International Business Machines Corporation (NYSE:IBM) Q4 2022 Earnings Call Transcript

International Business Machines Corporation (NYSE:IBM) Q4 2022 Earnings Call Transcript January 25, 2023

Operator: Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. 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 Ms. Patricia Murphy with IBM. Ma’am, you may begin.

Patricia Murphy: Thank you. This is Patricia Murphy and I’d like to welcome you to IBM’s Fourth Quarter 2022 Earnings Presentation. 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. Provided additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue growth are at constant currency. We have provided reconciliation charts for and other non-GAAP 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.

Arvind Krishna: Thank you for joining us. Our fourth quarter and full year results demonstrate the execution of our hybrid cloud and AI strategy. We delivered strong revenue growth in our business. The growth was broad-based across our software, consulting, and infrastructure segments as well as across geographies. Our clients recognize that technology continues to be a fundamental source of competitive advantage. Over the last several quarters, it has become clear that technology is playing a significant role in boosting productivity in the face of inflation, demographic shifts, supply chain challenges and sustainability requirements. We entered 2022, a more focused company and took steps to reinforce our position. We strengthened our consulting expertise and expanded strategic partnerships.

To bolster our software portfolio, we invested in hybrid cloud and AI capabilities. We also delivered significant innovations in infrastructure with our z16 and Power platforms. All of this was brought to market with a more technical and experiential sales approach. Looking back on the year, we are pleased with the progress we made. We delivered revenue growth above our mid-single-digit model and we delivered solid free cash flow. But I’ll acknowledge there is more to do. This year, we’ll unlock more productivity, expand our strategic partnerships, and put more investment in specific growth markets. For 2023, we see revenue growth in line with our mid-single-digit model range and about $10.5 billion of free cash flow. This keeps us on a path of sustainable growth.

I will now provide some color on the progress we are making in the execution of our strategy. Our perspective is clear. Hybrid cloud and AI are the two most transformative technologies for business today. These technologies work together to drive business outcomes. Hybrid cloud is where the world is going. Containers are the preferred destination for applications. Hybrid cloud offers more value than relying on a singular public cloud. It enables organizations to drive business value across multiple clouds, on-premise or at the edge. This includes scale, security, ease of use, flexibility of deployment, seamless experiences and faster innovation cycles. Our platform, built on Red Hat, is the leading container platform, allowing clients to harness the power of open source software innovations.

IBM software and infrastructure technologies have been optimized for this platform. Our consultants and others leverage their extensive technical and business expertise to accelerate clients’ digital transformation journeys. Clients realizing real value from working with IBM’s hybrid cloud platform approach. For example, we worked with the Canadian Imperial Bank of Commerce, CIBC, to adopt a hybrid cloud approach. Using Red Hat technology, CIBC manages and skills its infrastructure with greater speed and flexibility. They can now develop applications in a private cloud and quickly deploy them to a public cloud. They deliver hundreds of new applications and reduced — provisioning time by 95% and deployment time by 50%. We are helping Delta Airlines leverage hybrid cloud to modernize options, automate operations and integrate security.

IBM Consulting deployed Red Hat on Amazon Web Services and IBM Cloud Packs to provide a consistent platform. Delta now has more levers that can use to boost developer productivity, reduce time to market and improve employee satisfaction. CIBC and Delta are both great examples of the value hybrid cloud can provide. Let’s now talk about artificial intelligence, or AI. AI is projected to contribute $16 trillion to the global economy by 2030, including a massive boost in productivity by infusing AI into every enterprise process. We have been co-creating with many clients to deploy AI at scale. We automated the drive-through experience for quick-serve restaurants. We accelerated the rollout of COVID-19 vaccines by automating the processes that assist millions of customers with inquiries and appointments.

By applying AI and automation we have helped security analysts to use the time to respond to threats from hours or days, to minutes. Recently, the U.S. Patent and Trademark Office partnered with IBM to leverage a host of AI capabilities that make it easier for people to glean insights from their vast database of patents. The BBC is now using our AIOps software to automate the management of its IT infrastructure. For businesses, deploying AI can be challenging because it takes time to train each model. But by using large language models, companies can now create multiple models using the same data set. This means businesses can deploy AI with a fraction of the time and resources. That is why we are investing in large language, our foundation models for our clients and have infused these capabilities across our AI portfolio.

Our partner ecosystem plays a critical role in the execution of our strategy. In the fourth quarter, we made a series of new IBM software offerings available as-a-Service in the AWS marketplace. Likewise, Red Hat continued the expansion of its offerings in hyperscaler marketplaces, making Ansible Automation Platform available on both Azure and AWS. Adobe and Salesforce are also leveraging open source innovation based on Red Hat technologies in their offerings. Business with our strategic partners continues to grow with SAP, Microsoft and AWS, all over $1 billion in revenue for the year. We’ve had great success with our strategic partners and as we enter the New Year, we are expanding and better enabling our broader ecosystem. Recently launched Partner Plus, a new simplified program that increases our reach and scale through new and existing IBM partners.

We remain focused on delivering new innovations that matter to our clients. In the fourth quarter, we introduced Red Hat Device Edge, a lightweight solution to flexibly deploy traditional or containerized workloads on small devices such as robots, IoT gateways, point-of-sale and public transport. We also formed a collaboration with the Japanese consortium, Rapidus to leverage the depth of our intellectual property on advanced semiconductors. We unveiled Osprey, a 433-qubit quantum processor, that brings us closer to delivering our goal of building a 1,000 qubit system later this year. At the same time, we continue to acquire companies to complement our organic innovation. In the fourth quarter, we acquired Octo, which improves our footprint in the US federal market.

This caps the year with eight acquisitions across software and consulting. As sustainability becomes more of a priority, companies need digital technologies to analyze data, creating a baseline and improve the way they operate. Our software has helped IBM reduce its own carbon footprint. Across IBM’s global real estate presence, we were able to reduce carbon emissions by over 61% when compared to 2010. Using IBM sustainability software, we have simplified and automated our sustainability reporting processes and reduced reporting costs by 30%. Let me wrap by saying I’m pleased with the progress we have made with our portfolio, our go-to-market and our ecosystem. I’m confident in our ability to leverage hybrid cloud and AI to help clients turn business challenges into opportunities.

Our strategy continues to strongly resonate with clients and partners, and this gives us a solid foundation to build upon in this year. While there is more to be done, we enter the New Year as a more capable and nimble company, well-equipped to meet our clients’ needs. I will now turn it over to Jim who will give you more detailed information on our performance and expectations.

Jim Kavanaugh: Thanks, Arvind. I’ll start with the financial highlights of the fourth quarter. We delivered $16.7 billion in revenue, $3.8 billion of operating pre-tax income and operating earnings per share of $3.60. In our seasonally strongest quarter, we generated $5.2 billion of free cash flow. Our revenue for the quarter was up over 6% at constant currency. While the dollar weakened a bit from 90 days ago, it still impacted our reported revenue by over $1 billion and 6.3 points of growth. As always, I’ll focus my comments on constant currency. And I’ll remind you that we wrapped on the separation of Kyndryl at the beginning of November. The one-month contribution to our fourth quarter revenue growth was offset by the impact of our divested health business.

Revenue growth this quarter was again broad-based. Software revenue was up 8% and consulting up 9%. These are our growth vectors and represent over 70% of our revenue. Infrastructure was up 7%. Within each of these segments, our growth was pervasive. We also had good growth across our geographies, with mid single-digit growth are better in Americas, EMEA and Asia Pacific. And for the year, we gained share overall. We had strong transactional growth in software and hardware to close the year. At the same time, our recurring revenue, which provides a solid base of revenue and profit also grew, led by software. I’ll remind you that on an annual basis, about half of our revenue is recurring. Over the last year, we’ve seen the results of a more focused hybrid cloud and AI strategy.

Our approach to hybrid cloud is platform-centric. As we land a platform, we get a multiplier effect across software, consulting and infrastructure. For the year, our hybrid cloud revenue was over $22 billion, up 17% from 2021. Looking at our profit metrics for the quarter, we expanded operating pre-tax margin by 170 basis points. This reflects a strong portfolio mix and improving software and consulting margins. These same dynamics drove a 60 basis point increase in operating gross margin. Our expense was down year-to-year driven by currency dynamics. Within our base expense, the work we’re doing to digitally transform our operations provides flexibility to continue to invest in innovation and in talent. Our operating tax rate was 14% which is flat versus last year.

And our operating earnings per share of $3.60 was up over 7%. Turning to free cash flow. We generated $5.2 billion in the quarter and $9.3 billion for the year. Our full year free cash flow is up $2.8 billion from 2021. As we talked about all year, we have a few drivers of our free cash flow growth. First, I’ll remind you, 2021’s cash flow results included Kyndryl related activity including the impact of spin charges and CapEx; second, we had working capital improvements driven by efficiencies in our collections and mainframe cycle dynamics. Despite strong collections, the combination of revenue performance above our model and the timing of the transactions in the quarter led to higher-than-expected working capital at the end of the year. This impacted our free cash flow performance versus expectations.

Our year-to-year free cash flow growth also includes a modest tailwind from cash tax payments and lower payments for structural actions, partially offset by increased CapEx investment for today’s IBM. In terms of cash uses for the year, we invested $2.3 billion to acquire eight companies across software and consulting, mitigated by over $1 billion in proceeds from divested businesses, and we returned nearly $6 billion to shareholders in the form of dividends. From a balance sheet perspective, we ended the year in a strong liquidity position with cash of $8.8 billion, this is up over $1 billion year-to-year and our debt balance is down nearly $1 billion. Our balance sheet remains strong, and I say the same for our retirement-related plans. At year-end, our worldwide tax qualified plans are funded at 114%, with the US at 125%.

Both are up year-to-year. You’ll recall, back in September, we took another step to reduce the risk profile of our plans. We transferred a portion of our U.S. qualified defined benefit plan obligations to insurers, without changing the benefits payable to plan participants. This resulted in a significant non-cash charge in our GAAP results in the third quarter, and we’ll see a benefit in our non-operating charges going forward. You can see the benefit of this and other pension assumptions to the 2023 retirement-related costs in our supplemental charts. Turning to the segments. Software revenue grew 8%, fueled by growth in both hybrid platform and solutions and transaction processing. We concluded the year with seasonally strong transactional performance as well as a solid and growing recurring revenue base in software.

In hybrid platform and solutions, revenue was up 10%, with pervasive growth across our business areas: Red Hat, automation, data and AI and security. Our platform-based approach to hybrid cloud and AI is resonating with clients. As a proof point, OpenShift, our industry-leading hybrid cloud platform now has $1 billion in annual recurring revenue, and we modernize and optimize our software capabilities, including through cloud packs across automation, data and AI and security for that platform. Red Hat revenue grew 15% in the quarter, led by strength in OpenShift and Ansible, both growing double digits and gaining market share. Automation revenue was up 9%. Growth was led by business automation, application servers and integration as clients look to automate business workflows and improve applications.

Data and AI revenue grew 8% with enterprise needs to organize, store and manage their data. This performance reflects demand in areas including data management, data fabric and asset and supply chain management. Security delivered 10% revenue growth. We’re helping clients detect, prevent and respond to security incidents, which led to strength across threat management, data security and identity. Across these businesses, the annual recurring revenue or ARR for hybrid platform and solutions is $13.3 billion. And for all of software, hybrid cloud revenue is now more than $9.3 billion over the last year, up 16%. In transaction processing, revenue was up 3%. Demand for this mission-critical software has followed increases in Z Systems installed base capacity over the last couple of product cycles and strong renewal rates continued this quarter.

Both are evidence of the importance of this platform in a hybrid cloud environment. Moving to software profit. Our pre-tax margin was up 2 points this quarter, contributing to a full year margin of nearly 25%. Consulting revenue grew 9%. Clients are leveraging IBM’s hybrid cloud leadership and deep industry expertise to navigate the complexity of their digital transformation journeys. Revenue growth was broad-based across all business lines and geographies. And I’ll remind you that this is on top of the 16% growth consulting delivered in the fourth quarter of 2021. Strong demand for our offerings led to signings growth of 17%. With this, fourth quarter had the best quarterly book-to-bill of the year, and we sequentially improved our trailing 12-month book-to-bill ratio to 1.1. Clients are partnering with IBM Consulting as they decide what applications to modernize and how to migrate those applications across hybrid, multi-cloud environments.

Over the last 12 months, consulting delivered $9 billion in hybrid cloud revenue, which is up 23%. This quarter, our Red Hat practice was again a meaningful contributor to this growth. Revenue from strategic partnerships also grew at a strong double-digit rate. We continue to see momentum in this space. In aggregate, our strategic partnership bookings were up over 50% with Azure and AWS more than doubling. Turning to our lines of business. Business transformation revenue grew 7%. Growth in business transformation was once again driven by data and client experience transformation along with supply chain and finance optimization. Our partnerships with key ISV partners like SAP, Salesforce and Adobe enable IBM Consulting to transform critical workloads at scale.

In technology consulting, where we architect and implement clients cloud platforms and strategies, revenue was up 10%. Growth was led by cloud application development practices. Red Hat engagements along with our strategic hyperscaler partnerships contributed to the growth. Application operations revenue grew 12%. We help clients to optimize their operations and reduce costs by taking over the management of applications in hybrid and multi-cloud environment. Our incumbency and understanding of clients’ applications are key differentiators. Moving to consulting profit. Our pre-tax margin was 11% for the quarter and nearly 9% for the year. The fourth quarter margin is up nearly 2 points year-to-year and over 1 point sequentially. We are starting to see the benefit from pricing actions and productivity and our acquisitions have become more accretive.

Turning to Infrastructure segment. Revenue grew 7% driven by hybrid infrastructure, which was up 11%. Within hybrid infrastructure, Z systems revenue grew 21% this quarter. Among the new z16 capabilities, clients are leveraging cyber resiliency to comply with business regulations and proactively avoid outages in their operation and the new on-chip AI accelerator, for example, has been helping mitigate risk and detect fraud in credit card application processes. Our distributed infrastructure revenue was up 5%. This performance was fueled by strength in power following the extension of Power 10 innovation throughout the product line. Infrastructure support performance was flat including the impact from client adoption of new hardware with the latest z16 product cycle.

Credit: IBM

Moving to infrastructure profit. Pre-tax margin was down less than 1 point in the quarter. And for the full year, our pretax margin was nearly 15%. Now let me bring it back up to the IBM level to wrap up. At our investor briefing 15 months ago, we laid out our hybrid cloud and AI strategy and our priorities of revenue growth and free cash flow generation. Since then, we’ve been focused on our portfolio, our go-to-market model, our ecosystem and our capital allocation to execute that strategy and create value through focus. We now just completed the first year as today’s IBM. Our 2022 revenue was up nearly 12%, including nearly 4 points of incremental Kyndryl contribution that’s above our model of mid-single-digit growth. Over 70% of our revenue was in our growth vectors of software and consulting and about half of our revenue is recurring.

With this high-value mix and contribution from the incremental Kyndryl revenue, we expanded our full year operating pre-tax margin by 2.5 points. And our free cash flow was $9.3 billion, up $2.8 billion from the prior year. We invested organically and inorganically and return significant value to shareholders through dividends. Now there were some external factors that we faced this past year that impacted our profit and cash. We exited a profitable business in Russia. We are dealing with a much stronger dollar, and we are operating in a highly inflationary environment, which put pressure on our margins, especially in consulting. Putting it all together, we are pleased with the fundamentals of our business and the progress we have made in executing our strategy.

Our 2022 performance demonstrates that we now have a higher growth, higher value company with higher return on invested capital and a strong and growing free cash flow. For 2023, we again expect solid growth in our two most important measures of success; revenue and free cash flow. Arvind talked about the important role technology plays in this environment and how our solutions are closely aligned to the needs of our clients. With this, we expect constant currency revenue growth for the year to be in line with our mid-single-digit model. As we enter this year, I think it’s prudent to expect the low-end of the mid single-digit model. And for free cash flow, we’d expect to generate about $10.5 billion in 2023, which is up over $1 billion year-to-year.

Let me spend a minute on our expectations for constant currency revenue and pre-tax profit performance by segment. In software, with continued momentum in our recurring revenue stream in both hybrid platform and solutions and transaction processing, we expect revenue growth in line with software’s mid single-digit model. This revenue growth generates operating leverage, and we’d expect software pre-tax margin to expand by about 2 points year-to-year. Consulting’s model is to deliver high single-digit revenue. We’re coming off a strong year with revenue growth of 15% as we help clients with their digital transformations. This momentum and strong book-to-bill ratio support consulting revenue growth at the high-end of its model despite the tough compare.

We expect to expand consulting pre-tax margin by at least 1 point as we continue to realize more of the price increases and improved utilization. Infrastructure revenue is roughly flat over the midterm model horizon, with performance in any year reflecting product cycle dynamics. We’re entering the year three quarters into the z16 cycle, and will also ramp on Power 10. As a result, we expect 2023 infrastructure revenue below its model and pre-tax margin in the low-teens. For perspective, infrastructure should impact IBM’s overall revenue growth by over 1 point. With these segment dynamics, we would expect IBM’s operating pretax margin to expand by about 0.5 point. That’s in line with our model and our tax rate should be in the mid- to high-teens range.

Let me comment on a few items within our expectations. First, as I said, currency was a significant headwind in 2022, impacting revenue by $3.5 billion. With the movement of spot rates over the last 90 days, currency translation would be fairly neutral to revenue in 2023 with a headwind in the first half, flipping to a tailwind in the second. But I’ll remind you that we had over $650 million of hedging gains in 2022, which will not repeat in 2023, resulting in an impact to our profit and cash on a year-to-year basis. Second, as you know, we’ve taken a number of significant portfolio actions over the last couple of years, which has resulted in some stranded cost in our business. We expect to address these remaining stranded costs early in the year and anticipate a charge of about $300 million in the first quarter.

We would start to see benefits in the second half and pay back by the end of the year. And then third, we regularly review the useful lives of our assets. Due to advances in technology, we are making an accounting change to extend the useful life of our server and networking equipment effective the 1st of January. Based on our year-end asset base, we expect this change to benefit 2023 pre-tax profit by over $200 million, primarily in our Infrastructure segment. Given this is a change to the depreciation, there’s no benefit to cash. Looking at the first quarter, our constant currency revenue growth should be fairly consistent with the full year. Reported growth will also include about a three-point currency headwind at current spot rates. With operating leverage, we’d expect operating pre-tax margin to expand 50 to 100 basis points in the first quarter.

And that’s before the charge I just mentioned for the remaining stranded costs. Given the timing of currency and stranded cost dynamics, we’d expect about one-third of our net income in the first half and about two-thirds in the second half. To sum it all up, we have made a lot of progress this past year. While there’s always more work to do, we’re confident in the fundamentals of our business, and how we’re positioned as we enter the New Year. Patricia, let’s go to the Q&A.

Patricia Murphy : Thank you, Jim. Before we begin the Q&A, I’d like to mention a couple of items. First, supplemental information for the quarter and the year is provided at the end of the presentation. And then second, as always, I’d ask you to refrain from multi-part questions. Operator, let’s please open it up for questions.

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Q&A Session

Operator: Thank you. At this time, we’ll begin the question-and-answer session of the conference. Our first question will come from Amit Daryanani with Evercore. Your line is open.

Amit Daryanani: Thanks a lot for taking my question. I guess my question is around the free cash flow numbers. And perhaps you could spend a little bit of time on, you touched on kind of the 22 levers a fair bit and how you got there. But as you think about calendar 2023 free cash flow of $10.5 billion, upwards of $1.2 billion. What are the puts and takes? What are the bridge that gets you there? And then maybe related to that, as I think about what you did in 2022 and 2023, it does imply to get to the $35 billion number over the three years, 2024 would have to be $14 billion plus. So perhaps you can level set that because I do think from, when you provided the $35 million number, a fair bit has changed. So maybe a bridge for 2023 and just an update on how you think about the $35 billion number over three years as well? Thank you.

Jim Kavanaugh : Thanks, Amit. This is Jim. I appreciate the question. So let’s start there. We saw a solid free cash flow generation in 2022, up $2.8 billion year-over-year. Now as you remember, we entered 2022. We talked about a very strong free cash flow generation engine. And we put in place a guidance for 2022 well in excess of our model of $750 million year-to-year. First, as we were very transparent, we were going to get at least about half of that out of the Kyndryl related spin dynamics. That’s the charges and CapEx. And we were going to get a little bit more than half of that out of our base operations overall. And I think when you look at 2022, what happened we got impacted by two external factors. Number one, the unfortunate humanitarian crisis with the war in Russia and Ukraine, and we exited that business, the right decision.

Second is unprecedented US dollar appreciation. I think last time I looked, the rate, the breadth, the magnitude of the change is the most we’ve seen in multiple decades. We got hit with that. But we’re able to overcome some of that with the fundamental underpinnings of our business overall and still delivered almost $3 billion of free cash flow year-over-year. By the way, Russian currency by themselves is over $600 million of profit and cash we had to absorb. So now to your question about 2023, we guided, as you heard in the prepared remarks, a $10.5 billion, that’s up $1.2 billion year-over-year, and again, above our $750 million year-to-year. The underpinnings of that, though, are going to be very different in 2023. Given the improving business fundamentals of our now sustainable revenue growth with a high value mix contribution, we see then continued operating leverage.

So our cash PTI is going to deliver a substantial amount of that free cash flow generation year-over-year. We’re still going to get working capital efficiency. So our realization will definitely be up over 100%. But that’s really given the volume dynamics of what happened in the fourth quarter with a very strong and accelerated growth profile as we went through fourth quarter, we finished extremely strong on our transactional business in the month of December. So that now creates an opportunity for free cash flow generation in 2023 and that’s in our guidance. And then there are some other puts and takes. Yes, we’ll get modest structural actions tailwind, but they’re going to be offset by a cash tax headwind for the year. So that kind of plays out 2022 and 2023 now.

How does that relate to a mid-term model? First of all, we’re one year into that mid-term model. And as I talked about, the dynamics in dealing with the decision to exit our Russia business and the significant US dollar appreciation, I quantified it for you over a $600 million impact on profit and cash. But as you all know quite well, that’s not a one-time impact, that will continue over a multi-period and it definitely puts pressure on our mid-term model to the tune cumulatively about over $2.5 billion. So, we are entirely focused on how we execute this company on a sustainable revenue growth profile and generating that $10.5 billion of free cash flow. So it enables us, with the right ample financial flexibility, to continue to invest in our business and return value to our shareholders overall.

Patricia Murphy: Thank you, Amit. Sheila, let’s go to the next question.

Operator: Our next question comes from Wamsi Mohan with Bank of America. Your line is open.

Wamsi Mohan: Hi, yes. Thank you. Arvind, nice to see the revenue guide here. I was wondering if you could share some thoughts around what’s happening in software, in particular, you’ve had a really strong performance in transaction processing over the past year. How are you thinking about the trajectory of that? I know historically, we’ve kind of thought about this as mid-single-digit or higher decliner, and clearly, we’re tracking very differently here. If you could share some thoughts around the trajectory of that in 2023 and beyond, that would be very helpful. Thank you.

Arvind Krishna: Yeah. Thanks Wamsi, for the question. So, I’ll address your transaction processing question first and then all of software right after that. So some of you have heard me talk about that transaction processing would be a mid-single-digit decliner in the past. And that’s effectively, Wamsi, is what you asked, what’s going to be different. As we look at our business there and we look both at the underlying MIPS growth, as well as the criticality of that software, as well as our ability to have some very modest pricing uplift, we would now look at that business as being a slight increaser as opposed to a modest decliner. So, I think, if you are looking at that one, Wamsi, low single-digit increases for transaction processing is what we think is appropriate for the short to medium-term model looking forward.

Now, that does help in overall software. So first, let’s look at software and decompose it. Software, as Jim mentioned in his prepared remarks, is almost 80% recurring revenue. We see that recurring revenue increasing consistent with our model of the mid-single digits, based on both the consumption, the usage, as well as what we have seen through ’22 in people renewing that base of software business. Then, I will acknowledge to you that ’22 was a great ELA year, ’23 will be not as good as ’22. But with the transactional piece of the business being less than 20%, that has a much smaller impact on the overall growth rate. As you put all that together, we see the mid-single digits as being appropriate for the software business.

Patricia Murphy: Excellent. Thank you, Wamsi. Let’s go to the next question.