And that’s kind of how we paint the picture on that side.
James Kavanaugh: 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 two-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 three 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 wrapping on that in the second half. So that provides us a tailwind in the second half. But our subscription business today, the 80%, three points acceleration, double-digit in the first quarter, all three 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.
James Kavanaugh: Operator, next question, please.
Operator: Our next question comes from Erik Woodring with Morgan Stanley. Please state your question.
Erik Woodring: Great. Thank you very much for taking my question. 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 three 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? Thank you.
Arvind Krishna: Erik, let me just maybe address some macro points in 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 you got these two yet to come, we’ve got Software AG that we hope to close mid-year 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?
James Kavanaugh: 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, 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.
Olympia McNerney: Operator, next question, please.
Operator: Our next question comes from Brent Thill with Jefferies. Please state your question.
Brent Thill: 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? Are we just being too focused on the short term? What’s — what do you think unlocks that value in getting you to your closer TAM of the growth?
Arvind Krishna: So Brent, as you can imagine, we are very, very focused on that question. If I just want to lay out a four-year trajectory, if you will indulge me with just a minute, we began with a software portfolio that was, let’s call it, flat would be a kind way of putting it about five 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 both 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 four-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.
Olympia McNerney : Great. Operator, next question.
Operator: Thank you. Our next question comes from Brian Essex with J.P. Morgan. Please state your question.
Brian Essex: Hi. Good afternoon and thank you for taking the question. 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 you think might be there longer term to capture more share of that market?
Arvind Krishna: 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 that 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.
Olympia McNerney: Great. Operator, let’s take one last question.
Operator: Our next question comes from Matt Swanson with RBC Capital Markets. Please state your question.
Matt Swanson: Yes. Thank you so much for taking the question. I think I might try a qualitative version of an earlier question around GenAI. 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 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 for you to kind of hold their hand in terms of this Gen AI journey?
Matt Swanson: 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 were 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 GenAI. 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? 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 is don’t pick lots of little experiment, try to pick a few use cases, which can scale.
And by scale, meaning that they actually do impact a large fraction of the 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.
Olympia McNerney: Thank you, Arvind. Operator, let me turn it back to you to close out the call.
Operator: Thank you. Thank you all for participating on today’s call. The conference has now ended. You may disconnect at this time.
