International Business Machines Corporation

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 Olympia McNerney, IBM's Global Head of Investor Relations. Olympia, you may begin.

Thank you. I'd like to welcome you to IBM's fourth quarter 2023 earnings presentation. I'm Olympia McNerney, and I'm here today with Arvind Krishna, IBM's Chairman and Chief Executive Officer, and Jim Cavanaugh, IBM's Senior Vice President and Chief Financial Officer. We'll 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. To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation, which is posted to our investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filings. So with that, I'll turn the call over to Arvind.

Thank you for joining us. We had a solid close to 2023 with growth across our businesses and strong cash generation. Our fourth quarter and full year results demonstrate the strength of our portfolio and sustainability of our revenue growth. We are pleased with the progress we made in 2023, delivering revenue growth of 3% and over $11 billion of free cash flow. Two-thirds of the way through our midterm model, I am proud of our achievements. Since 2021, we delivered average revenue growth for IBM and for each segment at or above our model. The overall trends we are seeing reinforce our views of the future. We are confident in achieving our mid-term revenue model, and the strength of our diversified business model allows us to make progress each quarter. We entered the year intent on enhancing our software portfolio and strengthening our consulting position. We have done both. Mid last year, we launched Watson X, our flagship AI and data platform, and we are excited by the traction we are seeing. Consulting has delivered durable revenue growth through the year, despite an uneven macro environment. Our expanding ecosystem, skills and technical expertise, global reach and co-creation approach not only set us apart, but also contributed to our consulting performance outpacing that of our competitors. This year also underscored the enduring nature and relevance of our Z systems platform. Before getting into the execution of our strategy, I'll make a few comments about what we see in the current environment. I expect many macro trends to be similar to 2023. Technology demand will continue to be strong and serve as a major driving force behind global economic and business growth. It allows businesses to scale, offer better services, drive efficiencies, and seize new market opportunities. Every client I speak with is asking about how to boost productivity with AI and how to manage their technology stack, much of which is deployed across a hybrid environment. public, private, and on-premises. These trends continue to fuel demand for both hybrid cloud and artificial intelligence. I will now provide some color on the progress we are making in the execution of our strategy, starting with AI. Our approach to AI for business is resonating. Earlier in 23, we introduced WatsonX, IBM's core platform that enables clients to train, tune, validate, and deploy AI models. We believe AI will be multi-model, with our clients leveraging a combination of models, IBM's open source, their own proprietary models, and those of other companies. Flexibility of deployment is key. Simply put, we meet clients where they are and allow clients to deploy AI models across multiple environments. In the fourth quarter, we released WatsonX.Governance to help clients and partners govern and instill trust in generative AI. This toolkit helps organizations manage and monitor their AI and prepare for compliance with future AI-related regulations. IBM was recently named a leader in generative AI for governance platforms by IDC. As I have mentioned before, IBM was one of the first companies to announce indemnification of all our models. Additionally, IBM and Meta announced in December the formation of the AI Alliance, a group of 70 industry and academic leaders joining together to advance open, safe, and responsible AI. We continue to believe our consulting business will be an early beneficiary of AI. We are the only provider today that offers both the technology stack with our WatsonX platform and consulting services for deploying and managing generative AI. The early work for clients around data architecture, security, and governance is critical and hard, and we think consulting expertise is going to be crucial here. Just as we quickly ramped a meaningful practice around Red Hat to address the hybrid cloud opportunity, we are on a similar trajectory with Generative AI. Consulting is a core driver of our value proposition for clients. Last quarter, I shared with you that our book of business in the third quarter, specifically related to Generative AI and Watson X, was in the low hundreds of millions. Since then, demand continues to increase, and our book of business in the fourth quarter is roughly double that third quarter amount. We continue to have thousands of hands-on client interactions, including an acceleration in pilots that were completed during the quarter. Software transactional revenue and SaaS ACV was approximately one-third of our book of business related to generative AI in the fourth quarter, and two-thirds was consulting signings. There was a balance of both large and small transactions across both segments. Enterprise use cases addressing code modernization, customer service, and digital labor continue to offer meaningful near-term benefits to clients. We've been collaborating with numerous clients using WatsonX Code Assistant for Ansible. This includes a successful pilot with Citi where initial results point to substantial developer productivity and code quality improvements that have led to plans for a rapid expansion focused on scaling for enterprise-wide outcomes. This is just one of many examples. In other industries, we have done work with clients such as NatWest, Lockheed Martin, and Warringah Ingelheim. We are working on an interesting use case with the Sevilla Football Club using WatsonX to find the right players to sign by describing attributes across the database of more than 200,000 scouting reports. As clients build out their AI strategies and focus on driving ROI and productivity, the importance of optimizing IT spend and consumption is magnified. Apptio, our virtual command center for managing technology investments, comes up in nearly all of my client discussions. The value proposition is clearly resonating. Looking beyond AI, we had a number of important client wins in the fourth quarter. For example, we are helping NATO strengthen their cybersecurity posture and build out a customized solution to have greater visibility into cyber threats and respond to them more quickly. We are working with Riyadh Air to help them drive their digital and technology strategy and establish their hybrid cloud integration platform. We also saw meaningful consulting renewals, which combined with new wins, highlights the focus and unique strengths of our capabilities. Our strategic partnerships with companies such as SAP, AWS, Microsoft, Salesforce, and Adobe continue to expand and thrive. For instance, we are working together with Adobe to embed WatsonX into their platform. We also continue to deepen our partnership with SAP through further collaboration across WatsonX and Quantum. We also have several new WatsonX ISV partners. What we see is clear. Many ISVs are eager to work with us as a trusted provider that understands enterprise needs. We continue to invest and bring new innovations to the market in other areas as well. In the quarter, Red Hat enhanced its Ansible automation platform, introducing new offerings like Ansible Lightspeed and event-driven Ansible. We announced the availability of Red Hat Device Edge to manage your workloads and deliver automation at the edge. In quantum computing, we introduced Heron, the most advanced quantum processor, and the System 2, a modular quantum computer. Focusing our portfolio remains a key priority. We completed nine acquisitions this year, including Aptio, and we recently announced the acquisition of StreamSets and WebMethods from Software AG. which we expect to close mid-year. With respect to divestitures, we announced the sale of our weather assets, which we expect to close in the first quarter. We also announced the Enterprise AI Venture Fund, a $500 million fund with the goal of partnering with the startup community to tap into the latest AI innovations in the market and help them scale. In summary, I believe that the changes we have made to our business over the last couple of years position us for the evolving technology landscape. As I reflect on our performance since we presented our midterm model in October of 2021, I am pleased with the progress we have made internally and with our clients. We have delivered average revenue growth for IBM in line with our midterm model, and this is true for all our segments. Software has delivered average growth at the high end of the mid-single-digit model. Consulting delivered average growth in line with the high single-digit model. And infrastructure is well ahead of expectation. This performance gives me confidence as we move into the new year. For 2024, we expect performance in line with our mid-term model with mid-single-digit revenue growth and about $12 billion of free cash flow. This keeps us firmly on a path of sustainable growth. Jim will now take you through the details of the quarter and our expectations for 2024. Jim, over to you.