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 First Quarter 2024 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. In the first quarter, we had solid performance across revenue and cash flow. These results are further proof of the quality of our portfolio and our hybrid cloud and AI strategy. We had good performance in Software, at the high end of our model; continued strength in Infrastructure, above our model; while Consulting was below model. On a relative basis, Consulting outperformed the market. Our cash flow generation is the strongest first quarter level we have reported in many years. This performance speaks to the strength of our diversified business model. Before we get into more detail on the quarter, let me address the announcement of our agreement to acquire HashiCorp, a company we have partnered with for a long time and believe is a tremendous strategic fit with IBM. Enterprise clients are wrestling with an unprecedented expansion in infrastructure applications across public and private cloud as well as on-prem environments, making this the ideal time to pursue this acquisition. As generative AI deployment accelerates alongside traditional workloads, developers are working with increasingly heterogeneous, dynamic and complex infrastructure strategies. HashiCorp has a proven track record of helping clients manage the complexity of today's infrastructure by automating, orchestrating and securing hybrid and multi-cloud environments. HashiCorp is a great strategic addition to our portfolio, extending Red Hat's hybrid cloud capabilities to provide end-to-end automated infrastructure and security life cycle management. HashiCorp's technology is foundational to enabling the transition to hybrid and multi-cloud, and Terraform is the industry standard for infrastructure automation for these environments. With security top of mind for every enterprise, Vault is a powerful secrets management offering to automate identity security across applications. The combination will also bolster our leading IT automation platform to address the sprawling complexity of AI-driven application and infrastructure growth. HashiCorp's products have wide-scale adoption in the developer community, highlighting the pervasive nature of their technology used by over 85% of the Fortune 500 and downloaded over 0.5 billion times. The acquisition of HashiCorp builds on IBM's commitment to industry collaboration, the developer community and open source hybrid cloud and AI innovation. Today's acquisition is consistent with our M&A strategy. We have taken a disciplined approach to M&A, and HashiCorp aligns well across all our key criteria to continue to focus and strengthen our portfolio, on hybrid cloud and AI, deliver synergies with the rest of IBM and be near-term accretive to free cash flow. I will now turn it to Jim to discuss the financial implications.

Thank you, Arvind. Let me start with the details of the transaction. We have agreed to acquire HashiCorp for $6.4 billion in enterprise value to be funded by cash on hand. The transaction was approved by HashiCorp's Board of Directors. Closing is anticipated by the end of 2024, subject to approval by HashiCorp's shareholders, regulatory approvals and other customary closing conditions. We have been executing a disciplined capital allocation strategy, and the acquisition of HashiCorp meets all of our criteria, including strategic fit, as Arvind just walked through, synergies across IBM and financial accretion. Let me start by addressing synergies. We see multiple drivers of product synergies within IBM and accelerating growth for HashiCorp. Product synergies span across multiple strategic growth areas for IBM, including Red Hat, watsonx, data security, IT automation and consulting. For example, the powerful combination of Red Hat's Ansible automation platforms configuration management and Terraform's automation will simplify provisioning and configuration of applications across hybrid cloud environments. We are well positioned to drive growth for HashiCorp by leveraging IBM's enterprise incumbency and global reach. With 70% of the revenue today coming from the U.S., the opportunity to scale HashiCorp across IBM's operations in 175 countries is significant. We also believe we can accelerate HashiCorp's adoption with IBM clients. To put this in perspective, only about 20% of the Forbes Global 2000 are HashiCorp customers and just 25% of HashiCorp customers result in more than $100,000 annual recurring revenue, underscoring the opportunity to better monetize and upsell their products. Bringing it all together, the acquisition allows us to deliver a more comprehensive hybrid cloud offering to enterprise clients, enhancing IBM's ability to capture global cloud opportunity. This will drive a higher growth profile over time. Finally, we expect to realize operating efficiencies and expect the transaction to be accretive to adjusted EBITDA within the first full year post close and to free cash flow in year 2. Significant near-term cost synergies underpin the financial profile of the transaction, while product synergies represent further upside. We are very comfortable with our strong balance sheet, liquidity profile and solid investment-grade rating and remain committed to our dividend policy. I'll now turn it back to Arvind.

Now turning back to the quarter. Let me start with a few comments on the macroeconomic environment. We expect the global economy to behave similarly to last year, albeit with some uncertainty due to persistently high interest rates. There are reasons to believe technology will be even more important in 2024 as clients focus on productivity improvements and customer experience. AI-driven productivity, in particular, continues to be a top priority for businesses for both cost reductions and new revenue opportunities. I will now provide some details on the execution of our strategy around hybrid cloud and AI. Enterprise AI continues to gain traction. This year, we anticipate more clients moving from experimenting to deploying AI at scale to unlock productivity. We are pleased with the solid progress of our AI offerings. Each quarter, we are winning more clients, expanding partnerships and introducing new innovations. Inception to date, our book of business related to watsonx and generative AI is greater than $1 billion with sequential quarter-over-quarter growth. Similar to last quarter, this remains weighted towards Consulting. We believe our comprehensive AI strategy is well positioned to help clients scale AI. We developed our watsonx platform for clients to build their AI solutions, spanning from foundation model training to data preparation and governance. This includes both IBM/Red Hat models and third-party models, giving our clients variety as well as efficiency and focus on enterprise domains that IBM brings. We have leveraged watsonx to build AI assistance through our software portfolio. Our consultants are helping clients navigate the AI landscape. And finally, we are seeing our infrastructure segment play a larger role as clients leverage their hardware investments in their AI strategies. Let me touch on these infrastructure dynamics briefly. As AI becomes widely adopted, IBM Z is uniquely advantaged. We believe a lot of AI inferencing will happen where the data is for security, efficiency and latency reasons. Our full-stack focus, from on-chip AI processing to AI accelerator cards, to watsonx platform support, allows models to be built and trained on any platform and easily deployed on IBM Z. The Telum chip is a unique differentiator, enabling real-time AI inferencing. Generative AI is also driving lift for our storage offerings where industry-leading performance and scalability is utilized for data curation, model building and fine-tuning. For enterprises to deploy AI at scale, AI is not a one-size-fits-all proposition. It requires tuned, domain-specific models trained with quality data to maximize its impact. Clients value the flexibility of our approach. They appreciate having the ability to leverage a combination of AI models, whether they're IBMs; their own models; open source models, such as Llama from Meta and Mixtral from Mistral. And they can deploy these AI models across multiple environments. The flexibility we offer is resonating as our use cases are both large and more efficient models. We are committed to an open innovation ecosystem around AI to help our clients maximize flexibility and leverage skills. Let me spend a minute on our progress in this area. We see early parallels to Linux in making open source AI models performant for enterprise use. We believe that IBM with Red Hat can be a key driver of open source AI. As you know, we have done a lot of work with AI models and recently released a family of state-of-the-art open source code models from our Granite series. Red Hat and IBM also recently launched Instruct Lab to evolve and improve AI models through incremental community contributions, much like open source software. This open strategy is resonating around the world. We recently announced a collaboration with the Spanish government to leverage IBM's investments across their entire AI stack and open source to build the world's leading suite of foundation models proficient in the Spanish language. Enterprise use cases addressing code modernization, customer service and digital labor remain top of mind for our clients. This quarter, we signed a multiyear contract with Providence Health to reimagine talent and HR workflows with AI from IBM and partners. We're also providing data-driven insights and enabling Spanish language narration for this year's Masters golf tournament. Our partner ecosystem remains essential to both AI and hybrid cloud growth. This quarter, we progressed strategic partnerships with a number of industry leaders. Consulting joined forces with NVIDIA to accelerate clients' AI journeys. ServiceNow will embed watsonx AI capabilities into the ServiceNow platform to accelerate enterprise digital transformation. We also expanded our relationship with Adobe around OpenShift and watsonx as it relates to the Adobe Experience Platform. We continue to invest in emerging technology as well, bringing new innovations to the market. Since we put the world's first Quantum system on the cloud in 2016, we have deployed over 80 Quantum systems, and our users have run over 3 trillion programs to date. We just installed a Quantum System One at Rensselaer Polytechnic Institute. This is the first IBM Quantum system on a college campus anywhere in the world. This installation will advance research in critical areas such as energy storage, material science and financial modeling. As always, focusing on our portfolio remains a key priority. We closed the sale of The Weather Company in the first quarter and expect to close the announced acquisition of StreamSets and webMethods from Software AG by midyear. Overall, we had a positive start to the year, which gives us confidence in our next quarter and full year expectations. Jim will now take you through the details of the quarter. Jim, over to you.

Thanks, Arvind. In the first quarter, we delivered $14.5 billion in revenue; $3 billion of adjusted EBITDA; $1.7 billion of operating pretax income; $1.68 operating earnings per share; and we generated free cash flow of $1.9 billion, up approximately $600 million year-over-year. Our revenue for the quarter was up 3% at constant currency. We saw an impact to our top line performance from the closing of The Weather Company earlier than expected in the quarter. Software grew by 6% with growth across Hybrid Platform & Solutions and Transaction Processing and continued strength in our recurring revenue base. Consulting was up 2%, reflecting organic growth. We continue to have solid signings performance and a trailing 12-month book-to-bill of over 1.15. Infrastructure had strong performance, delivering growth across all of our hardware offerings. Looking at our profit metrics, we expanded operating gross margin by 100 basis points and operating pretax margin by 130 basis points over last year, inclusive of about 100 basis point currency headwind to pretax margin. At the end of January, we closed on the divestiture of The Weather Company, generating a pretax gain of $241 million in the quarter. Mitigating that benefit, we took charges of $374 million to address workforce rebalancing. Operating pretax margin was up 50 basis points, excluding the year-over-year impacts of workforce rebalancing and divestiture dynamics. We are pleased with this performance, in line with our guidance of roughly 50 basis points of operating pretax margin improvement in 2024. Margin expansion was driven by our operating leverage, product mix and ongoing productivity initiatives. This allows for continued investments to drive innovation, which you can see in our higher R&D expense. The timing of discrete tax items this quarter resulted in an operating tax rate of about 6%. We are still expecting a full year operating tax rate consistent with last year. Overall, the combination of our revenue and operating margin performance resulted in 7% growth in our adjusted EBITDA. This contributed to our free cash flow performance. For the quarter, we generated $1.9 billion of free cash flow, up $600 million year-over-year. This growth reflects the performance of our underlying business, with adjusted EBITDA up $200 million year-over-year and about $400 million from timing of balance sheet dynamics and CapEx. Over the last 12 months, we generated free cash flow of $11.8 billion. This puts us on track to deliver about $12 billion of free cash flow for the year, with the growth largely driven by adjusted EBITDA. Since our acquisition of Red Hat, excluding 2021 when we spun off Kyndryl, our operating net income to free cash flow realization averaged 120%. Two factors drive this. One is stock-based compensation, which today represents 15 points of realization. And two, given the shift in our portfolio to a growing software business, deferred income also contributes to our realization. In terms of cash uses, we returned $1.5 billion to shareholders in the form of dividends. From a balance sheet perspective, we have a very strong liquidity position with cash of $19.3 billion, up from $13.5 billion at year-end 2023. Our debt balance at the end of the first quarter was $59.5 billion, including $9.9 billion from our financing business. Turning to the segments. Software revenue grew 6% with good performance across both Hybrid Platform & Solutions and Transaction Processing. As mentioned in January, the Software revenue growth drivers for the year include Red Hat growth, acquisitions, strong recurring revenue and transaction processing. And this is just how the first quarter played out. Hybrid Platform & Solutions revenue was up 7%. Let me spend a minute on the various elements. Red Hat revenue grew 9%, reflecting solid performance across the 3 key solutions: RHEL, OpenShift and Ansible. Annual bookings growth was again in the mid-teens, with OpenShift up over 40% this quarter and RHEL and Ansible each up double digits. Beyond Red Hat, recent acquisitions contributed to the growth profile of Hybrid Platform & Solutions as did new innovation areas, including watsonx. The combination of Apptio, acquired mid-last year, and our IT automation portfolio has delivered strong results, unlocking the full benefits of a fin op solution for technology investments across hybrid cloud environments. In fact, just this quarter, we partnered with Microsoft to bring Apptio to Azure and we'll co-sell to our joint customers, and Microsoft has agreed to adopt Apptio's capabilities in parts of their organization. Our revenue performance continues to reflect growth in our high-value recurring revenue base. Our ARR, after removing The Weather Company and security services, is now $13.9 billion, up over 8% since last year. 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. And there's an increasing interest in generative AI application modernization capabilities, like watsonx Code Assistant for Z. Software segment profit was up 80 basis points while absorbing both key investments in innovation and about 1 point of currency impact in the quarter. We continue to deliver operating leverage driven by our revenue performance this quarter. Our Consulting revenue was up 2%. We continue to see clients prioritizing large data and technology transformation projects focused on driving productivity with AI and analytics. These results reflect the organic performance of our business. Solid demand for our offerings led to signings growth of 4%, our highest absolute first quarter signings in recent history, and our trailing 12-month book-to-bill ratio remains over 1.15. Our overall backlog remains healthy, up 7% year-over-year, and backlog erosion levels remain stable. At the same time, we saw both a lengthening of backlog duration driven by large-scale digital transformations and a reduced level of revenue realization in the quarter as clients tightened discretionary spending. Contributing to growth across the business this quarter, our strategic partnerships continue to make up over 40% of our Consulting revenue, with both AWS and Azure practices growing double digits. Additionally, our Red Hat practice grew revenue double digits. Expanding upon our partnerships, we are leveraging Microsoft Copilot to drive productivity for our clients. Just as we quickly ramped a meaningful book of business around Red Hat to address the hybrid cloud opportunity, we are ahead of pace at this stage with our generative AI book of business. Turning to our lines of business. Business Transformation revenue grew 3% led by supply chain and finance transformations. Customer experience transformations also contributed to growth. Technology Consulting revenue was also up 3% with double-digit growth in cloud modernization projects, and both strategic partnerships and Red Hat engagements delivered double-digit growth. Application Operations revenue declined, reflecting weakness in on-prem custom application management projects, partially offset by strength in cloud-based application management offerings. Moving to Consulting profit. We delivered over 8% of segment profit margin, which is flat year-to-year. Our segment profit margin was impacted by about 1 point of currency, offsetting improvements in pricing and productivity actions we have taken. Moving to Infrastructure. Revenue grew, reflecting growth in Hybrid Infrastructure of 6% and declines in Infrastructure Support of 7%. Within Hybrid Infrastructure, growth was broad-based with strong demand from our hardware offerings across IBM Z, Power and Storage. In IBM Z, revenue was up 5% in the eighth quarter of z16 product availability. Now 2 years in, this product cycle continues to resonate with clients and surpassed z15 revenue performance. IBM Z is uniquely positioned for AI with the first processor design with on-chip acceleration for real-time AI inferencing. In fact, we're working with over 100 clients on the application of AI on z16. Use cases range from fraud detection to anti-money laundering, to anomaly detection. This remains an enduring platform, driving not just hardware adoption but also related software, storage and services. Distributed Infrastructure delivered 7% revenue growth with strength in both Power and Storage. Power performance was fueled by demand for data-intensive workloads. Storage delivered strong double-digit revenue growth, including demand for high-end storage tied to the Z16 cycle. And clients are also looking to our storage offerings for data curation, model building and fine-tuning and support of generative AI. Looking at Infrastructure profit. We delivered both gross profit and segment profit margin expansion. Segment profit margin expanded 20 basis points in the quarter, reflecting benefits from productivity while absorbing about 1 point of impact from currency. Now let me bring it back to the IBM level to wrap up. More than 2 years into our midterm model, we are a more focused business that has delivered sustained revenue and free cash flow growth. Over this time, we've continued to invest organically and inorganically, bring new products and innovation to market, expand our ecosystem and drive productivity across our business. Our first quarter performance is another proof point of this progress with constant currency revenue growth, operating gross margin and operating pretax margin expansion, and the strongest first quarter free cash flow in many years. Looking to the full year 2024, we are holding our view on our 2 primary metrics: revenue and free cash flow. We see full year constant currency revenue growth in line with our mid-single-digit model, still prudently at the low end. And for free cash flow, we expect to generate about $12 billion driven primarily by growth in adjusted EBITDA. On the segments. In Software, we had a solid start to the year and continue to expect growth slightly above the high end of our mid-single-digit model. In Consulting, we continue to see strong demand for digital transformations. Though, as I said, we are seeing some pressure on smaller, more discretionary projects. We now see mid-single-digit revenue growth in Consulting with acceleration throughout the year. Given our ongoing productivity initiatives and investment in innovation, we expect to see about 1 point of segment profit margin expansion in both of these segments. And in Infrastructure, given product cycle dynamics, we expect revenue to decline, driving about a 0.5 point impact to our overall growth. Given IBM Z cycle dynamics, we expect segment profit margin to be lower year-over-year. With these segment dynamics, we continue to expect IBM's operating pretax margin to expand by about 0.5 point year-to-year, consistent with our view 90 days ago, and we are maintaining our view of operating tax for the year to be consistent with last year, in the mid-teens range. We took a workforce rebalancing charge this quarter. And as I mentioned 90 days ago, we continue to see the overall amount this year consistent with last year. We expect this to pay back by the end of the year. On currency, given the strengthening of the dollar, we now expect a 150 to 200 basis point impact to revenue growth for the year, which is about 1 point worse than 90 days ago. For the second quarter, I expect our constant currency revenue growth rate to be consistent with the full year. Our tax rate is expected to be in the high teens. And for profit, we expect the first half skew of net income will remain a couple of points ahead of the prior year. In closing, we are pleased with our performance to start the quarter. We are positioned to grow revenue, expand operating profit margin and grow free cash flow for the year. Arvind and I are now happy to take your questions. Olympia, let's get started.

Thank you, Jim. Before we begin the Q&A, I'd like to mention a couple of items. First, supplemental information is provided at the end of the presentation. And then second, as always, I'd ask you to refrain from multipart questions. Operator, let's please open it up for questions.

[Operator Instructions] Our first question comes from Amit Daryanani with Evercore.

I guess I was hoping you could talk a bit more on the Consulting side of the business because revenues did decelerate rather notably in March quarter, but I think, on the other side, your AI-centric backlog at over $1 billion is doing extremely well. So I'm hoping you'd touch on the near-term side, what are you hearing from your customers? What are they telling you around the duration of this pause? Because I think the expectation of mid-single-digit growth would imply this business will recover rather quickly. So I'd just love to get a sense on what are customers' view on Consulting, in terms of the duration of the pause? And then longer term, what does the opportunity look like given the AI-centric backlog appears a lot more robust versus what I think folks have expected beyond '24?

Thanks, Amit. I appreciate the question. Let's take a step back because I think you're seeing some interesting dynamics in the consulting industry overall. And let's bifurcate it between how you asked the question. Let's look at real demand that's being measured in bookings, and then let's talk about what's happening with the revenue realization. On demand, we continue to see and capitalize on solid demand in key areas around digital transformation, application modernization and Gen AI. Our signings in the quarter, up 4%, the strongest absolute first quarter signings we've had as far back as I can go. We have a strong book-to-bill, over 1.15 on a trailing 12 months. Our backlog dynamic is in a very strong position, 7% overall with stable erosion, but our duration has been going up the last 2 quarters. It's been up a couple of months. But let's talk about the underpinnings of what's driving demand because I think that's what's most important around the key growth focus areas. You talked about Gen AI. Gen AI for IBM, Arvind indicated, inception to date, over a $1 billion book of business. Consulting in the first quarter, the book of business on Gen AI was 2x all of last year, so I think we're winning in the marketplace. We're taking share. And by the way, we're well above that ramp we saw with regards to Red Hat. Our strategic partnerships still have great velocity, book-to-bill well north of 1.2. Our Red Hat book business is now $2.8 billion ARR around hybrid cloud. And we're seeing very nice acceleration in Gen AI and digital transformation around core workflow use case areas of finance, supply chain, HR and talent. So I think in the key focus areas, is our demand profile still continues to be good. Now let's translate that to revenue. Revenue, first of all, in the first quarter, as we indicated, it was all organic. We ramped on our acquisitions. We continue to operate a very disciplined M&A process and we continue to be opportunistic, but that 2% revenue growth was all organic quarter-to-quarter. Second, in this marketplace, you look at competition, we're taking share still. So when you look at it, 90 days ago, we talked about the year. We talked about the year was going to play out accelerating throughout the year. Why? Because, one, we knew we had a strong backlog and that backlog realization showed us that it was going to play out throughout the year with sequential improvement. But second, Easter. Easter, we knew calendar was there, it was at the end of March. That does impact a human capital-based business on a number of billing days. So when you look then at first quarter, that backlog duration extending out a couple of months. We also saw, though, less revenue backlog yield, and that really played out if you look at our subsegments, in Application Operations. That's centered around custom AMS applications which, by the way, many of that, as you know quite well, is volume-based business. And that volume, like I said, backlog is stable overall. We're not losing the business. That is moving out to the right. So with all that said, what are we focused on? We're focused on capturing new client demand in areas around our key growth areas. Two, we're continuing to focus and we are gaining share in the marketplace. Three, we're driving that economic multiplier of consulting and technology across our hybrid cloud and AI platform. So in light of all that, that's why you see the mid-single-digit growth. I think that's prudent just given what every other consulting competitors come out with. By the way, that still drives 1.5 points of growth to IBM for the full year. And as I stated earlier, we see an accelerated growth profile as we move through the year.

The next question comes from Wamsi Mohan with Bank of America.

Arvind would love to get a little bit more of sort of a macro demand backdrop. I mean I know Jim mentioned the tightened discretionary spending in some areas. How do you think about the risk of that sort of filtering more broadly as you go through the course of the year, especially given your guidance calls for an accelerating trend here? And if I could, quickly, Jim, the synergies relative to HashiCorp on the cost side, is there any way you can dimensionalize that given that, when you're defining accretion on EBITDA basis, I get that, but can you also help on the net income basis or from a free cash flow how much it might be dilutive in year 1 and accretive on year 2?

Thanks, Wamsi. So let me address your thought about the demand profile globally. So if I look at where we are right now and where we project for the rest of the year, demand is actually quite strong. I would put it as very similar to 2023. This is backed up by IMF GDP estimates, which are now north of 3% for the global business. If I look at it by geography, Japan remains very strong. I think that they are taking this opportunity to refresh the technology across their enterprise and government base. If you look at South Asia, extremely strong; even the Middle East, U.A.E., Saudi, very strong; Europe has remained consistent to last year; North and South America. So on a geography basis, we're seeing very, very strong demand. Now interest rates are higher than people were expecting. I think we should acknowledge that. That means you get two effects going on. One, there is even stronger demand for software and infrastructure because people believe technology helps you in those environments and helps in an environment of increased labor costs and increased supply chain costs. Then when you look at the discretionary side, Jim answered this in the previous question, we are seeing a little bit, not across the board, not in all of the offerings in consulting, but where there is a little bit of discretionary labor, that is where we sense that pressure. What we are going to do is pivot into the areas around helping people become more productive, take more cost out, digital transformation, work with our partners where there is very strong demand in the market. And as you pivot there, we believe that our growth rate in Consulting will continue to accelerate. So I hope, Wamsi, that, that gave you a flavor on the demand vectors we have, both in Software and Infrastructure and in Consulting and on a geography basis. Jim, over to you for part 2.

Okay. Thank you. Thanks, Wamsi, for the question. As Arvind indicated in the prepared remarks, we couldn't be more excited about the powerful combination of HashiCorp with IBM and Red Hat together. We talked about it in the prepared remarks, we've been very disciplined in our set of criteria around M&A. And this fits strategically. It has tremendous synergistic value to our hybrid cloud and AI portfolio and it has an attractive financial return overall. And Hashi meets all three: One, it's a higher revenue growth profile company, so it accelerates IBM's revenue growth over time; two, to your question, adjusted EBITDA accretive in the first 12 months; and three, levered free cash flow accretive by the end of year 2. We think there are a potential for meaningful synergies overall and, when we look at it, significant near-term operating efficiencies, cost synergies. And to put that in perspective, we see this business profile moving from about a mid-single-digit free cash flow margin business to about a 30% to 40% free cash flow margin business in a handful of years, free cash flow accretive by the end of year 2. Now the multiple we paid on that, fully supported by, one, the stand-alone revenue growth and the cost synergies that come out. All of the IBM revenue synergies around Red Hat, around data security, around watsonx, around consulting and IT automation are all upside potential. So let's talk and conclude on the cost synergy. Cost synergies are where you would fully expect. IBM runs a global operations in 175 countries. We run a very disciplined G&A-efficient structure. We see significant G&A operating efficiencies that we're going to go capitalize on. Second, running the playbook on how we expand it globally, our go-to-market model that we did with Red Hat, and that has both global incumbency, global scale, global breadth and ecosystem leverage overall. And when you look at that, those significant synergies allow us to invest in product, R&D, innovation and capability that's built into our case and also deliver our financial returns, so we feel pretty good about it.

Our next question comes from Toni Sacconaghi with Bernstein.

Jim, just to clarify, you've taken down your consulting outlook for the year from 6% to 8% to 5%. I think that's about 60 basis points to company growth. Is there anything offsetting that? Or is that just kind of a rounding error, in the low single-digit guidance? And then my question is, maybe you could just elaborate a little bit more on the AI book of business, maybe just help clarify exactly how you define that. I think it's both revenue recognized and your bookings. And maybe partner bookings, maybe you could just help define that? And last quarter, you said it doubled sequentially. This quarter, you just commented that it grew sequentially, maybe you could add a little color. Was that double digits or 20% or 30% or 40%? And at least when I do the math, it sounds like it's less than 5% of your Consulting backlog, AI backlog. Could you help to mention that as well?

Okay, Toni. Many questions here, let me see if I can get through them quick. You look at full year, full year, as Arvind indicated, we're maintaining our guidance on our model mid-single digit, I think, prudently just coming out of a first quarter. We've got a lot of work to do in the next 3 quarters, but I think prudently, at the low end of that model. By the way, that was very consistent with what we said 90 days ago. Now let's unpack that. When you take a look at full year, first of all, we are dealing with a stronger U.S. dollar. So we've given you supplemental chart, now we've lost basically about 1 point more of headwind on currency. Well, let's talk about the underlying fundamentals of our business across our segments because I think that's at the heart of your question. When you take a look at our growth at mid-single digit, one, we said software would grow slightly above the high end of our mid-single-digit model. We are very pleased with our Software performance in the first quarter. We've accelerated growth from fourth quarter to 6% overall. We have a very strong recurring revenue base. We accelerated Red Hat to a very strong 9% with our third consecutive quarter of mid-teen booking growth, which positions our business extremely well for double-digit growth for the full year, and we're getting nice scale and leverage on acquisitions. Software for the year will deliver over 3 points of that IBM mid-single digit by itself. Based on that Red Hat momentum, acquisitions, solid recurring revenue; TP, by the way, nice start, up 4%; and new innovation like watsonx. Consulting, we said for the full year, appropriately, in light of the market and still gaining share, would be mid-single digits. That will deliver about 1.5 points of growth to IBM. Why did we feel good about that? One, solid book-to-bill, winning in key focus areas, strategic partnerships, Gen AI scale overall. But like first quarter, we're going to continue to monitor that backlog realization to see how that plays out. But between Software and Consulting, over 3 points in Software, about 1.5 points, now you get to Infrastructure. We started out well above what we expected here in the first quarter. Mainframe, eighth quarter in, grew 5%. Our Distributed Infrastructure, Power and Storage, both grew double digits as we're capitalizing on Distributed Infrastructure and demand requirements for Gen AI. Full year, that's a little bit better than what we thought 90 days ago off our first start, so we expect about a little bit less than 0.5 point impact to IBM. You throw on top of that, we executed the closure of The Weather Company, that would be about 0.5 point. So that's kind of how we build up our full year overall. So AI book of business, I think you nailed it in your question. It's, one, on a Consulting perspective, it's our signings book of business overall. And on our Software, it's our subscription, our SaaS and perpetual licenses. Again, as you know, we offer clients flexibility on how they want to purchase that overall. And Consulting backlog, yes, 5% overall. I would tell you, let's put it in perspective, it's probably mid- to high single digits. But we've got, give or take, about a $30 billion book of business on backlog with Consulting. So coming from where we started, less than 9 months ago, I think that's a very good ramp. And let's put it in perspective. When we drove the hybrid cloud platform-centric play with Consulting, which has done extremely well, over the first 4 quarters, we did a $1 billion book of business. Right now, through less than 3 quarters, we're very damn close to that $1 billion book of business.

Our next question comes from Ben Reitzes with Melius Research.

I wanted to ask about Red Hat. You accelerated it to 9% in the quarter from 7%. What is your confidence level you get to the mid-teens, which kind of equals your bookings growth? And then on Red Hat, the follow-up would be, how much can HashiCorp augment that growth rate? And can you clarify the synergies a little bit more between Red Hat and Hashi? And was Hashi needed to help grow Red Hat? Or is it a bonus? How do you see that?

Ben, let me take the first part of those questions. We are very, very pleased with Red Hat. If I look at Red Hat now, we have had mid-teens or better bookings growth for the last 3 quarters, third quarter, fourth quarter and first quarter. That, combined with the growth we are seeing in OpenShift as well as in both Ansible and RHEL, OpenShift growing almost 40%, gives us a lot of confidence. So bookings growth plus OpenShift plus what we're seeing in the revenue now at 9% tells us that we should see that Red Hat growth continue or accelerate through the year. Two, let me just address the macro point. Hashi is a nice add for the Red Hat portfolio. But it's not inside Red Hat, let's just be clear. So when we talk about Red Hat growth numbers in line and accelerating, that is Red Hat as is. Hashi will be measured in software, but in IBM software, not in Red Hat. Where the synergy comes is, we believe, there will be added demand because if a combined portfolio is more interesting, we think even more clients will talk to us. That is how Hashi will help Red Hat. It's not that the Hashi revenue counts at all for the numbers we just mentioned. So we kind of want to be clear on that. Hashi to us is an accelerant for IBM strategy and for software strategy, and Hashi helps in being offensive in terms of giving us an overall better portfolio. So even more clients want to do business with us in the environments they're going to. That's kind of how I'd pitch it. And people know Hashi really well for their infrastructure management, but the security pieces of Hashi are also very, very interesting and really important as people navigate these very complex environments with all the worries about people losing secrets and keys and that resulting ransomware or hacking attacks. And that's kind of how I would paint the picture on that side.

Yes, I would just add one other point, Ben. As you and I and many of the investors have talked about since first quarter earnings, we've kind of bifurcated this business when we saw the slowdown happen in second half last year between our subscription-based business within Red Hat versus our consumption-based services and offerings, the former being about 80% of our portfolio, the latter being about 20%. If you look at first quarter, as Arvind indicated, we're very pleased. Coming off of a 2-plus point acceleration positions us extremely well, even more confident in that double-digit for the year. But the reason why we're even more confident is that 80% of that portfolio, that subscription business, we accelerated 3 points quarter-to-quarter in revenue and we were above double digits. On the consumption base, we finally saw a stabilization. We didn't see acceleration, we saw stabilization. But remember, we start ramping on that in the second half, so that provides us a tailwind in the second half. But our subscription business today, the 80%, 3 points acceleration, double-digit in the first quarter, all 3 major lines broad-based double-digit bookings; Red Hat OpenShift, over 40% booking strength; $1.3 billion ARR book of business, growing 25-plus percent; Ansible taking share, we feel even more confident as I said.

Next question comes from Erik Woodring with Morgan Stanley.

Arvind, maybe this one is for you. If we include the Software AG assets and now HashiCorp, I think you spent about $16 billion on acquisitions since your 2021 Analyst Day. Back then, you talked about kind of having $20 billion to $25 billion of M&A firepower you could leverage through 2024. Just curious, as we sit here today, your willingness or desire to go after more M&A for the rest of this year, would you be willing to go kind of above and beyond that total that you had laid out almost 3 years ago? And just as we think about the potential targets in the future, where do you believe you have gaps that you can still fill within your portfolio?

Erik, let me just maybe address the macro points on it, and I'll let Jim talk to some of the numbers here. We are going to remain incredibly disciplined on our M&A strategy. We kind of said it, but I just want to repeat, we've got to find things that meet our strategy, we've got to have some synergy opportunities at IBM, and it has to be financially accretive within the second year. So if we find things that meet that and we are committed, I'll say, to both our dividend and our investment-grade ratings, then that is kind of the picture we go in. Now within that, we believe we have some level of flexibility and that is what we will operate in. So that gives you a sense there. By the way, while we've got these 2 yet to come, we've got Software AG that we hope to close midyear and HashiCorp which will come near the end of the year, we also have to look at what is our overall internal dynamics of making sure that we can succeed on these businesses as we proceed down the path. We need to build consulting practices. We need to have synergy plays in other parts of the portfolio. We have to enable our sales teams globally. As we say, a big part of our synergy is getting the amplification from our global footprint that is there with clients all around the world. Jim?

Yes. Arvind, just building on your point, we are very confident in the capital structure of this company. We are committed to maintain a very solid investment-grade balance sheet. We are focused on debt leverage, obviously. But our primary capital allocation is to invest in our business, both organically and inorganically, and to maintain an attractive return to shareholder program with our dividend policy. So with all that said, just to reaffirm what Arvind indicated, we will remain in the market prudently evaluating complementary tuck-in opportunities that fit our M&A strategy, and we got the capability of doing that.

Our next question comes from Brent Thill with Jefferies.

Arvind, on the Software business, I mean, you've been ranging somewhere between 3% to 8%, 9% growth. Many have asked, it seems like the overall market is growing faster. What's going to take to unlock this incredible portfolio you've built to effectively maybe monetize at the rate the industry is growing out? Is there something that's causing friction to unlock that true potential of the Software business? Or are we just being too focused on the short term? What do you think unlocks that value in getting you to your closer TAM of the growth?

So Brent, as you can imagine, we are very, very focused on that question. If I just want to lay out a 4-year trajectory, if you'll indulge me with just a minute, we began with a software portfolio that was, let's call it, flat, it would be a kind way of putting it, about 5 years ago. We've gone from flat to, as you said, some volatility. But we are now seeing that we can be north of 6% for this year, whether you want to call that 6.5% or 7%, and we are very confident in that. As we do organic innovation and as we do M&A, we will find that, that number will keep improving year-over-year. And I'm pointing to a very consistent 4-year trajectory of having achieved that. By the way, within that, we do find there are a couple of slower growing pieces, but they're incredibly important to our overall profile, both for incumbency with clients and for the cash flow that we produce. We would never expect our mainframe software, the TPS piece, to be growing in the high-single digits or in double digits. So as that mix also changes over time, then we find that we're going to get closer and closer. And we do want to, over time, get software to grow above where we are right now. So right now, we are at the upper end of the mid-single-digit model. I think you can conclude what would be the next step we will go at, and then we'll go from there.

Our next question comes from Brian Essex with JPMorgan.

Another Red Hat one. Maybe, Arvind, if you could maybe give us a little bit of sense of what's going on in the pipeline there and whether or not you're seeing a substantial benefit in the Red Hat pipeline from the VMware acquisition, both on the consulting side as well as the software side. Are you seeing a lot of migration? And how much of an opportunity do you think might be there longer term to capture more share of that market?

Brian, great question. So let me talk to some of the Red Hat dynamics. It's not so much directly related to VMware per se, but clients are all beginning to say, they're asking the question, which is the platform they want to bet on for the next 10 to 20 years on which they will write their applications, deploy them both in their own data centers and on public cloud. We find an incredible amount of interest in that question. And as we have built out the Red Hat portfolio not just for containers, because many people know OpenShift as a great container platform, but also for virtualization with both container-native virtualization and with the KVM hypervisor, we are finding a lot of interest around those topics. Then as we layer in, by the end of the year, the HashiCorp advantages of managing the infrastructure across all these environments, we do believe that, that will be an accelerant to the Red Hat portfolio. So first, RHEL has got its place as the primary place where people want to deploy, OpenShift as a platform for both containers and virtualization, Ansible and HashiCorp helping increase automation and reduce the complexity. We think all of this plays in. And Brian, I think the best number is the mid-teens bookings growth on the subscription side of the business. That speaks to the demand in terms of not only is there demand but we are realizing that demand in the book of business that we are getting clients to commit to on Red Hat.

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

I think I might try a qualitative version of an earlier question around gen AI. And I think just we see so much of the news feed being around kind of the hype cycle, and obviously, growing $1 billion book of business shows you're monetizing it. Can you just talk about maybe the pain points that enterprises are looking to address when they first come to you or when those consulting relationships start? Like, how much of a plan is in place versus how much they're looking to you to kind of hold their hand in terms of this gen AI journey?

I think, Matt, that's a great question. So let me maybe take that, and I'll address it from both the consulting side and the software side. If we look 12 months ago, I would say that there was a lot of excitement and there was a lot of experimentation that we're starting, and people were not thinking through what does this mean for my overall ROI, what are the economics of running gen AI, how do I get the people changes done so that the ROI can actually be realized. What is happening in all of my conversations this year, in the first quarter of 2024, is a lot of people have woken up that those issues need to be addressed as well. So when they talk to our consulting team, they are spending energy on, but can you help my people also do the transformation it takes, what is the change process through which you can recognize those things. They then go to immediately asking, in these models, how expensive is it to run them. And they begin to do the math, wait, if I run this model just for this one business process, the infrastructure costs alone could be $300 million a year. That doesn't close the ROI, can I do it in a much more cost-effective way but an equally good answer, and that is where you begin to see some of the models that IBM has produced. Our Granite series play very strongly into helping them recognize their ROI by reducing the economics. And then lastly, and this is advice that I gave to the C-suite usually, and it resonates, don't take lots of little experiments, try to pick a few use cases which can scale. And by scale, meaning that they actually do impact a large fraction of their employees or their clients' customers and they begin to have a large impact in how business is done by either improving revenue or by making the enterprise significantly more productive. That's kind of a conversation shift from simply, oh, this is a neat new tool, let me try out to see what I can do, not what I should do, but what I can do. And I think that, that is a big change in terms of helping the organization scale. So let me now wrap up the call. In the first quarter of 2024, we have executed on our strategy to deliver revenue growth and cash generation, allowing us to invest organically and through strategic acquisitions like HashiCorp. As always, we need to execute to capture the opportunity in front of us. I look forward to sharing our progress with you as we move through the rest of the year.

Thank you, Arvind. Operator, let me turn it back to you to close out the call.

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