INTERNATIONAL BUSINESS MACHINES CORP Q3 FY2024 earnings call

• Macro environment: Technology spending strong, but consulting business impacted by economic uncertainty from geopolitical issues, elections, interest rates, and inflation.
• Business performance: Software growth accelerating, Red Hat showing strong growth with revenue doubling since acquisition, AI book of business over $3 billion, infrastructure z16 well ahead of prior cycles.
• Innovation and collaborations: Announced new Granite models, opened Europe's first IBM Quantum Data Center, collaborated with many companies like NatWest, Telefonica, etc.

Software is nearly 45% of total revenue, up from the high-20s in 2018. Software revenue growth accelerated to 10% in the quarter, including Red Hat at 14%, with 7 points of organic growth. Recurring revenue base is about 80% of annual software revenue, and hybrid platform and solutions ARR stands at $14.9 billion, up 11% year-over-year. Consulting revenue was flat in the quarter, impacted by the macro environment. Infrastructure revenue was down 7% reflecting product cycle dynamics.

• Fourth quarter revenue: Software expected to have low double-digit growth, consulting similar to third quarter, infrastructure full-year impact about 1 point.
• Profitability: Software segment profit margin expected to expand by over 1 point, consulting flat, infrastructure mid to high teens.
• Free cash flow: Confident in delivering greater than $12 billion of free cash flow for the year.

• Macro economic uncertainty impacting consulting business.
• Product cycle dynamics affecting infrastructure revenue.

Q: Amit Daryanani asked about IBM's portfolio inflection and consulting growth.

A: Arvind Krishna said software has good traction with Red Hat and Gen AI, consulting has pent-up demand and bill-to-book ratio at 1.14, infrastructure to see upticks in 2025.

Q: Toni Sacconaghi asked about growth being like a one-off and consulting signings.

A: Arvind Krishna talked about portfolio rebuilding, software organic growth, recurring revenue, and consulting backlog and Gen AI book of business.

Q: Wamsi Mohan asked about consulting book of business and profit dynamics.

A: James Kavanaugh discussed Gen AI book of business growth, revenue yield differences, and profit equation with operating leverage.

Q: Ben Reitzes asked about free cash flow potential in 2025 and consulting mix.

A: James Kavanaugh said confident in strategy, portfolio, and growth opportunities, with free cash flow expected to grow faster than revenue.

Q: Jim Schneider asked about consulting work translation to revenue and M&A targets.

A: James Kavanaugh talked about Gen AI book of business growth and duration, Arvind Krishna discussed M&A strategy focusing on hybrid cloud, automation, data and AI, and synergy with IBM.

Q: Brent Thill asked about software margin sustainability.

A: James Kavanaugh said software is core to strategy, with revenue inflection, strategic focus, and productivity initiatives enabling margin and operating leverage.

Q: Erik Woodring asked about AI consulting project translation to revenue.

A: James Kavanaugh discussed early cycle of Gen AI, backlog building, and inflection in 2025.

Q: Matthew Swanson asked about enterprise feedback on Gen AI development.

A: Arvind Krishna talked about enterprise concerns over cost of large Gen AI models and IBM's pragmatic approach with Granite models offering cost-efficient solutions for enterprise use cases