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, and 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 one-third of our book of business related to generative AI in the fourth quarter and two-thirds was consulting signings. There was a balance of both large and small transactions across both segments. Enterprise use cases addressing code modernization, customer service, and digital labor continue to offer meaningful near-term benefits to clients. We've been collaborating with numerous clients using watsonx code assistant for Ansible. This includes a successful pilot with Citi, where initial results point to substantial developer productivity and 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.

Thank you, 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 three 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 a 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.

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, combined with new wins highlighting 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 startup community to tap into the latest AI innovations in the market and help them scale. In summary, I believe that the changes we have made to our business over the last couple of years position us for the evolving technology landscape. As I reflect on our performance since we presented our midterm model in October of 2021, I am pleased with the progress we have made internally and with our clients. We have delivered average revenue growth for IBM in line with our midterm model, and this is true for all our segments. Software has delivered average growth at the high end of the mid-single-digit model. Consulting delivered average growth in line with the high single-digit model, and Infrastructure is well ahead of 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 billion of free cash flow. This keeps us firmly on a path of sustainable growth.

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.

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.

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, and good afternoon, everyone. My question is focused on the software side. Regarding the calendar '24 guidance, which I understand is slightly above the mid-single-digit medium-term target, can you discuss the expected split between organic and inorganic growth in '24? Additionally, could you elaborate on your expectations for key segments, particularly Red Hat, which I believe fell short of your expectations in '23, as well as the TPP side? 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.

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.

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. 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.

Thanks, Ben. So as opposed to trying to directly compare with one or two 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 two 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.

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.

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, etc. 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.

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, three 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.

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. 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.

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.