Arvind Krishna: Yes, Brent. So let me address that. I’ll begin by saying, I see ’24 playing out quite similar to ’23. While there has been a lot of talk about reduced software budgets and reduced technology budgets overall, we are not seeing that. We are seeing that people are a bit more discriminating in what they’re spending on. But that is as is spending more on AI, more on digital transformation, and I’ll come to why it might mean that they are sort of focusing less on some other areas. So why is that? We see that there is a remarkably resilient economy. We can see that across South Asia from India to Japan, to the Middle East. Europe has kept remarkably resilient despite the conflict in Eastern Europe. Then when we come to North America, the economy here is resilient.
Latin America, despite some early predictions, has actually done quite well. You put that all together, look, we don’t forecast GDP. We just look at what other people forecast, and all of them are forecasting in the 2% range, 2%, 2.3%, same difference from our perspective. Then if you look at some of the pressures our CEO clients face, whether it’s interest rates, whether it’s inflation, whether it’s supply chain, whether it’s the demographic shifts on population, whether it’s political conflicts or uncertainty, one answer that lets them grow without taking on fixed costs of either labor or physical infrastructure is technology. So we see every one of them leaning into technology as a potential answer that helps them against all of those potential headwinds.
And so we feel pretty good that technology budgets should stay in line with 2023 going into ’24.
Operator: Our next question comes from Erik Woodring with Morgan Stanley. Please state your question.
Erik Woodring: Hey, good afternoon, guys. Thank you for taking my question. I just wanted to dig into the software results a bit. And that was if we maybe set aside Red Hat, which we’ve spoken about, some of the other businesses continue to decelerate, especially looking at something like Data & AI or automation, especially in this climate of AI and a focus on spending there. I’m just curious, what is driving the confidence that those businesses reaccelerate? Is it customer conversations? I’d love if you could just give a bit more detail, one on, again, what happened in 4Q and kind of how you parse through some of that deceleration across those businesses. And then two, again, what’s underscoring the confidence that some of these businesses then reaccelerate into next year? Thanks so much.
Jim Kavanaugh: Yes. Let’s start with the bigger picture. all we laid out a midterm model. We set our software portfolio would grow mid the way coming from a prior cycle that we were very low single digits overall. And we finished this year up over 5%. We finished a 2-year CGR already 2/3rds into our model at the high end of the model at 6%. Is that our aspiration? Absolutely not is what Arvind has the entire team focused on. And that’s why we continue to fuel investment into new innovation both organically and organically. But let’s take a step back how we set the year up. We set the year up, we said the year was going to be predominantly driven by the strength of our recurring revenue annuity portfolio, which, by the way, high value, 80% of our software revenue.
That’s our subscription-based models, our SaaS models, our TP software, et cetera. And we said that was going to grow mid-single digit. We actually delivered on that. We said then, second, prudently coming off of a peak ELA cycle, and you understand our ELA cycle extremely well in 4Q ’22 that we expected a headwind. Now let’s go back 90 days ago. 90 days ago, we were sitting year-to-date 6.5% total software segment, which gave us the confidence of taking up our guidance to the high end of the mid-single-digit model. What was driving that? Both HP&S was up 7%, TP was up 6% and underneath that, we were seeing very solid growth in our transactional business both volume and NRR with new clients. Now we get the fourth quarter and the ELA rep hit us.
By the way, the ELA cycles give or take, they’re in these ranges. They’re on average about 3 years. They get probably somewhere around 40 to 50-plus percent in year 1, and then it tails off. So it’s the biggest impact we’ll see. We got through that in the fourth quarter, and we still delivered over 5% on a 2-year CGR, we’re at the high end of the model. Now when you look at full year performance, Red Hat up 9%, automation, I’m directionally correct, 4% or 5%, Data & AI, 4% or 5%, security, yes, we got an execution gap on security. We got an opportunity to go fix in 2024. So I think it’s actually glass half full. The innovation we’re fueling in organically, the M&A portfolio, which is scaling nicely with a strategic fit, that gives us the confidence on why we’re actually taking up and accelerating our growth in light of Brent’s question in 2024.
Operator: Our next question comes from Matt Swanson with RBC Capital Markets. Please state your question.
Matt Swanson: Yes. Thank you guys so much. Congratulations on both the free cash flow and then also obviously the free cash flow going into next year. Maybe focusing even more so on the Software side and just thinking so on that 2.5 points of growth that’s expected to come from the Red Hat. I mean you’ve talked about the consulting strength that you’re hearing around both cloud and application modernization. Are there any other signs you’re hearing specifically from like pipeline or customer conversations about an improving demand environment for Red Hat specifically? And then maybe just as like a caveat, how maybe some of the cloud cost optimizations impacted Red Hat in 2023?
