And duration, I would say, not only we had great signings growth, we’re monitoring our backlog realization. Our duration, by the way, this year has went up by a couple of months, but that revenue will play out over time. And all in all, if I sum it up, I think we’re taking share. I’m pleased with the team.
Patricia Murphy: Thank you, Ben. Sheila, let’s go to the next question.
Operator: Our next question will come from Erik Woodring with Morgan Stanley. Your line is open.
Erik Woodring: Hey, guys, thanks for taking my question. I’ll stick to the one as well. Maybe Jim, this is for you. You didn’t change your software consulting guidance ranges for the year. I think you had a minor benefit from Apptio closing early in 3Q, but you now expect a full year constant currency revenue growth to be at the low end of the 3% to 5% range. And so, I’m just wondering, should we now think about software consulting to grow at the lower ends of those ranges that you provided earlier, especially now kind of given some of your Red Hat comments? I’m just trying to understand what has changed underlying the different segments to get to kind of that new view on total revenue in constant currency? Thank you.
Jim Kavanaugh: Yes, thanks, Erik, I appreciate the question. So, similar to — I think Toni asked something similar to this overall. When you look at IBM, 3% to 5%, just practically speaking, one quarter to go, we said, oh, it’s better to say we’re prudently at the low end of that range. Now, let’s talk about it by segment. Software, you dial back 90 days ago. We said that we were very excited about the announced acquisition of Apptio. We said that we expected that to close in early fourth quarter. Team did an outstanding job. We got through that regulatory approval. We closed it mid-August. But when we announced that acquisition in July, we actually given our first half performance, both in our recurring revenue streams and the strength of that, but also in our transactional book of business.
We actually took our full year guidance up to the high end of the range. Now we closed it — and by the way, we said Apptio would be about 0.5 point on the full year. Now we closed it, what, a month, month-and-a-half earlier? Okay, so that 0.5 point of contribution on Apptio might be 70 basis points of contribution on a full year. We still feel very confident. By the way, through three quarters we’re up 6.5%. That’s above our mid-term model. Yes, we have the peak wrap on ELAs last year, but very interesting, underneath our third quarter year-to-year performance, we’re growing transactional revenue. Very different profile than what we started out in January, which I think prudently we said we expected transactional revenue was going to be a headwind to us.
What’s happening? The new innovation we’re bringing to market is actually creating much more volume of new ELA content that by the way is contributed about 1.5 point of growth above our expectation. And we’re also getting great [closing in] (ph) NRR of 7 points versus history. So, we think like we just finished above our model in third quarter on constant currency on Software, we said in the prepared remarks, we expect a pretty similar fourth quarter at the high end overall, so we’re maintaining Software. If you look at Consulting, we said 6% to 8% overall. By the way, year-to-date, we’re up 6%. Actually, 6.4% to be exact. And we look at fourth quarter overall, we just talked about in Ben’s question, our strong bookings, our book-to-bill at 1.16, the tailwinds on hybrid cloud around strategic partnerships, I think we feel pretty good about our overall guidance.
Patricia Murphy: Okay. Very good. Let’s go to the next question, please.
Operator: Our next question comes from David Grossman with Stifel. Your line is open.
David Grossman: Thank you. Jim, you provided some good detail on free cash flow year-to-date. And the question really is, are there any early indications on what non-operating items could impact free cash flow next year, working capital, cash taxes, et cetera, as well as how restructuring actions this year may flow into earnings and cash flow as well over the next several months?
Jim Kavanaugh: Yeah, David, thanks for the question overall. We’ll spend a lot of time in January talking about 2024 free cash flow, but I’m glad you actually asked the question because we’ve been talking about free cash flow all year long. It’s one of Arvind and IBM’s two important metrics, revenue growth, free cash flow generation. We called out $10.5 billion, by the way, up $1.2 billion this year off of last year where we grew $2.8 billion year-to-year. And we said that’s above our annualized model. Our annualized model is about [$750 million] (ph) per year coming on off the I&E and the business fundamentals. You look through the third quarter, we’re up now $1 billion year-to-year. We’re at $5.1 billion, very high quality by the way.
Of that $1 billion, $700 million of it is cash sourced from operating profit overall, so that’s the improving fundamentals of our sustainable revenue growth and our operating leverage and productivity we’re driving in this business. And as I said all year long, I was very transparent in January, repeated it in April, said it again in July, and now let’s say it again, when we look at that $1.2 billion free cash flow growth year-to-year, we’re going to get most of it through cash source from profit, read that about $800 million to $900 million, and we said that we would get working capital efficiency this year. Why? Because of our 4Q ’22 opportunity gap that we missed. And we called it out transparently in January. We’re seeing that play out.
You do the puts and takes. Yes, we’re going to get a little bit of a modest tailwind on structural actions this year that will offset cash tax headwinds. But you look at the underlying $1.2 billion free cash flow growth, it is a high quality, fundamentally driven out of our revenue growth and operating leverage. Now, you look to ’24, we’ll spend a lot more time on cash tax, a lot of that is going to be predicated on where we actually finished fourth quarter overall. But we feel confident with the actions we’ve been putting in place, and we’ve got to earn the credibility and discipline here closing out a free cash flow quarter, by the way, that’s $5.4 billion.
Patricia Murphy: Very good. Sheila, let’s take one last question.
Operator: Our last question will come from Brian Essex with JPMorgan. Your line is open.
Brian Essex: Hi, good afternoon. Thank you for taking the question. I guess maybe Arvind, if we could just circle back on this well-worked topic of AI, could you maybe just take a very high-level approach at how you’re seeing customers evaluating adoption, and how that might impact the nature of contracts within the Consulting business and feed the watsonx platform? Maybe initial read on adoption rates in view into how Consulting could be the tip of the spear there? Thank you.
Arvind Krishna: All right. Thanks, Brian, for the question. So, Consulting is going to be the tip of the spear, but it’s not going to be the only, because some clients do have enough expertise inside to do things on their own. As we approach clients, trying to use, I’ll call it, a big public chatbot to perhaps improve some service is not where they look to us, and we’ve been very clear that’s not where we are going to go, and we do not actually serve up any of those services. However, I’ll take maybe some quick examples as I go through. So, with a large, I’ll use the word financial services company. They want to use generative AI to dramatically improve the productivity of their developers. They actually use their own proprietary languages, not only the common languages that are available outside.
They are then asking the question, who can I trust to augment their model, give it to me, and I don’t really want to get into all the details of how I might use it, but I want them to provide the technology. In this case, Brian, we would work with them to augment the model using their language and their data and their code snippets. We would do it in a way that they are completely comfortable, meaning 100% that that leaks nowhere else. They would take back the model. It now becomes an as-a-service deployment in their private cloud infrastructure, and we monetize it as is typical for as-a-service software. I’ll take another example that we are building out with Dun & Bradstreet, and I mentioned that briefly on the call. In that case, it is consulting led.
