IBM : 2024 1Q Prepared remarks

IBM 1Q24 Earnings Prepared Remarks

Introduction

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've 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.

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IBM 1Q24 Earnings Prepared Remarks

CEO Perspective

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 of 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.

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IBM 1Q24 Earnings Prepared Remarks

Creates Leading End-to-End Hybrid and Multi-Cloud Platform

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 and applications across public and private clouds, 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 lifecycle 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 widescale adoption in the developer community, highlighting the pervasive nature of their technology - used by

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IBM 1Q24 Earnings Prepared Remarks

over 85% of the Fortune 500 and downloaded over half a 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.

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IBM 1Q24 Earnings Prepared Remarks

Together We Unlock Value and Drive Growth

Thank you, Arvind. Let me start with the details of the transaction.

We have agreed to acquire HashiCorp for $6.4 billion of 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 Platform's 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 their 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 a quarter of HashiCorp's customers result in more than $100k 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

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IBM 1Q24 Earnings Prepared Remarks

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 two. 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.

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IBM 1Q24 Earnings Prepared Remarks

CEO Perspective

Now turning back to the quarter, let me start with a few comments on the macro-economic 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 Granite models and third-party models, giving our clients variety as well as the efficiency and focus on enterprise domains that IBM brings. We have leveraged watsonx to build AI assistants through our software portfolio. Our consultants are helping clients navigate the AI landscape. And finally, we are seeing our

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IBM 1Q24 Earnings Prepared Remarks

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 are IBM's, their own models, or 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 there are use cases for 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 InstructLab to evolve and improve AI models

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IBM 1Q24 Earnings Prepared Remarks

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 the 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 three 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, materials science, and financial modeling. As always, focusing our portfolio remains a key priority. We closed the sale of The Weather

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IBM 1Q24 Earnings Prepared Remarks

Company in the first quarter and expect to close the announced acquisition of StreamSets and webMethods from Software AG by mid- year.

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.

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