we are well on our way right now, Katy, I would tell you one as you know quite well, we will be transparent about the strategic commercial relationship we have between IBM and Kyndryl going forward and we will disclose what those relationships are and how we will treat that revenue. But more work to be done and we will come back to you at the appropriate time. Patricia Murphy: Thanks, Katy. Sheila, can we please go to next question. Operator: Absolutely. Next we will hear from Toni Sacconaghi with Bernstein. Your line is open. Toni Sacconaghi: Yes. Thank you for taking my question. I guess this is a clarification or maybe two clarifications. I am wondering if you can just comment. I think you said that you think consensus revenue estimates for Q2 are reasonable. They are up about $500 million sequentially from Q1. If I look back at normal seasonality, typically revenues up about $1 billion and it sounds like IT spend is improving. So if anything one would expect better than normal seasonality. So I am wondering whether you are being conservative or there were some one-time things that happened in Q1, but why wouldn’t you underwrite normal or better than normal seasonality, which I have as about a $1 billion sequential increase in revenues? And then separately, Arvind, could you just clarify, when you talk about IBM as an AI company, what role does Watson play in that? I don’t think that name was really mentioned on the call. There’s speculation about Watson Health. Maybe you can give us an update on how Watson fits into IBM as an AI company and specifically what’s happening with Watson Health and Watson Financial? Thank you. Jim Kavanaugh: Okay. Toni, thank you for your question. And I will handle the first part and provide some clarity around our forward-looking guidance and then turn it over to Arvind for your second part of the question. But as we said in prepared remarks, similar to 90 days ago, in fact we are even more confident in the position we put in place with regards to our two most important measures, one, revenue growth, and second, adjusted free cash flow, which is going to provide the fuel for the investments needed for us to capture that hybrid cloud $1 trillion TAM. Now, we reiterated that we are going to grow revenue overall for the year and that is despite currency volatility again with the U.S. dollar appreciating 90 days ago. We lost about a point of revenue for the year and we lost about a point of revenue in the second quarter. So now going to your math with regards to our historical quarter-to-quarter. Very close, I mean, the math I got in my head is somewhere around $900 million, $950 million give or take quarter-to-quarter. We see normal historical attainment across 1Q to 2Q in both our software base of business, as Arvind said. We are feeling even more confident given the rebound here in the first quarter and also in both of our services-based businesses, we see normal historical attainment to that roughly $900 million to $950 million. Now, given our first quarter performance of driving a very strong mainframe cycle growing 49% in the first quarter, in the seventh quarter of the program, which is unheard of coming off of 60% growth last year, Arvind and I both believe it’s very prudent for us as we go forward with our guidance to not count on continued acceleration of our mainframe. We are very pleased with the performance. We are pleased with the value proposition. But I would say against that $900 million to $950 million, I would take a couple hundred million off of that number just based on first quarter’s very strong performance in mainframe and that not concluding going forward. So let me turn it over to Arvind for the second part. Arvind Krishna: Thanks. So, Toni, Watson remains critically important to us. To be absolutely clear, Watson is the brand product name for our AI capabilities. You will see it in the market as Watson Conversational Agent, but you will also see it as, for example, our security products with Watson. It is embedded inside our Cloud Pak for data and called out as Watson. Let me give you a quick example of where we are seeing a huge amount of success. So let me take one of the large entities doing vaccine administration in the United States. When they were -- when they realized in December they could do this, they slowly began to realize that they could get tens of millions of calls every quarter and then how would they handle them? Staff of tens of thousands of people or perhaps deploy Watson. And so far at one of these places and we are deploying a lot more than one, 5 million calls handled in the quarter with over 70% handled by Watson. You now think about extrapolating this over the year. So that would make it 20 million in four quarters and with the confidence building up on one program you could imagine it going to others. This is a lot more straightforward to do and where I think AI excels in handling issues in both improving client satisfaction, because you get an instantaneous answer, but also in taking cost out and those are rare in our industry where you get both together. We see lots and lots of opportunities here. We also see a lot of Watson being embedded on how to automate data cleansing, on how to do AI operations, on dramatically improving the resilience of people’s IT infrastructure. So, Toni, to net it out, Watson remains really important. AI is in the early parts of its journey. Not us, consultants have estimated $16 trillion of global productivity over the decade. We are maybe 5% of our way into that journey. Watson will be the tool that unlocks that for our clients albeit in areas like IT, in data, in conversation, in call handling and in all these areas where we excel and we have a large footprint with our clients. Patricia Murphy: Thank you, Toni. Can we please take the next question? Operator: Our next question comes from Wamsi Mohan with Bank of America. Your line is open. Wamsi Mohan: Yes. Thank you. Arvind, you said the go to market changes have not yet had an impact. Should we expect to see some benefit in the second half of 2021 and if you could maybe address what the cadence of the benefit would be across the business segments, where it would play out first and later, that would be helpful? And separately, maybe you can just help us think through what’s going on with bookings and backlog. The signings numbers were quite weak relative to the confidence you are expressing on consulting growth, is there a pause given the upcoming spin or maybe any -- maybe if you could just dig down into that a little bit, that would be great? Thank you. Arvind Krishna: Thanks, Wamsi. Look, go-to-market changes, Wamsi, always have I will call it a bit of a hystericist loop. It takes time to take impact. We rolled them out in the beginning of January, but then you have to -- there’s a human part to this. You have to assign people to accounts. There is some level of learning, there’s some level of changes and all of that just takes months to flow through. I wish I could do it quicker, but I have got to acknowledge it takes months. That’s why you hear me say it will take time for us to see the benefit. Where will we see the benefit? We would expect to see improved productivity for our sales teams that cover our large accounts. That will result in better software growth and in better GBS growth. I do expect to see that in the second half. I expect to see even more of it going into 2022. As we are also investing in what we are calling our ecosystem, to be clear, that is investments whether it’s in Schlumberger or Siemens or Palantir, just to name some from this last quarter. But before that, relationships we had with Box and Slack and Adobe and Salesforce and SAP. You expect to see all of those play out in the improved growth both in software and in GBS. So you kind of sort of unpack those and you see that. Now, when I talk about why would I see more productivity in our top accounts? Well, the 200 garage engagements that I mentioned, you expect that all of those will build pipeline, oftentimes we might never have had in the past. So that is why you begin to see improved yield in the top accounts. So I expect to see some definite, we will see it in our numbers in the second half and then more going into next year. For the second part of the question, I will hand it to Jim to talk a little bit about signings. Jim Kavanaugh: Okay. Thanks, Wamsi, for the question. Let me unpack some of this for you. First of all, printed numbers, signings down 27% to your point. Entirely driven by our large deal renewal comparison the last first quarter in GTS. If you remember, we signed two massive deals last year with Anthem and Caixa, well in excess of $1 billion a piece in each. But I think this goes to the testament that I have talked about many times on this call and that is all signings are not created equal. The duration, the mix, the offering, the content, all impact how signings translate into backlog and how backlog then translates into revenue realization overall. So let’s talk a little bit about the GTS portfolio, because that’s where it really centers around here in the quarter. When you look at GTS, I think, there’s a couple different dynamics playing out. First, yes, greater than $100 million deals. We were down substantially compared to last year just off of that very tough compare and I will remind you we grew GTS signings north of 40% last year. So, second, though, is our mid-sized deals, read that kind of $10 million to $100 million. We were up high teens and embedded in that, we also had another nice quarter of new logos, which means we are out there winning new business, capturing new client value even in light of the announced separation with Kyndryl. The second component at the heart of your question I think is are we losing business or is business getting paused. I would think one with the new logo wins and, second, we have consistent high renewal rates in this business. This business is very sticky from a managed infrastructure services perspective and we have high 90%-plus renewal rates and we have not seen that change since the announcement. Now, with that said, are there pipeline that has built up that naturally some clients are pausing so they wait to see what our Form 10 is? Yeah. And I don’t think we expected anything different overall. But when you take all that together, our backlog position overall in GTS and our backlog run out, we actually see continued sequential improvement, nice improvement off of fourth quarter, 3 points better and we see that continue modestly here from 1Q to 2Q. And that’s a reflection of those new logos that are going to start ramping up and that’s a reflection of our mid-sized deals which by the way has changed the duration in that part of the portfolio by one month overall which is impacting the revenue realization. So we still feel very good and very comfortable. We have got a very good pipeline in front of us and we see better revenue realization. Patricia Murphy: Thanks, Wamsi. Let’s go to the next question, please. Operator: Next you will hear from Amit Daryanani with Evercore. You may proceed. Amit Daryanani: Good afternoon. Thanks for taking my question. I guess I was hoping if you could touch a little bit more on the GBS performance. We saw a nice improvement I think from what we saw in the December quarter, it was down, but a nice 400 basis points improvement nonetheless. And consulting I think it was notable that we started to see growth over there. So I was hoping you could just help us understand, if you should think about consulting growth as a leading indicator to what GBS can do and would we expect this to be positive growth for GBS in calendar 2021? And then also have you clarify this for me, as you go through the process of splitting of these long-term contracts between IBM and NewCo, why would customers agree to do this without rebidding the contract or getting a price concession from either IBM or NewCo? Jim Kavanaugh: Okay. Amit, this is Jim. Let me take your question and I appreciate the point. We are pretty pleased with the trajectory improvement overall with regards to our GBS business. We improved by 4 points quarter-to-quarter. And we talked about 90 days ago as we went through the pandemic, and Arvind reiterated it here on the call tonight. What we have seen is our clients’ acceleration in their digital transformations and their journeys to cloud and we expected to capitalize on that as we move forward. So if you take a step back and just look at our first quarter performance and then I will translate that into what we see with our GBS business going forward, our first quarter performance really reflects a level in the confidence in the value of our portfolio, our cloud book of business in GBS doubled its growth rate to 28% here in the first quarter. We have over a $6 billion book of business in cloud and GBS alone, leveraging our strength and application modernization, and our cloud transformational services built on top of our Red Hat hybrid cloud platform. Our Red Hat engagements we increased 150 to let alone just in the first quarter overall and our cloud book of business is up double digits across all three subsectors. Now to your point about consulting, very pleased of that leading indicator, we returned back to growth. And we have been talking about the last handful of quarters, how the whole journey to cloud with our value proposition about our advise, move, build and manage that the front end of that equation as clients go through around application modernization really shows up in our consulting base of business and then translates into our application management business overall and our global processing services business overall, which we saw very nice growth as clients are reimagining how they run their companies and we are capitalizing on what we call intelligent work flows. So we definitely believe that consulting is the leading indicator. Now, going forward we are very confident in getting back in second quarter to our pre-pandemic levels of growth. By the way, our backlog run-out in the next 90 days already shows that. But let me give you a little bit of some quantitative components behind why we are so confident. Number one, our book-to-bill over the last 12 months is well north of 1, led by consulting to your point, which we believe is the front end of that curve that will lend itself into GPS and into AMS, second, we continue to have very good momentum in small and midsized deals that you know has immediate revenue realization in the near-term, which is led, third, to our overall backlog level of growth, strong growth in GBS, consulting in GPS, and improving trend in our AMS business going forward, and fourth, we talked about up front we closed on five acquisitions here in the last handful of months, we are very focused on-ramping, scaling and driving that business. So we feel comfortable getting back to pre-pandemic growth here in second quarter. We feel very confident in the full year. GBS delivering growth, and most importantly, is that exit velocity in 2021 heading into 2022 GBS is an integral part of that mid single-digit growth objective that Arvind talked about. Patricia Murphy: Thanks, Amit. Let’s go to the next question, please. Operator: Our next question comes from Tien-Tsin Huang with JP Morgan. Your line is open. Tien-Tsin Huang: Hey. Thank you so much. Thanks, Pat. Just maybe a stupid question, clarification. Just the strength in System Z at this point in the cycle, what -- can you maybe go through that a little again? What’s changed -- what’s different, is it a different buying or selling motion, just trying to understand that a little bit better? And then just on the ecosystem strategy, Arvind, opening new areas of growth, is there a pipeline for more deals like a Palantir and others? I am just curious where the effort is there today and how close you are to adding more partners there or if that’s more of a mid-term expectation for us to manage or watch for? Jim Kavanaugh: Okay. Thanks, Tian-Tsin. I will handle the IBM Z discussion and then turn it over to Arvind for the ecosystem. We are very pleased. Seven quarters into a Z cycle growing 49% on a 60%-plus growth here in the first quarter of last year, very strong comparison overall and really kind of breaks the cycle from what we have typically seen. But we saw growth when you look at it, one, are we capitalizing on the overall encouraging trend from a macroeconomic perspective? Yes. We are also capitalizing on robust trading-based volumes in our traditional FSS-based industry. So capacity needs are driving some parts of our industry consumption. But I will tell you we are also seeing changing regulatory requirements, clients needing backup and recovery is very essential right now. We saw that play out in the first quarter. And then beyond the FSS industry, we start seeing some good adoption. And we talked about this in prior calls, where we see elongated cycles just given some industries are more impacted by the pandemic. But we see now our value proposition to cloud native applications where we have Red Hat Enterprise Linux, Red Hat OpenShift that runs on our mainframe platform and also pervasive encryption. Security is at the top of every CIO and CTO’s priority list, and the mainframe by definition is the most secure, most scalable, most reliable platform out there and I think you are seeing all of that play out. Arvind Krishna: Yeah. On your second part of your question, Tian-Tsin, on ecosystem, yes, we have a long pipeline. I expect this number to go into the high 10s, maybe not 100, but definitely into very many more. Let me caution, though, when you say mid-term, it’s not multiple years. Each of these takes about six months to become real and then another few months to become into real revenue. So I would not expect that new ones we announce now will have an impact much before the end of the year. However, they will have big impact at the very end of this year and into next year. So I will sort of position it like that. But expect that we should be announcing these at a regular cadence. Patricia Murphy: Thanks, Tien-Tsin. Let’s go to the next question. Operator: Our next question comes from David Grossman with Stifel. Your line is open. David Grossman: Thank you very much. So you have made some high level but very consistent comments about sustaining the dividend as we approach the spin and I think most of us on the call understand the reasons for that. That said, in the past there have been some criticisms that the company has prioritized returns to shareholders at the expense of growth and I know you have talked a lot about reinvestment and cost savings among several other actions. However, in Software Cloud and Services you are going out against some pretty big companies that really don’t return capital at your rates. So how do you want us to reconcile that dynamic as you look to reaccelerate and sustain growth in 2022 and beyond? Jim Kavanaugh: So, David, this is Jim. Thank you for your question. Let me -- I am not going to talk to other competitors, but I would go check some of those about how much share buybacks they are all doing overall. But with that said, I am only going to talk about IBM. And we feel very confident in our capital allocation process and our disciplined financial management system overall. Let me remind you 90 days ago how we entered the year. We entered the year I think I talked about the sources and uses of our cash. We think entering the year we had $14 -- over $14 billion of cash on the balance sheet. We said we were going to generate adjusted free cash flow of $11 billion to $12 billion in the year and that we were going to continue to optimize our IGF portfolio and set of offerings to be a captive aligned to our hybrid cloud and AI strategy, and that would give us another $3 billion to $5 billion. So we had from a source perspective about $30 billion overall. When you take that against the uses in the year, we talked about a $3 billion charge for the structural actions in 2021 and our one-time charges for the separation that goes against that $30 billion. We talked about $8 billion of debt maturities against that and we talked about our dividend being $6 billion overall. So that comes up to be about, what, $16 billion, $17 billion. So we think from a cash source and use perspective, that we have got flexibility to continue to invest and compete in the market both organically and inorganically, while delevering to support a very strong balance sheet overall with a single A rating and also deliver given our investor base, deliver a secure and modestly growing dividend overall. And what you have seen in the first quarter I think only strengthens that position. We still ended the quarter with over $11 billion of cash on the balance sheet. And I will remind you that, we took into account $5 billion of debt maturity, $1.5 billion of dividend in the quarter, roughly $600 million under one-time charges and another $1 billion plus in acquisitions and still ended with $11 billion overall. So we feel very confident and we will capitalize whether there’s any inorganic opportunities and you have seen, what, 11 acquisitions since Arvind has taken over. And we will continue to capitalize where it makes the right client value and the right IBM value at the right economic equation going forward. But we are not constrained by sources and uses of cash. Patricia Murphy: Thanks, David. Sheila, we are past the top of the hour, but why don’t we take one more question. Operator: Thank you. Our last question will come from Keith Bachman with Bank of Montreal. Your line is open. Keith Bachman: Thanks so much for fitting me in, Patricia. I appreciate it. Jim, I wanted to follow up on that question. If you could talk a little bit about the drivers of the change in underlying cash flow for this year, what are the key metrics and how should that make us think about your ability to generate cash in the next fiscal year, obviously I am eliminating the charges associated with the separation, if you could just talk about that? And then, Arvind, since I am last I wanted to sneak in one more. You have talked repeatedly about GBS growing in mid-single digits. Can you just talk about if I pick a number of 5%? If you could just clarify how much is M&A within that kind of number? And in particular, when you talk about application maintenance, are you assuming that application maintenance grows within GBS, because it’s -- I think it’s pretty clear that the industry is struggling for growth and if you are assuming that application maintenance can grow within the envelope of GBS, I’d like to understand why when I think the industry faces challenges? Many thanks for taking my questions. Jim Kavanaugh: Thanks, Keith, for the question overall. So let me handle the free cash flow and then Arvind can talk about GBS. As we said 90 days ago, which we reiterated here tonight on the call, we feel confident in the forward-looking guidance of $11 billion to $12 billion of adjusted free cash flow in ‘21. And if you remember 90 days ago, to give the investor a perspective of the sustainability just given the $3 billion worth of charges we would will have from the structural actions in the fourth quarter and the upcoming spin separation charges, we gave a perspective of 2022 that that would accelerate to $12 billion to $13 billion of adjusted free cash flow. When you look at the underpinnings of both ‘21 and then 2022, I think you start seeing the fundamentals of our business model. And that is returning back to revenue growth, the operating leverage that this business can generate with some level of sustainable level of revenue growth, the underlying mix contribution of that and the continued productivity that this business drives. You will see profit growth and also I remind you Red Hat, which we achieved be it free cash flow accretive in the first year will continue to drive improvements. Now, we have been making great progress on working capital efficiency and I would tell you our collections rate. We didn’t talk about it, although in the prepared remarks. I talked about our record deferred income given the strength of our software renewal position overall. All of those will continue to generate improvements going forward. But that is going to be needed in 2021 because we got about $1 billion cash tax headwind with all of that in front of us. With I would say, probably, 60% to 70% will hit in the second quarter. So once we get through that cash tax headwind here, we feel pretty comfortable and confident in that cash generation machine, leveraging sustainable revenue growth and operating leverage in the business on our way to $12 billion to $13 billion next year. Arvind Krishna: Thanks. And Keith, you asked one of our favorite questions, how is GBS going to grow and how much will it go? So when you look at the mid-single digits. That’s actually our nearer term forecast. Our goals certainly are to make it grow even above that. If you look at the M&A component, look, I mean, M&A could contribute at most a couple of points to that growth. It just would be -- that would be sort of the upper bound and we won’t necessarily see all of that even this year, but who knows, it -- because it’s hard to predict how much those properties can grow once they are inside IBM as well. But you shouldn’t expect more than that. But that’s part of our path to make GBS grow faster even than the mid-single digits. In terms of AMS, AMS is really important for a number of reasons and it all depends on how you define it. If you define it as this is application management and maintenance of those applications that were in place five years ago, by definition that will shrink, because everybody expects massive productivity and they don’t expect those to grow and you kind of see that in the numbers. But why is that incumbency relevant? As you have knowledge of that application base and you now help the client on their cloud transformation journey, then what was that older application asset now becomes a brand-new application estimate and you get growth, because you are helping them transform it using AI, using workflows, using cloud and so that contributes to growth, whether that shows up in consulting near-term and then AMS long-term, whether that shows up as global processes business services in the medium-term. That’s the kind of mix that goes on. But that is why AMS is critical to giving GBS is kind of fuel in order to grow. But that is why we are confident in the mid-to-single -- mid-to-high single-digit growth in the longer term for GBS. Arvind Krishna: So, Keith, thanks, but since we are well past the hour, let me just make a couple of comments to wrap up the call. We had a good start to the year. We expect to continue our progress over the course of the year as we execute our strategy and realize benefits from the investments and actions we are taking. We will exit 2021 in a stronger position than we started the year and I look forward to continuing this dialogue with you. Patricia Murphy: Thanks, Arvind. Sheila, let me turn it back to you to close out the call. Operator: Thank you. Thank you for participating on today’s call. The conference has now ended. You may disconnect at this time.
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IBM’s Buy Rating Maintained at BofA

BofA Securities analysts reaffirmed their Buy rating and a $209 price target for IBM (NYSE:IBM) stock. The analysts attended IBM's Think 2024 event in Boston, where the company announced the release of its Granite model family into open source. The analysts noted that while large language models (LLMs) can be costly to train and operate, IBM is adopting a more pragmatic approach with smaller, more enterprise-friendly models, particularly for inferencing.

BofA reiterated the Buy rating, highlighting IBM's ongoing turnaround, revenue growth, and free cash flow improvements. They also emphasized IBM's defensive portfolio, attractive dividend yield, and underappreciated AI portfolio, which has a cumulative business value exceeding $1 billion.

BMO Capital Sees Steady Upside For IBM

BMO Capital analysts maintained their Market Perform rating and a $210 price target for IBM (NYSE:IBM), suggesting that for both IBM Consulting and Software segments, the current and consensus estimates for 2024 are achievable but unlikely to exceed expectations, with detailed analysis provided within their report.

Additionally, the sum of the parts valuation approach was applied, indicating that IBM's present valuation multiple is fair. Although IBM's operational performance and outlook have shown improvement compared to its past performance, the analyst sees limited potential for stock price appreciation from its current levels.

IBM Stock Jumps 9% on Strong Q4 Results

IBM's (NYSE:IBM) shares saw a significant rise of over 9% on Thursday following the announcement of its Q4 earnings, which exceeded analysts' expectations for both earnings per share (EPS) and revenue.

The technology and consulting giant reported a Q4 EPS of $3.87, surpassing the Street estimate of $3.77. Its revenue for the quarter was reported at $17.38 billion, exceeding the analysts' prediction of $17.23 billion.

Breaking down the revenue, IBM's software segment contributed $7.51 billion, a 3.1% increase year-over-year, but slightly below Wall Street's expectations of $7.69 billion. The consulting segment brought in $5.05 billion, marking a 5.8% rise from the previous year and narrowly missing the expected $5.11 billion.

The company's infrastructure revenue was notably strong at $4.6 billion, a 2.7% year-over-year increase and higher than the anticipated $4.35 billion.

IBM forecasts a free cash flow of $12 billion for the entire fiscal year, which is higher than the analyst estimate of $10.92 billion. Furthermore, IBM anticipates its revenue to grow by approximately 4-6% in 2024, surpassing the Wall Street projection of about 3%.

IBM Started With Hold Rating at Jefferies

Jefferies analysts initiated coverage of IBM (NYSE:IBM) with a Hold rating and a price target of $180 per share. In their note issued on Friday, the analysts acknowledged IBM's progress in software but see no major breakout potential.

The analysts pointed out their appreciation for IBM's strategic shifts to reorient itself towards a software-centric model. This transformation includes significant steps like the acquisition of Red Hat, the spinoff of Kyndryl, and investments in AI and software go-to-market strategies. Furthermore, Jefferies views IBM as an "under-the-radar AI player," with greater potential in consulting than in software.

The analysts highlighted IBM's Watsonx platform, which provides substantial exposure to general AI workloads. However, Jefferies sees a more immediate AI opportunity in IBM's strategic consulting division. This is because most clients are still in the early stages of implementing general AI strategies and require guidance on effectively utilizing these technologies.

Despite these positive aspects, Jefferies noted that IBM's revenue growth is trailing behind its software industry peers, and it operates with lower margins. The analysts suggest that while IBM's stock might see incremental gains, significant upside is limited unless there's a considerable acceleration in its software segment.

IBM Shares Gain 5% Following Q3 Results

Shares of International Business Machines (NYSE:IBM) increased by nearly 5% yesterday after the company beat Q3 profit expectations and maintained its guidance.

IBM posted an adjusted EPS of $2.20 on revenue of $14.75 billion, slightly surpassing analyst predictions of $2.12 EPS on $14.73 billion revenue. Software revenue, encompassing its AI platform, grew 8%, consulting revenue went up by 6%, while infrastructure revenue declined by 2%.

The tech giant confirmed its projected 3-5% revenue growth on a constant currency basis and maintained its 2023 free cash flow forecast of around $10.5 billion.

IBM Shares Gain 5% Following Q3 Results

Shares of International Business Machines (NYSE:IBM) increased by nearly 5% yesterday after the company beat Q3 profit expectations and maintained its guidance.

IBM posted an adjusted EPS of $2.20 on revenue of $14.75 billion, slightly surpassing analyst predictions of $2.12 EPS on $14.73 billion revenue. Software revenue, encompassing its AI platform, grew 8%, consulting revenue went up by 6%, while infrastructure revenue declined by 2%.

The tech giant confirmed its projected 3-5% revenue growth on a constant currency basis and maintained its 2023 free cash flow forecast of around $10.5 billion.

IBM Stock Gains 3% Following Q2 Earnings Report

IBM (NYSE:IBM) shares rose more than 3% intra-day today after the company reported its Q2 earnings results, with EPS of $2.18 coming in better than the Street estimate of $2.02. However, revenue of $15.5 billion came in worse than the consensus estimate of $15.58 billion.

The company provided its fiscal 2023 outlook, expecting revenues to grow in the range of 3-5%.

BofA Securities analysts reaffirmed their Buy rating on IBM and raised their price target to $160.00 from $152.00, stating that they believe the positive momentum in IBM's business, including revenue growth and improvement in free cash flow, will persist. The analysts highlighted that IBM possesses a defensive portfolio, an appealing dividend yield, and an AI portfolio that is not fully recognized or valued by the market.