Welcome and thank you for standing by. [Operator Instructions] 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 Kavanaugh, 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 midterm 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 watsonx, 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 zSystems 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 watsonx 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 the 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 transaction revenue and SaaS ACV was approximately 1/3 of our book of business related to generative AI in the fourth quarter and 2/3 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 core 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 Boehringer 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're 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 Light Speed and event-driven Ansible. We announced the availability of Red Hat device edge to manage their workloads and deliver automation at the edge. In quantum computing, we introduced Heron, the most advanced quantum processor; and the System 2, a module of quantum computer. Focusing our portfolio remains a key priority. We completed 9 acquisitions this year, including Apptio, and we recently announced the acquisition of Stream Sets and Web Methods from Software AG, which we expect to close midyear. 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 start-up 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 expectations. 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 million 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.

Thanks, Arvind. In the fourth quarter, we delivered $17.4 billion in revenue, $4.2 billion of operating pretax income and operating earnings per share of $3.87, and we generated $6.1 billion of free cash flow. This wrapped up another solid year, where we continue to deliver durable growth in our repositioned business aligned with client priorities of digital transformation and driving productivity. Taking a step back, let me touch on a full year before I go into additional details of the quarter. Our revenue for the year was nearly $62 billion, up 3% and in line with our expectation 90 days ago. We generated $10.3 billion of operating pretax income and operating earnings per share of $9.62. Our free cash flow was $11.2 billion, our strongest level of cash generation since 2019. Revenue performance for the year was again led by software and consulting. Software grew by over 5% with good growth across Hybrid Platform & Solutions and Transaction Processing. Consulting revenue was up over 6% with solid growth every quarter and broad-based growth across all 3 lines of business, highlighting the durability of our results and differentiated client offerings. Infrastructure was down 4%, reflecting product cycle dynamics. Our revenue growth and productivity initiatives led to margin expansion and strong free cash flow generation. For the full year, we expanded operating gross profit margin by 130 basis points with every segment growing margin across every quarter. Our operating pretax margin expanded by 40 basis points, in line with our expectations and driven by strong productivity gains and operating leverage. And this includes a 110-basis point headwind from currency dynamics. Now turning to a deeper dive on the quarter. Our revenue was up over 3%. Software revenue was up 2%. Our fourth quarter performance reflects continued growth in our recurring revenue and a wrap on last year's seasonally strong transactional performance. Consulting had another solid quarter with 5.5% revenue growth, which is a sequential improvement in the growth rate. We had good signings performance and a trailing 12-month book-to-bill ratio over 1.15. This continued momentum in consulting is reflective of how we work with clients, the investment we are making in skills and talent, velocity in our strategic partnerships, and our integrated value proposition. We had great Infrastructure performance this quarter. Revenue was up 2% with growth in both zSystems and distributed infrastructure. This performance is particularly notable given it's the seventh quarter of the z16 cycle and in our seasonally largest quarter, again, highlighting the innovation we are bringing to this mission-critical platform. Looking at our profit metrics. We expanded operating gross margin by 140 basis points and operating pretax margin by 110 basis points, inclusive of 150 basis point currency headwind to pretax margin. Currency impacted operating pretax profit growth in the quarter by over $200 million. Margin expansion was driven by our operating leverage and ongoing productivity initiatives, which allowed for continued investments to drive innovation in our portfolio. You can see this in our higher R&D expense. Our operating tax rate was 14%, which is flat versus last year and our operating earnings per share of $3.87 was up 8%. We remain laser-focused on our productivity initiatives as we digitally transform our business processes and scale AI within IBM. This includes simplifying our application and infrastructure environments, streamlining our supply chain, aligning our teams by workflow, reducing our real estate footprint, and enabling a higher value-added workforce through automation and AI-driven efficiencies. Against a target of $2 billion in annual run rate savings by the end of 2024, which I mentioned back in April of last year, we have already achieved over $1.5 billion. Our productivity initiatives have allowed us to increase our investments in innovation, technical and industry skills and go-to-market capabilities, including our ecosystem. And we have accomplished this while simultaneously growing our profit margin and free cash flow, which in turn has increased our financial flexibility. This remains our playbook going forward. And given our success to date, we now believe we can achieve at least $3 billion in annual run rate savings by the end of 2024. Overall, the combination of our revenue and margin performance resulted in 9% growth in our operating pretax profit for the quarter. This contributed to our free cash flow performance. For the year, we generated $11.2 billion of free cash flow, up $1.9 billion year-over-year. The largest driver of this growth comes from $900 million of adjusted EBITDA. For better transparency, we have included a view of our adjusted EBITDA performance in our supplemental slides. Our free cash flow growth also reflects benefits of about $400 million from working capital efficiencies, which is consistent with what we've been suggesting throughout the year. CapEx was also down about $400 million, reflecting actions to optimize our real estate portfolio. These actions reduced our net CapEx although had limited benefit to our profit performance. In terms of cash uses for the year, we invested over $5 billion to acquire nine companies, and we returned over $6 billion to shareholders in the form of dividends. Looking at the balance sheet. We ended the year with a strong liquidity position with cash of $13.5 billion, which is up $4.6 billion year-over-year. Total debt is up $5.6 billion over the same period. And our debt balance ended the year at $56.5 billion, including approximately $12 billion of debt associated with our financing business. Our retirement-related plans remain in a strong financial position. At year-end, our worldwide tax-qualified plans are funded at 111% with the U.S. at 123%. Turning to our segments. Software grew 2% with growth across both Hybrid Platform & Solutions and Transaction Processing. This quarter's performance, again, reflects growth in our high-value recurring revenue base, which is up mid-single digits. I'll remind you this comprises about 80% of our annual software revenue. Transaction processing with its strong base of recurring revenue delivered revenue growth of 4%. Clients continue to value this portfolio of mission-critical software, supporting growing workloads on our hardware platforms like zSystems. This, together with price increases, contributed to growth in both recurring and transactional software revenue in transaction processing for the year. Hybrid Platform & Solutions revenue was up 1%. Within this performance, Red Hat revenue was up 7%, automation was flat, Data & AI was up 1% and security declined. Looking across Hybrid Platform & Solutions. The strength of our recurring base of business is evident in our ARR, now $14.4 billion and up over 7% since last year. We also faced a tough compare here in the fourth quarter, wrapping on seasonally strong transactional performance, including strength in ELAs, as we discussed at the start of the year. What played out in the fourth quarter reflects just these dynamics. And while transactional revenue overall was significant, it was down year-to-year a little more than expected. In Red Hat, revenue performance was similar to last quarter as we continue to see dampened growth in consumption-based services. Our future growth indicators are encouraging. Red Hat annual bookings were up 17%, including double-digit bookings growth across all 3 key offerings: RHEL, OpenShift and Ansible. Renewals have been strong this quarter with our NRR up well over 100% and up 6 points over last year. And OpenShift continued its strong performance with annual recurring revenue of $1.2 billion. Beyond OpenShift, our platform-based approach is resonating with clients. We're seeing growing interest in our generative AI platform, watsonx, as Arvind touched on earlier. And we've been investing to both extend and expand our hybrid cloud and AI capabilities and software from new offerings in Ansible to the launch of watsonx.governance, to the announced acquisition of Stream Sets and Web Methods. Looking at Software profit. Gross profit margin expanded and pretax margin was flat with the latter reflecting key investments in innovation and about 2 points of currency impact in the quarter. In Consulting, our revenue in the quarter was up 5.5%. We continue to see solid demand for data and technology transformation projects with a focus on AI and analytics. Clients are also prioritizing cloud modernization and cloud-based application development projects. This focus on digital transformation and AI initiatives to drive productivity and cost savings has been consistent throughout the year. Our ability to address these client demands drove signings growth of 8% with a 1.3 book-to-bill ratio in the quarter. That caps off a solid year where signings grew at a high-teens rate. And with this, our trailing 12-month book-to-bill ratio remains over 1.15. There has been significant interest this year regarding our consulting outperformance relative to competitors. Let me give you my thoughts on what differentiates us. Our integrated value, investments in skills and strategic partnerships and focused execution. First, we are the only technology company with the consulting business at scale. This unique integrated value proposition helps our clients implement digital transformations and generative AI solutions. Second, we reposition our portfolio to address our clients' top priorities through investments in skills, capabilities and strategic partnerships. Consulting is even more powerful when working in collaboration with our partners. Our strategic partnerships now make up over 40% of our consulting revenue and delivered double-digit growth in both signings and revenue for the full year. Within this performance, our AWS and Azure practices each grew revenue more than 50% for the year. Finally, our solid results throughout the year demonstrate our focus on execution. When you look at our three lines of business in consulting, we have consistently delivered solid revenue performance. Business transformation revenue grew 5% for the third consecutive quarter, again, led by data and technology transformations, including AI and analytics-focused projects. Finance and supply chain transformations also contributed to growth. Technology consulting revenue was up over 4% with growth in cloud modernization projects and cloud-based application development. Application operations revenue grew 6% driven again by cloud application management and platform engineering services with both strategic partnerships and Red Hat engagements contributing to growth. Moving to consulting profit. We expanded gross margin 30 basis points and delivered pretax margin of 11.5%, which is up 50 basis points year-to-year. Our pretax margin performance continues to reflect the pricing and productivity actions we have taken, offsetting increased labor costs and nearly 1 point of currency impact. In our Infrastructure business, revenue was up 2%, hybrid infrastructure revenue grew 7%, and infrastructure support declined 9%. Within hybrid infrastructure, zSystems revenue was up 8%. Now seven quarters into the product cycle, z16 revenue performance has significantly outperformed prior cycles, including the successful z15 cycle. The z16 program incorporates a number of key innovations for our clients, including cloud-native development for hybrid cloud, embedded AI at scale, quantum safe cyber resilience security, energy efficiency and strong reliability and scalability. Clients are increasingly leveraging zSystems for more and more workloads, and that translates to demand for more capacity, which we described in terms of MIPS. In fact, installed MIPS have roughly doubled over the last two cycles. Putting this all together, zSystems remains an enduring platform, driving not just hardware adoption but also related software, storage and services. Distributed infrastructure revenue was up 7% with growth across both power and storage. Power performance was fueled by demand for data-intensive workloads on Power10, and storage traction was aligned to the success of the z16 cycle we just mentioned. Infrastructure support revenue declined given our successful hardware performance. Looking at Infrastructure profit. We delivered gross profit and pretax margin expansion. Pretax margin expanded 280 basis points in the quarter, reflecting benefits from productivity while absorbing over a point of impact from currency. Now let me bring it back up to the IBM level to wrap it up. As Arvind mentioned, we are now 2/3rds of the way through our midterm model. And so I'd say it's a good time to reflect on what we have accomplished over this period. Let me start with the actions we've taken to execute our strategy and deliver sustainable revenue and free cash flow growth. We aligned our business to a platform-centric model focused on hybrid cloud and AI. Our go-to-market is based on more technical and experiential selling. We opened IBM's ecosystem and strategic partnerships to give our clients greater choice and technical depth and give IBM multiple ways to win across our portfolio. We have invested in innovation and skills and pursued strategic M&A, and we presented a simplified reporting structure to give increased transparency into our performance. These actions resulted in a fundamentally different company with an improved business mix and a higher-value recurring revenue base. Today, our growth vectors of software and consulting represent 75% of our revenue base, up from about 55% in 2020, and our stable recurring revenue stream represents about half of IBM's revenue. As Arvind said, our 2-year average revenue growth is in line with our mid-single-digit model, and our segments have delivered at or above the revenue models. With this backdrop, let me turn to 2024 guidance and our 2 key measures of success: revenue growth and free cash flow. We expect constant currency revenue growth in line with our mid-single-digit model. As we start the year, I think it's prudent to assume the low end of that model. And for free cash flow, we expect to generate about $12 billion. Our revenue expectations are underpinned by solid growth in both software and consulting. In software, given our pipeline of business, investment in innovation and the contribution of acquisitions, we expect revenue growth slightly above the high end of our mid-single-digit model. In consulting, our solid signings and book-to-bill ratio support revenue growth in the range of 6% to 8% with acceleration throughout the year. Given this growth profile, coupled with our productivity actions, we expect to see well over a point of pretax margin expansion in each of these segments. And then in Infrastructure, as we are entering the year seven quarters into the z16 cycle, we expect 2024 infrastructure revenue to decline. This should drive over a point impact to IBM's overall revenue growth. And given the z cycle dynamics, we expect Infrastructure pretax margin to be lower year-over-year. Bringing it all together with these segment dynamics, we expect IBM's operating pretax margin to expand by about 0.5 point, consistent with what we delivered in 2023. Our tax rate for the year should also be fairly consistent with 2023, and as always, the timing of discrete items can cause the rate to vary within the year. For free cash flow, we expect to generate about $12 billion in 2024 driven primarily by growth in adjusted EBITDA. We will have lower cash requirements driven by changes in our retirement plans, which will be offset by higher CapEx and other balance sheet dynamics. Let me comment on a couple of items that are included in our guidance. First, we are seeing increased productivity in our business, which will lead to workforce rebalancing fairly consistent with 2023 levels. And second, as we remain focused on portfolio optimization, we expect to close the sale of the Weather Company assets in the first quarter. On a full-year basis, we expect this to impact revenue growth by over 0.5 point, and any pretax gain from the transaction will be partially offset by foregone profit. In the first quarter of 2024, the company will realign its management structure to manage these assets outside of the software segment within other divested businesses, which will provide comparability within software on a year-over-year basis. Looking into the first quarter, I'd expect our revenue growth rate to be similar to the full year. For profit, we expect the first half to second half SKU of net income to be fairly consistent with history and first quarter to be a couple of points better than last year's SKU. In summary, we have a durable growth business with strong free cash flow generation. We have made a lot of progress this past year and feel good about our position as we enter 2024. Arvind and I are now happy to take your questions. Olympia, let's get started.

Thank you, Jim. As a reminder, supplemental information is provided at the end of this presentation. And please refrain from multi-part questions. Operator, let's please open it up.

[Operator Instructions] Our first question comes from Wamsi Mohan with Bank of America. Please state your question.

Hi. Thank you. If we look at your cash flow performance, it's really very compelling at $12 billion on your guidance. Jim, could you maybe help us bridge from 2023 to 2024, what are the items that are driving that $12 billion in free cash flow? What's happening with maybe cash taxes within that and working capital? And any other detail that you can help parse out would be great. Thank you so much.

Thanks, Wamsi. I appreciate the question overall. We're obviously very pleased. The team has executed extremely well in 2023, our strongest free cash flow since 2019, $11.2 billion, up $1.9 billion year-to-year. I think it's important, to your point, before we get to '24, to take a step back a year ago and talk about how we guided the year. And by the way, we've been consistent every quarter about our guidance of about $10.5 billion. The reason I think it's important because it goes right at the heart of your question, which is the quality and sustainability and why we here at IBM had the confidence in the guide of about $12 billion. We said a year ago about $10.5 billion. It was predominantly going to be driven by the improving fundamentals of our business, read that sustainable revenue growth, operating leverage, and that, by the way, is our model $750 million year-to-year. On top of that, remember, we had an opportunity gap coming out of fourth quarter 2022. We said we would get working capital efficiency of $400 million, and then we would have modest structural action tailwind offsetting modest cash tax headwind. That kind of brought it all together, $750-ish million from improving fundamentals of the business, $400 million. Now how did 2023 play out? Number one, the improving fundamentals of our business, we had a very strong second half both on our top line revenue, our portfolio mix, our productivity. And we delivered $900 million of growth and adjusted EBITDA year-to-year, which, by the way, we gave you as far as increased transparency. On top of that, we got the $400 million worth of working capital efficiency, very consistent. Then we've got and we capitalized on all of the productivity actions that we have done. We capitalized on being opportunistic on some real estate rationalization. That's why our CapEx was down about $400 million. By the way, full transparency, that's timing. That was a 2024 item. We got that in 2023, so let's put that aside. And then we've got about $100 million worth of cash tax that came in a little bit better. So I would say, against that, very strong high-quality sustainability that sets the baseline for '24. 2024 really is simple as we said in the prepared remarks. One, we see very consistent growth in the fundamentals of our business around revenue profile, margin and productivity that we will get a similar level of growth year-to-year in adjusted EBITDA. By the way, that's above our model again as I'll state, so that we did $900 million last year, we'll get it again. With that, we will also have benefits from the changes in retirement plans that many of you have written about. But offsetting that, we got higher cash taxes year-to-year, and we've also got CapEx that we are going to continue to invest for the long-term sustainable leadership of this company. So it's really in 2024 entirely driven by the business model of our adjusted EBITDA growth. So thank you, again, Wamsi, for the question.

Thank you. Our next question comes from Amit Daryanani with Evercore. Please state your question.

Thanks a lot, and good afternoon, everyone. I guess my question will be focused on the software side. When I think about the calendar '24 guide of, I think, slightly above the mid-single-digit medium-term target that you folks have, can you maybe talk about how do I think about the split between organic versus inorganic in '24? And if you could also perhaps unpack, what do you expect to see across some of the key segments like Red Hat -- which I think was somewhat below your expectations in '23 and then also the TPP side would be really helpful. Thank you.

Okay. Amit, thank you. Let me do some of the financial bridges year-over-year then turn it over to Arvind and talk about the portfolio, the competitiveness, the innovation and why we feel very confident overall. When you look at our guide, by the way, an acceleration from 2023, I would first start with full year last year, we were very pleased with our software performance, over 5% growth year-over-year. And on a 2-year CGR against our mid-single-digit model, we're at the high end of that model. So when you look at our guide, we feel confident in the level of innovation we've been bringing in, but I would break that guide down mathematically into about 3 or 4 different buckets. Number one, I think we've proven over the last 2 years that we have rebuilt and repositioned our portfolio, and we now have a high-value recurring revenue stream that can grow in this business, offer the innovation and the success of our hardware platform business. That's about 2 points of growth of slightly above the mid-single digit model of software. So 2 points based on credibility of our sustained growth in the high-value recurring revenue. Number two, you talked about acquisitions. We are going to continue to invest and fuel investment into our software portfolio to improve the innovation, the synergistic value, the strategic fit, the hybrid cloud and AI. You saw we closed very excited off to a great start with Apptio, and we announced the acquisition of Web Methods and Stream Sets. Acquisitions will probably give us a little bit less than 2 points of that growth in 2024. So 2 points from high-value recurring revenue, a little bit less than 2 points of acquisition and then Red Hat, to your point. We actually delivered about what we said in fourth quarter. We said high single digit. We still got impacted by consumption-based services. By the way, we'll start wrapping on that later in 2024. But we're extremely excited about the acceleration of demand in our single-year bookings in our subscription book of business, 14% growth in third quarter, 17% growth in fourth quarter. Red Hat will give us about 2.5 points of growth year-over-year. And then the remaining 0.5 point is our continued growth of our transaction processing, and that's about 0.5 point. You add those up, you're over 6% growth, and I think we feel pretty good. But let me turn it over to Arvind.

Thanks, Jim. And Amit, the second part of that is all of the innovation that we are delivering. When we play it up against the demands in the marketplace, our AI platform is going to be a part of what fuels innovation. And as I think you all understand when people like one part of the portfolio, they tend to also leverage other parts of the portfolio. Other than the AI portfolio automation, which really helps our clients with productivity, Jim mentioned Apptio or Apptio, Turbonomic the whole category called AIOps in the market, we believe, is going to be a big driver of demand for us. And on the mainframe, let's remember, TP does get driven by increased MIPS, and Jim talked about the increased MIPS that are out there. Those MIPS, coupled with the innovation we do in that part of the portfolio, drive the growth. So it's very well balanced. You have M&A, you have Red Hat innovation, you have AI innovation, automation innovation and TP innovation. And that is really what comes together to give us that growth and give us the confidence of being able to deliver all of that growth.

Thank you. Our next question comes from Toni Sacconaghi with Bernstein. Please state your question.

Yes. Thank you. I have one clarification and one question, please. So just on the free cash flow, Jim, I'm wondering, can you give us a bridge from net income, which I think The Street is expecting is about $9 billion or a little over for fiscal '24 and how you get to $12 billion in free cash flow, not from 2023 levels but from net income levels? And maybe in that, can you just clarify how much do you expect depreciation expense to be? And how much do you expect CapEx to be and how big a contributor is that? And then secondly, on the AI book of business, I think you said low hundreds of millions that doubled. So should we be thinking $300 million to $400 million? And it sounds like a third was in software. Was that revenue recognized during the quarter? And then the other couple of hundred millions were consulting signings? Can you just elaborate specifically on exactly what the book of business means?

Okay, Toni. Let me take the first piece, and I appreciate the question as always, and then Arvind can talk about the AI overall. For increased transparency, by the way, coming out of third quarter, where we delivered free cash flow of $1 billion up year-over-year, Arvind and I and many other of the senior leaders, we've spent a tremendous amount of time with our investors. And our investors were actually guiding us, coaching us around giving increased transparency about the drivers right at the heart of your question. That's why we put in both the press release and in the supplemental earnings chart a bridge down from operating pretax income down to adjusted PTI. Why? As I stated in Wamsi's question, for depicting the quality and sustainability of our free cash flow. So when you look at 2024, so to your point, I'll leave '23 aside. When you look at '24, it's entirely going to be driven, and more by the growth in adjusted EBITDA. And when you look at net income and you break it down, there's not that much difference between net income overall and the adjusted EBITDA overall. So the $900 million is purely a function of the confidence we have in the portfolio, the mix, the scale, the operating leverage and the productivity, which you heard on the prepared remarks, we took up to $3 billion here as an annual exit run rate by the end of 2024. So it's an entirely driven balance sheet. We'll have dynamics going one way or the other, cash tax modest headwind but those all kind of wash out. It's going to be entirely driven by the business fundamentals.

Thanks, Jim. So Toni, on the AI book of business, this is not all revenue in the quarter. I would just begin with that statement to set it straight. At this stage, we wanted to start looking at what is our momentum, what is the sentiment from our clients. So we went to a measure that is more reflective of, I'll use the word signings. What is the commitment the clients are making to us? Consulting is straightforward. It is the signings. Consulting signings are anywhere from 12 to 24 months on average is how much time they play out over there. And on software, it's what they're committing to. And we are using SaaS ACV. So it's a 12-month commitment, which is typical for as a service as well as, since we do offer our portfolio both ways as license or as a service, it includes the license piece as well. Now over a long-term, let's call it a couple of years or more, yes, the book of business should turn into an amount of revenue in a quarter, but that's going to take a bit of time to catch up. But we felt that this gives the better indicator right now of what is our traction and what is our acceleration in that part of the business.

Our next question comes from Ben Reitzes with Melius Research.

Yes. Great. Hey, thanks a lot. Wanted to ask about consulting. And Jim, you mentioned and disclosed high teens bookings growth in 2023 and just at 8% off a pretty difficult comp. I was wondering how that's going to play out in terms of revenue yields in '24 and into '25. Does that give you more confidence that the second half of '24 is going to have a pickup in Consulting revenue reported? And then for Arvind, if I could just sneak more on consulting. Your top competitor has much easier comps in terms of bookings and revenue over the next 12 months. Do you think you could continue to outperform them in the next year? Thanks.

Thanks, Ben. Really appreciate your question [Technical Difficulty], consulting-based question. I think the team is executing extremely well in the marketplace. And as we talked about in prepared remarks, there's real synergistic value of consulting in a hybrid cloud and AI platform-centric company. I think you've seen that play out. When you look at it, yes, we had a very strong year, relatively speaking, in the marketplace around consulting in 2023. Signings growth 17%, book-to-bill over 1.15, our absolute backlog is up 8%, the strongest we've had in quite some time, by the way, stable erosion and duration is up slightly, which we expect as clients do more and more application modernization, those are long tails. So when you look at that profile and you look at how we enter 2024, we take a look at that backlog. We do our backlog runouts. We look at how much of that comes out of our waterfall of the backlog realization and how much actual sell and bill activity you got to do in the year, and that gives us confidence. We guided full year to 6% to 8%. We also said that we expect, just based on those backlog realization trends albeit a lot of work still to get done in '24. But based on those backlog realization trends, we see an acceleration growth path throughout 2024. And that tailwind into 2025, we're well in front of our skis now. And by the way, backlog, when you look at 2025, the predictor indicator is only about third of that backlog sits in '25. As we enter right now in '24, about 2/3rds is backlog-driven. And that still looks pretty healthy growth compared to what our model looks like. So we feel pretty good about our book of business and the strategic partnership velocity, the Red Hat velocity. So I would leave it at that. Let me turn it over to Arvind.

Thanks, Jim. So Ben, as opposed to trying to directly compare with 1 other or 2 other people, can I take it back to the market, if you don't mind. The overall consulting market seems to be in the 4% to 6% range. So we benchmark there to make sure that we're trying to take share and that we have the offerings which appeal to clients, which also allow us to keep a healthy margin in the business. So when we look at it from those 2 lenses, we are going to be absolutely focused on taking share, which is why we are guiding to a higher 6% to 8% number is where we feel it will be. Then we go back to do we have the bookings that justify that? Yes, the booking is justified. But as you all know, that is some but not all of the revenue in the year. So we feel it's prudent to then guide it into the 6% to 8%, not higher. So you combine it with the offerings we have, we are also very, very focused compared to many of the players out there who are much larger. We are very focused on our strategic partners, and we are very focused on digital transformation and data and AI as opposed to a much broader swath of offerings that other people have. That gives us confidence in our growth rate, as Jim pointed out, for our Consulting business.

Our next question comes from Brent Thill with Jefferies. Please state your question.

Thanks. Arvind, I'm just curious if you could just give us your view of the business climate, just how things are feeling in the last quarter versus quarters before we're continuing to hear of a defund some of these software budgets from CIOs. And I'm just curious if you're hearing and seeing the same thing that we're seeing in our work.

Yes, Brent. So let me address that. I'll begin by saying, I see '24 playing out quite similar to '23. While there has been a lot of talk about reduced software budgets and reduced technology budgets overall, we are not seeing that. We are seeing that people are a bit more discriminating in what they're spending on. But that is as is spending more on AI, more on digital transformation, and I'll come to why it might mean that they are sort of focusing less on some other areas. So why is that? We see that there is a remarkably resilient economy. We can see that across South Asia from India to Japan, to the Middle East. Europe has kept remarkably resilient despite the conflict in Eastern Europe. Then when we come to North America, the economy here is resilient. Latin America, despite some early predictions, has actually done quite well. You put that all together, look, we don't forecast GDP. We just look at what other people forecast, and all of them are forecasting in the 2% range, 2%, 2.3%, same difference from our perspective. Then if you look at some of the pressures our CEO clients face, whether it's interest rates, whether it's inflation, whether it's supply chain, whether it's the demographic shifts on population, whether it's political conflicts or uncertainty, one answer that lets them grow without taking on fixed costs of either labor or physical infrastructure is technology. So we see every one of them leaning into technology as a potential answer that helps them against all of those potential headwinds. And so we feel pretty good that technology budgets should stay in line with 2023 going into '24.

Our next question comes from Erik Woodring with Morgan Stanley. Please state your question.

Hey, good afternoon, guys. Thank you for taking my question. I just wanted to dig into the software results a bit. And that was if we maybe set aside Red Hat, which we've spoken about, some of the other businesses continue to decelerate, especially looking at something like Data & AI or automation, especially in this climate of AI and a focus on spending there. I'm just curious, what is driving the confidence that those businesses reaccelerate? Is it customer conversations? I'd love if you could just give a bit more detail, one on, again, what happened in 4Q and kind of how you parse through some of that deceleration across those businesses. And then two, again, what's underscoring the confidence that some of these businesses then reaccelerate into next year? Thanks so much.

Yes. Let's start with the bigger picture. all we laid out a midterm model. We set our software portfolio would grow mid the way coming from a prior cycle that we were very low single digits overall. And we finished this year up over 5%. We finished a 2-year CGR already 2/3rds into our model at the high end of the model at 6%. Is that our aspiration? Absolutely not is what Arvind has the entire team focused on. And that's why we continue to fuel investment into new innovation both organically and organically. But let's take a step back how we set the year up. We set the year up, we said the year was going to be predominantly driven by the strength of our recurring revenue annuity portfolio, which, by the way, high value, 80% of our software revenue. That's our subscription-based models, our SaaS models, our TP software, et cetera. And we said that was going to grow mid-single digit. We actually delivered on that. We said then, second, prudently coming off of a peak ELA cycle, and you understand our ELA cycle extremely well in 4Q '22 that we expected a headwind. Now let's go back 90 days ago. 90 days ago, we were sitting year-to-date 6.5% total software segment, which gave us the confidence of taking up our guidance to the high end of the mid-single-digit model. What was driving that? Both HP&S was up 7%, TP was up 6% and underneath that, we were seeing very solid growth in our transactional business both volume and NRR with new clients. Now we get the fourth quarter and the ELA rep hit us. By the way, the ELA cycles give or take, they're in these ranges. They're on average about 3 years. They get probably somewhere around 40 to 50-plus percent in year 1, and then it tails off. So it's the biggest impact we'll see. We got through that in the fourth quarter, and we still delivered over 5% on a 2-year CGR, we're at the high end of the model. Now when you look at full year performance, Red Hat up 9%, automation, I'm directionally correct, 4% or 5%, Data & AI, 4% or 5%, security, yes, we got an execution gap on security. We got an opportunity to go fix in 2024. So I think it's actually glass half full. The innovation we're fueling in organically, the M&A portfolio, which is scaling nicely with a strategic fit, that gives us the confidence on why we're actually taking up and accelerating our growth in light of Brent's question in 2024.

Our next question comes from Matt Swanson with RBC Capital Markets. Please state your question.

Yes. Thank you guys so much. Congratulations on both the free cash flow and then also obviously the free cash flow going into next year. Maybe focusing even more so on the Software side and just thinking so on that 2.5 points of growth that's expected to come from the Red Hat. I mean you've talked about the consulting strength that you're hearing around both cloud and application modernization. Are there any other signs you're hearing specifically from like pipeline or customer conversations about an improving demand environment for Red Hat specifically? And then maybe just as like a caveat, how maybe some of the cloud cost optimizations impacted Red Hat in 2023?

Yes. Matt, let me take that. So when we look at Red Hat, while there are many products in the portfolio, 3 are the pulps that drive the forward performance. So Red Hat Linux, as we look at the overall usage of Linux, as we look at customers being even more concerned about patching, security and making sure that hackers can't break into their infrastructure and we look at the share volatility that happens, I'll call it, in the unfitted open-source world, it drives a lot of demand for Red Hat. And we're beginning see not just enterprise customers but even many ISVs begin to embrace that. As we look at OpenShift, I go back to a fundamental. I think most of our clients now acknowledge that a hybrid environment is their reality, meaning multiple public clouds and their own data centers are private. In that environment, OpenShift is the leading platform that gives them the flexibility to take an application and run it across all of those. And in this day and age when people have thousands of applications and the ones they're ready to deploy without having thousands of people, it has to go give them the platform to go do that. Those three combined roll up into the 17% increase in bookings that Jim referenced on the call. So that's not a leading indicator that is actually already done. Now with 14% in the previous quarter, that tells us the acceleration happening on that side. And we feel confident given the client conversations that these are all going to lead to Red Hat growth, putting aside the innovation that's coming from the edge platforms, from embedded Red Hat and from other markets that as the edge opens up or create yet again another additional market that has to come. So this gives us confidence that Red Hat will grow and provide that 2 to 2.5 points of overall software.

Thank you. Our last question comes from Brian Essex with JPMorgan. Please state your question.

Hi. Good afternoon and thank you for taking the question. Maybe for Jim. With regard to acquisitions, could you maybe provide some color or an update on your pipeline and offer maybe an update on your philosophy behind M&A, how you assess transactions with regard to the level of accretion you might require or what they might contribute to top line revenue growth or how they might improve ROIC long-term?

Yes, sure. I appreciate that, Brian. Thank you very much. I mean, I think Arvind has been very clear for the last 3.5, 4 years since he's come on. First of all, let's talk criteria. We always get asked size this, size that. Size is not a criteria. It is entirely, and I complement him and the entire team, he's very focused on strategic fit to a hybrid cloud and AI platform-centric company. Those targeted areas are always centered around hybrid cloud, data, automation, security and oh, by the way, both software IP asset and consulting expertise on both sides. So strategic fit. Second, we run this platform-centric model to create a synergistic multiplier effect in our business. So when we look at every single week a set of targeted candidates, we're looking at the synergistic effect because as a CFO, when we deploy $1, we're looking for a multiplier of hardware, software services on top of that. And then third, financial attractiveness. It has to be high growth, recurring revenue, highly profitable and free cash flow accretion in a quick period of time. That will vary based on software, it will vary based on consulting. But I think you're going to continue to see us be opportunistic in the marketplace. We've got the right capital structure. We've got the right finflex. We ended with, what, $13.5 billion of cash on the balance sheet. So we feel pretty good about our position, and we will capitalize on that to the extent it hits and fits those criteria. So thank you for the question.

Thanks, Jim. Let me now wrap up the call. In 2023, we executed on our strategy to deliver sustained revenue growth and cash generation. The changes we have made to our business over the last couple of years and our performance reinforce my confidence as we move into 2024. I look forward to continuing this dialogue through the year.

Diego, let me turn it back to you to close out the call.

Thank you for participating on today's call. The conference has now ended. You may disconnect at this time.