Operator: Our next question comes from Lisa Ellis with SVB MoffettNathanson. Your line is open.
Lisa Ellis: Hi, good afternoon. Thanks for taking my question. Maybe following on that, I had a broader question, Arvind, on the overall demand environment you’re seeing. I think with earnings coming in from various enterprise tech players so far, we’re seeing a pretty wide range of signals about how the demand environment is shaping up for 2023. Can you just comment a bit on what you’re seeing from your large clients, say, relative to this past year? Thank you.
Arvind Krishna: Yeah. Thanks, Lisa, for the question. Look, if I think about our overall client base, we were first really pleased that there wasn’t much of a difference by geography. As I go through it, Japan, India, Australia, the Middle East, Western Europe, the UK, North America were really pretty strong in demand across. So I think Lisa, if I break it down into the two portions around technology and consulting, what we are seeing is that most of our clients do believe, but even if there are some I call the minor or different headwinds in 2023, they are going to emerge stronger. As they want to emerge stronger, that means they’re all deploying technology to help offset wage inflation, cyber issues, supply chain challenges and all the demographic shifts, meaning there’s just fewer skilled people to hire.
Consequently, we’re seeing them double down, and that is why we have focused on certain areas and certain partners, both for consulting and in technology. So they all want to deploy automated ways to get from the front to the back maybe Salesforce and Adobe play a very strong role in that. They all want to leverage cloud technologies that they can scale technology up to better handle client demand. Our partnerships with the hyperscalers play into that. They all want to leverage far more technology than they have before to counteract the wage inflation and other inflationary aspects and what we do with Red Hat plays into that. So I kind of see, Lisa, that all of our clients play into that. Now you’ve mentioned a wide spectrum from the people you’re seeing recently, I think the reason that we are remaining in this optimistic frame of mind, we have no consumer business.
I agree that our clients may have a consumer business, but we don’t have that directly. And so I think consequently, we might be seeing a little bit different subset of the economy than those who might have a large direct exposure to a consumer business.
Patricia Murphy: Thanks, Lisa. 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. So you had a very good transactional momentum in the software business in the fourth quarter, and you provided some good high-level commentary in your prepared remarks about the business and the broad-based growth may reflect many of those changes that you’ve been talking about in the go-to-market strategy and sales changes. That said, Arvind, can you talk specifically or identify any product-specific changes in software that you think may be driving that momentum and that may suggest your competitive positioning is shifting in any of those three non Red Hat segments. And then just one other thing — just sorry about the two-part question, but just for Jim, I just wanted to clarify with that working capital headwind in the fourth quarter that you talked about reverses in 2023. Thank you.
Arvind Krishna: Yes. Thanks, David. Let me talk a little bit about the product capabilities. And as you said outside Red Hat called focus on automation, data AI and cyber. If I look at those, let’s take automation. I’m really pleased with the progress we have made around an area I’ll call AIOps. But if you think about, we made a couple of small acquisitions Instana and Turbonomics, we built our own AIOps portfolio. And we’re seeing tremendous pickup from that as our clients want to take out labor complexity but also want to optimize their overall IT infrastructure, hardware and software. They also want to have uptime that is now the talk about not just 2 9s and 3 9s, but up to 5 9s. And they also want to worry about how to make sure some go to always on.
And so I think our AIOps portfolio there really advantages us, and I believe we’re in a unique position because we help our clients in an environment across multiple public clouds and on-premise, and with their private clouds in that space. If I think about data and AI, our focus on data fabric and allowing our clients to leverage the data wherever it is, not always moving it, but allowing them to catalog it, leveraging AI, deep inside our products is another example of where we have a unique capability. And third, if I look at cyber, we focus a lot on threat management. And if we think about how we can leverage the inputs from all kinds of sources in these days, and people are really worried about all of the threats coming, whether from nation states, all from just bad actors, then it allows them to leverage that portfolio better.
Consequently, we’re going to remain pretty focused on these areas. You should expect both organic and inorganic investment. And David, I can’t help us say, we are giving our clients the ability to deploy these capabilities on multiple public clouds as well as on-premise and I believe that does advantage them because it gives them a lot more flexibility and freedom than they might have from some other vendors.
Jim Kavanaugh: Yes. I would just build on that, Arvind. I mean, Software book of business today, it’s an integral part of our hybrid cloud platform thesis. It is the foundation. We eclipsed $25 billion for the first time ever here in 2022. So over 40% of IBM’s revenue and two-thirds of our EBITDA. So when you look at it, we are a hybrid cloud AI platform-centric company overall and software is right at that course. So why that recurring revenue stream and the improvements we’ve been seeing throughout 2022. And as Arvind answered earlier, getting that back to a growing contribution, not only helps the competitiveness and market share of our top line, but I think all of you understand the marginal dollar of that book of business is in the 90-plus percent range, as we move forward.
So David, I think you also asked a question about clarification. Free cash flow growth, $10.5 billion about, up $1.2 billion year-to-year, above our model of $7.50 billion. That will be driven based on the fundamental improvements of our underlying revenue growth and operating leverage and cash PTI, but there will also be, yes, a working capital efficiency contribution to our cash generation next year, really just the volume dynamics of what played out in the fourth quarter. We’ll get that back.
Patricia Murphy: Thanks, David. We are past the top of the hour, but let’s take one more question.
