Q4 2023 Summary
Published Jan 10, 2025, 5:10 PM UTC- IBM's Red Hat business is experiencing strong growth, with a 17% increase in bookings, and is expected to contribute 2 to 2.5 percentage points to overall software growth in 2024.
- IBM is well-positioned to capitalize on increased customer spending on AI and digital transformation, with its AI book of business doubling quarter-over-quarter, and clients showing strong interest in AI offerings like watsonx.
- IBM expects to accelerate software growth above mid-single-digits in 2024, driven by high-value recurring revenue, strategic acquisitions, and investments in innovation, including AI and automation, supporting sustained growth and profitability.
- Non-Red Hat software businesses, such as Data & AI and Automation, are continuing to decelerate despite the focus on AI spending, raising concerns about IBM's ability to reaccelerate growth in these areas.
- Red Hat's performance was somewhat below expectations in 2023 and continues to be impacted by consumption-based services, leading to uncertainty about its contribution to IBM's software growth in 2024.
- Analysts have expressed concerns about the transparency and sustainability of IBM's free cash flow projections, particularly regarding the breakdown from net income to free cash flow and contributions of acquisitions.
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Free Cash Flow Outlook
Q: What is driving IBM's $12B free cash flow guidance for 2024? How does it bridge from net income?
A: IBM expects to generate $12 billion in free cash flow in 2024, primarily driven by improving business fundamentals such as sustainable revenue growth and operating leverage. Adjusted EBITDA is anticipated to grow by around $900 million, similar to the growth in 2023. The increase from net income to free cash flow is largely due to this adjusted EBITDA growth. Other factors like higher cash taxes and capital expenditures will offset benefits from changes in retirement plans. , -
Software Growth Guidance and Red Hat Performance
Q: How will IBM achieve its 2024 Software revenue growth guidance, and what is expected for Red Hat?
A: IBM projects Software revenue growth slightly above its mid-single-digit model in 2024, driven by about 2 points from high-value recurring revenue streams, less than 2 points from acquisitions, and around 2.5 points from Red Hat growth. Red Hat showed strong bookings growth of 17% in Q4, signaling increasing demand fueled by innovation in AI and hybrid cloud offerings. These factors give IBM confidence in accelerating Software growth. , , -
Consulting Business Outlook
Q: What is the outlook for IBM's Consulting business revenue growth in 2024 and beyond?
A: IBM expects Consulting revenue growth of 6% to 8% in 2024, with an acceleration throughout the year supported by a strong backlog up 8% and bookings growth of 17% in 2023. The company is confident in taking market share by focusing on strategic partners and offerings in digital transformation and data and AI. This strong backlog provides tailwinds into 2025. -
Business Climate and Software Budgets
Q: How does IBM view the current business climate and trends in software budgets?
A: IBM sees the 2024 business climate as similar to 2023, with a resilient global economy across regions. Despite talks of reduced technology budgets, IBM is not observing decreases; instead, clients are investing in technology, especially in AI and digital transformation, to address challenges like inflation and supply chain issues. Technology remains a key area for clients to grow without increasing fixed costs. -
M&A Strategy
Q: Can you provide an update on IBM's M&A pipeline and philosophy behind transactions?
A: IBM's M&A strategy focuses on strategic fit with its hybrid cloud and AI platform, seeking acquisitions that offer synergistic value and financial attractiveness. The company targets high-growth, recurring revenue businesses that are profitable and quickly accretive to free cash flow. IBM remains opportunistic, with a strong balance sheet and $13.5 billion in cash to deploy for potential acquisitions.