International Business Machines Corp (IBM) — Q1 2021 Earnings Call Transcript

Thank you. This is Patricia Murphy and I’d like to welcome you to IBM’s First Quarter 2021 Earnings Presentation. I am here with Arvind Krishna, IBM’s Chairman and Chief Executive Officer; and Jim Kavanaugh, IBM’s Senior Vice President and Chief Financial Officer. We will 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.

Hello everyone. Thank you for joining us today. I am pleased to be speaking with all of you again. In our last call, we shared our financial expectations for the year, revenue growth and $11 billion to $12 billion of adjusted free cash flow. While it’s still early in the year and a lot remains to be done, we are confident enough to say that we are on track. Last quarter, I also talked about how the events of the last year have increased the needs for our clients to accelerate their digital transformations. This is continuing and the overall spending environment is improving, while there are some clear differences by geography and industry. With that as a backdrop, in the first quarter, we posted revenue growth at actual rates and grew free cash flow. We can see signs of progress in a number of areas. Our results in Cloud & Cognitive Software and Global Business Services revenue show that they are on an improved trajectory, including a return to growth in consulting. IBM Z again demonstrated its value as an enduring platform. Meanwhile, we improved margins in our Global Technology Services led by managed infrastructure services. As Jim will explain to you, all of this helped to deliver free cash flow improvement, which is a key focus area. As we move through the year, we will continue to execute on the important changes we are making to the company, from the acquisitions we are making, to the investments to expand our partner ecosystem, to the significant overhaul of our go-to-market model that we announced back in January, to the changes we are bringing to our culture to instill more of a growth mindset.

Thanks, Arvind. I will get right into the numbers. In the first quarter, our revenue of $17.7 billion grew 1% as reported. We expanded our gross profit margin and grew gross profit dollars. We reported operating earnings per share of $1.77. Our adjusted free cash flow was up, resulting in $11.6 billion over the last year and our balance sheet and liquidity position remain strong. As Arvind said, we made progress, but more to do. You can see this progress in our revenue with an improvement in the trajectory of our constant currency results. Our revenue was up in Cloud & Cognitive Software and in Systems, and consulting returned to growth. We are capitalizing on clients’ digital transformations and journeys to cloud. We take a platform approach to hybrid cloud and AI, with capabilities in infrastructure, software, and cloud services. Across these, our cloud revenue was up 18% in the quarter and over the last twelve months, and now stands at over $26 billion for the last year. The fundamentals in our business model also continued to improve. We expanded our operating gross profit margin this quarter by 110 basis points. I will remind you how we manage our business. We manage our services businesses at the gross margin level, while we look to capture the value of our product-based businesses at the pre-tax margin level. We had good margin expansion across our segments on those bases. This operating leverage enables a higher level of investment. We are investing in innovation, in skills, and in our ecosystem as we execute on our hybrid cloud and AI strategy. Our hiring was up year-to-year, with thousands of people hired in the quarter. We closed six acquisitions since mid-December. We are building out pre-sales garages, adding go-to-market and delivery capabilities in GBS, and technical skills in Red Hat. And we are increasing R&D in areas like AI and quantum to drive innovation. Our year-to-year expense dynamics reflect this investment, though it was offset by lower workforce rebalancing charges year-to-year and lower travel expense in the current environment. Let me round out the financial highlights with some color on our strong free cash flow and balance sheet and liquidity position. We had a good start to the year with $2.2 billion of adjusted free cash flow, and $11.6 billion over the last year. This adjusted view excludes the cash impact of over $600 million for the structural actions initiated in the fourth quarter and transaction charges associated with the separation of our managed infrastructure services business.

Thank you. Before we begin the Q&A with Arvind and Jim, I’d like to mention a couple of items. First, we have included supplemental information at the end of the presentation. And finally, as always, I’d ask you to refrain from multi-part questions. So, Operator, let’s please open it up for questions.

Yeah. Thank you very much. Good to see Cloud & Cognitive return to growth in the quarter. Just wondering if you could update us on what you are seeing in terms of the underlying demand environment in software and just where you are in dealing with some of the issues that weighed on the more transactional side of the business in Q4? And then software going forward, just wondering how we should think about the cadence of revenue for the balance of the year from here?

Matt, thanks for the question. Look, I think the spend environment overall is improving, Matt. I can say that, definitely compared to the fourth quarter and we talked in the fourth quarter about various pauses in buying. We didn’t really see that in the first quarter. Now that said, I do have to acknowledge there are some differences by geography and industry. When you look at the underlying results, you can see the Americas was stronger. There are pockets in Asia that depend very much on the country and we can all guess which ones are doing better, which ones are doing worse. It does depend on COVID rates and the pauses that happened then due to business circumstances. We do sense a bit of caution in Europe and you can see that in the numbers. So you can sort of expect that. You can also see that there are going to be differences by industry. Those most impacted are the obvious ones: travel, tourism and all others that then get touched by those. So that’s a color of what’s happening. However, as I have iterated before, we do see our clients accelerate their digital transformation and as they accelerate their digital transformation, our hybrid cloud thesis comes to play very strongly. Our multi-cloud, which is multiple public clouds, as well as private come into play. All the reasons that I mentioned around sovereignty and choice come into play, and you can see that then in our Red Hat results. So then explicitly addressing your Cloud & Cognitive Software, we expect Red Hat to maintain itself in the mid to high teens. That will show through in the Cloud and Data platform results being strong. We expect our applications, our AI applications, to remain in the single-digit software growth, and we can see that; we talked about the strong demand for security in there. I do expect to see continued declines in our TPP software, but it doesn’t really worry us. I mean, those are things where if I look at a two-year or three-year CAGR, we expect to see mid-to-high single-digit declines. But in any given period, it can be a little bit lumpy and we see that there. And so we expect this to carry on through this year. In the second quarter, I would be somewhat optimistic, but we have got to go deliver it, Matt.

Thanks, Matt. Can we go to the next question?

Thank you. Good afternoon. Arvind, you talked about increased investments in sales resources, technical skills, R&D. We saw M&A pick up this quarter. And all of this is meant to drive that mid-single-digit sustainable revenue growth that you have talked about, which I believe you have said that you can achieve next year. Can you just help us at a high level bridge how you get to the 4% to 5% revenue growth? What are the primary sources of growth acceleration at the segment level? How much M&A contribution should we be contemplating? And also in next year’s growth rate, are you baking in the revenue benefit that you will see as some of the internal revenue becomes reported as external post the spin? Thank you.

Thank you, Katy. It's evident that you pay close attention to our communications. Let me clarify your question. First, regarding our investments and their role in achieving mid-single-digit revenue growth, we have repeatedly mentioned that Red Hat, with a growth rate in the mid to high teens, contributes to the overall software growth in the mid-single digits. This accounts for the TPP mod decline but will still result in mid-single-digit growth overall. Any usual business acquisitions may be included, but I don't foresee significant contributions from acquisitions influencing IBM's top line. The math indicates it will be significantly less than one point overall. Regarding our go-to-market investments—such as our technical resources, client success managers, and segmentation—these have not yet started to pay off significantly. However, we are seeing early signs from the 200 clients participating in these initiatives. I anticipate this will contribute a couple of points, possibly more, for next year, but it won't add to our current software and GBS numbers. We've also invested approximately $1 billion into our ecosystem, which should help improve the GBS growth rate beyond pre-pandemic levels. This year, we aim to return GBS to the pre-pandemic growth range of $2 billion to $4 billion, and the combination of acquisitions and go-to-market changes should push this higher by year-end and into next year. On the subject of internal revenue contribution, which is a one-time adjustment, we have discussed sustainable mid-single-digit revenue growth beyond just one year. While it may provide some help next year, we're not relying on it as a consistent contributor since it is a one-off occurrence. In summary, we expect Red Hat's contributions along with software acquisitions to yield mid-single-digit growth, GBS should exceed this, and our systems will remain relatively stable over the next two to three years, with minor fluctuations in any given year. The internal to external revenue transition may offer a temporary boost, but it won't create a lasting impact, which is why I'm not depending on it. I hope this addresses your various questions.

And as we complete the Form 10 process, which we are well on our way right now, Katy, I would tell you one as you know quite well, we will be transparent about the strategic commercial relationship we have between IBM and Kyndryl going forward and we will disclose what those relationships are and how we will treat that revenue. But more work to be done and we will come back to you at the appropriate time.

Thanks, Katy. Sheila, can we please go to next question?

Yes. Thank you for taking my question. I guess this is a clarification or maybe two clarifications. I am wondering if you can just comment. I think you said that you think consensus revenue estimates for Q2 are reasonable. They are up about $500 million sequentially from Q1. If I look back at normal seasonality, typically revenues up about $1 billion and it sounds like IT spend is improving. So if anything one would expect better than normal seasonality. So I am wondering whether you are being conservative or there were some one-time things that happened in Q1, but why wouldn’t you underwrite normal or better than normal seasonality, which I have as about a $1 billion sequential increase in revenues? And then separately, Arvind, could you just clarify, when you talk about IBM as an AI company, what role does Watson play in that? I don’t think that name was really mentioned on the call. There’s speculation about Watson Health. Maybe you can give us an update on how Watson fits into IBM as an AI company and specifically what’s happening with Watson Health and Watson Financial? Thank you.

Okay. Toni, thank you for your question. And I will handle the first part and provide some clarity around our forward-looking guidance and then turn it over to Arvind for your second part of the question. But as we said in prepared remarks, similar to 90 days ago, in fact, we are even more confident in the position we put in place with regards to our two most important measures, one, revenue growth, and second, adjusted free cash flow, which is going to provide the fuel for the investments needed for us to capture that hybrid cloud $1 trillion total addressable market. Now, we reiterated that we are going to grow revenue overall for the year and that is despite currency volatility again with the U.S. dollar appreciating 90 days ago. We lost about a point of revenue for the year and we lost about a point of revenue in the second quarter. So now going to your math with regards to our historical quarter-to-quarter. Very close, I mean, the math I got in my head is somewhere around $900 million, $950 million give or take quarter-to-quarter. We see normal historical attainment across 1Q to 2Q in both our software base of business, as Arvind said. We are feeling even more confident given the rebound here in the first quarter and also in both of our services-based businesses, we see normal historical attainment to that roughly $900 million to $950 million. Now, given our first quarter performance of driving a very strong mainframe cycle growing 49% in the first quarter, in the seventh quarter of the program, which is unheard of coming off of 60% growth last year, Arvind and I both believe it’s very prudent for us as we go forward with our guidance to not count on continued acceleration of our mainframe. We are very pleased with the performance. We are pleased with the value proposition. But I would say against that $900 million to $950 million, I would take a couple hundred million off of that number just based on first quarter’s very strong performance in mainframe and that not concluding going forward. So let me turn it over to Arvind for the second part.

Thanks. So, Toni, Watson remains critically important to us. To be absolutely clear, Watson is the brand product name for our AI capabilities. You will see it in the market as Watson Conversational Agent, but you will also see it as, for example, our security products with Watson. It is embedded inside our Cloud Pak for data and called out as Watson. Let me give you a quick example of where we are seeing a huge amount of success. So let me take one of the large entities doing vaccine administration in the United States. When they realized in December they could do this, they slowly began to realize that they could get tens of millions of calls every quarter and then how would they handle them? Staff of tens of thousands of people or perhaps deploy Watson. And so far at one of these places and we are deploying a lot more than one, 5 million calls handled in the quarter with over 70% handled by Watson. You now think about extrapolating this over the year. So that would make it 20 million in four quarters and with the confidence building up on one program you could imagine it going to others. This is a lot more straightforward to do and where I think AI excels in handling issues in both improving client satisfaction, because you get an instantaneous answer, but also in taking cost out and those are rare in our industry where you get both together. We see lots and lots of opportunities here. We also see a lot of Watson being embedded on how to automate data cleansing, on how to do AI operations, on dramatically improving the resilience of people’s IT infrastructure. So, Toni, to net it out, Watson remains really important. AI is in the early parts of its journey. Not us, consultants have estimated $16 trillion of global productivity over the decade. We are maybe 5% of our way into that journey. Watson will be the tool that unlocks that for our clients albeit in areas like IT, in data, in conversation, in call handling and in all these areas where we excel and we have a large footprint with our clients.

Thank you, Toni. Can we please take the next question?

Thank you. Arvind, you mentioned that the go-to-market changes have not had an impact yet. Should we anticipate some benefits in the second half of 2021? Could you elaborate on how this benefit will manifest across the business segments, including which areas will see gains first? Additionally, could you provide some insight into the situation with bookings and backlog? The signing numbers seem weak compared to the positive outlook you have on consulting growth. Is there a pause due to the upcoming spin, or could you explain this further? Thank you.

Thank you, Wamsi. Changes in our go-to-market strategy often involve a complex process that requires time to take effect. We initiated these changes at the beginning of January, but there is a human element involved. We need to assign staff to accounts, and there is a learning curve alongside adjustments that can take several months to materialize. I wish we could accelerate this process, but it does require time. That’s why I emphasize that we need patience before we can realize the benefits. We anticipate seeing enhanced productivity among our sales teams that focus on our large accounts, which should lead to stronger software growth and more robust GBS growth. I expect to see these improvements in the second half of the year and even more as we move into 2022. We are also investing in what we refer to as our ecosystem, which includes partnerships with Schlumberger, Siemens, and Palantir among others from the last quarter, as well as previous relationships with Box, Slack, Adobe, Salesforce, and SAP. All these efforts should contribute to improved growth in both software and GBS. Regarding productivity in our top accounts, the 200 garage engagements I previously mentioned are expected to generate new pipeline opportunities that we might not have accessed before. This is why I anticipate seeing improved results in our top accounts. We should notice positive changes in our numbers during the second half and even more so into next year. For the next part of your question, I will let Jim provide some insights on signings.

Okay. Thanks, Wamsi, for the question. Let me unpack some of this for you. First of all, printed numbers, signings down 27% to your point. Entirely driven by our large deal renewal comparison the last first quarter in GTS. If you remember, we signed two massive deals last year with Anthem and Caixa, well in excess of $1 billion a piece in each. But I think this goes to the testament that I have talked about many times on this call and that is all signings are not created equal. The duration, the mix, the offering, the content, all impact how signings translate into backlog and how backlog then translates into revenue realization overall. So let’s talk a little bit about the GTS portfolio, because that’s where it really centers around here in the quarter. When you look at GTS, I think there’s a couple different dynamics playing out. First, yes, greater than $100 million deals. We were down substantially compared to last year just off of that very tough compare and I will remind you we grew GTS signings north of 40% last year. So, second, though, is our mid-sized deals, read that kind of $10 million to $100 million. We were up high teens and embedded in that, we also had another nice quarter of new logos, which means we are out there winning new business, capturing new client value even in light of the announced separation with Kyndryl. The second component at the heart of your question I think is are we losing business or is business getting paused. I would think one with the new logo wins and, second, we have consistent high renewal rates in this business. This business is very sticky from a managed infrastructure services perspective and we have high 90%-plus renewal rates and we have not seen that change since the announcement. Now, with that said, are there pipeline that has built up that naturally some clients are pausing so they wait to see what our Form 10 is? Yeah. And I don’t think we expected anything different overall. But when you take all that together, our backlog position overall in GTS and our backlog run out, we actually see continued sequential improvement, nice improvement off of fourth quarter, 3 points better, and we see that continue modestly here from 1Q to 2Q. And that’s a reflection of those new logos that are going to start ramping up and that’s a reflection of our mid-sized deals which by the way has changed the duration in that part of the portfolio by one month overall which is impacting the revenue realization. So we still feel very good and very comfortable. We have got a very good pipeline in front of us and we see better revenue realization.

Thanks, Wamsi. Let’s go to the next question, please.

Good afternoon. Thanks for taking my question. I guess I was hoping if you could touch a little bit more on the GBS performance. We saw a nice improvement I think from what we saw in the December quarter, it was down, but a nice 400 basis points improvement nonetheless. And consulting I think it was notable that we started to see growth over there. So I was hoping you could just help us understand, if you should think about consulting growth as a leading indicator to what GBS can do and would we expect this to be positive growth for GBS in calendar 2021? And then also have you clarify this for me: as you go through the process of splitting of these long-term contracts between IBM and NewCo, why would customers agree to do this without rebidding the contract or getting a price concession from either IBM or NewCo?

Okay. Amit, this is Jim. Let me take your question and I appreciate the point. We are pretty pleased with the trajectory improvement overall with regards to our GBS business. We improved by 4 points quarter-to-quarter. And we talked about 90 days ago as we went through the pandemic, and Arvind reiterated it here on the call tonight. What we have seen is our clients’ acceleration in their digital transformations and their journeys to cloud and we expected to capitalize on that as we move forward. So if you take a step back and just look at our first quarter performance, and then I will translate that into what we see with our GBS business going forward, our first quarter performance really reflects a level in the confidence in the value of our portfolio, our cloud book of business in GBS doubled its growth rate to 28% here in the first quarter. We have over a $6 billion book of business in cloud and GBS alone, leveraging our strength in application modernization, and our cloud transformational services built on top of our Red Hat hybrid cloud platform. Our Red Hat engagements we increased 150 to let alone just in the first quarter overall and our cloud book of business is up double digits across all three subsectors. Now to your point about consulting, very pleased with that leading indicator, we returned back to growth. And we have been talking about the last handful of quarters how the whole journey to cloud with our value proposition about our advice, move, build and manage that the front end of that equation as clients go through around application modernization really shows up in our consulting base of business and then translates into our application management business overall and our global processing services business overall, which we saw very nice growth as clients are reimagining how they run their companies and we are capitalizing on what we call intelligent workflows. So we definitely believe that consulting is the leading indicator. Now, going forward we are very confident in getting back in the second quarter to our pre-pandemic levels of growth. By the way, our backlog run-out in the next 90 days already shows that. But let me give you a little bit of some quantitative components behind why we are so confident. Number one, our book-to-bill over the last 12 months is well north of 1, led by consulting to your point, which we believe is the front end of that curve that will lend itself into GPS and into AMS. Second, we continue to have very good momentum in small and midsized deals that you know has immediate revenue realization in the near-term, which is led, third, to our overall backlog level of growth, strong growth in GBS, consulting in GPS, and improving trend in our AMS business going forward, and fourth, we talked about up front we closed on five acquisitions here in the last handful of months, we are very focused on ramping, scaling and driving that business. So we feel comfortable getting back to pre-pandemic growth here in the second quarter. We feel very confident in the full year. GBS delivering growth, and most importantly, is that exit velocity in 2021 heading into 2022 GBS is an integral part of that mid-single-digit growth objective that Arvind talked about.

Thanks, Amit. Let’s go to the next question, please.

Thank you very much, Pat. I have a question for clarification regarding the strength in System Z at this point in the cycle. Can you elaborate on what has changed? Is there a different buying or selling motion that I should understand better? Also, concerning the ecosystem strategy, Arvind, are there areas of growth being opened up? Is there a pipeline for more deals like with Palantir and others? I’m interested in the current efforts and how close you are to adding more partners or if that is more of a mid-term expectation for us to monitor.

Okay. Thanks, Tien-Tsin. I will handle the IBM Z discussion and then turn it over to Arvind for the ecosystem. We are very pleased. Seven quarters into a Z cycle growing 49% on a 60%-plus growth here in the first quarter of last year, very strong comparison overall and really kind of breaks the cycle from what we have typically seen. But we saw growth when you look at it, one, are we capitalizing on the overall encouraging trend from a macroeconomic perspective? Yes. We are also capitalizing on robust trading-based volumes in our traditional FSS-based industry. So capacity needs are driving some parts of our industry consumption. But I will tell you we are also seeing changing regulatory requirements, clients needing backup and recovery is very essential right now. We saw that play out in the first quarter. And then beyond the FSS industry, we start seeing some good adoption. And we talked about this in prior calls, where we see elongated cycles just given some industries are more impacted by the pandemic. But we see now our value proposition to cloud native applications where we have Red Hat Enterprise Linux, Red Hat OpenShift that runs on our mainframe platform and also pervasive encryption. Security is at the top of every CIO and CTO’s priority list, and the mainframe by definition is the most secure, most scalable, most reliable platform out there and I think you are seeing all of that play out.

Yeah. On your second part of your question, Tien-Tsin, on ecosystem, yes, we have a long pipeline. I expect this number to go into the high 10s, maybe not 100, but definitely into very many more. Let me caution, though, when you say mid-term, it’s not multiple years. Each of these takes about six months to become real and then another few months to become real revenue. So I would not expect that new ones we announce now will have an impact much before the end of the year. However, they will have a big impact at the very end of this year and into next year. So I will sort of position it like that. But expect that we should be announcing these at a regular cadence.

Thanks, Tien-Tsin. Let’s go to the next question.

Thank you very much. So you have made some high level but very consistent comments about sustaining the dividend as we approach the spin and I think most of us on the call understand the reasons for that. That said, in the past there have been some criticisms that the company has prioritized returns to shareholders at the expense of growth and I know you have talked a lot about reinvestment and cost savings among several other actions. However, in Software Cloud and Services you are going out against some pretty big companies that really don’t return capital at your rates. So how do you want us to reconcile that dynamic as you look to reaccelerate and sustain growth in 2022 and beyond?

So, David, this is Jim. Thank you for your question. I’m not going to discuss other competitors, but I suggest you look into how much share buybacks they are undertaking overall. With that being said, I will focus solely on IBM. We are very confident in our capital allocation process and our disciplined financial management system. Just to remind you, 90 days ago we entered the year with over $14 billion in cash on the balance sheet. We projected an adjusted free cash flow of $11 billion to $12 billion for the year, and we aimed to optimize our IGF portfolio in alignment with our hybrid cloud and AI strategy, which would contribute an additional $3 billion to $5 billion. So, in total, we had around $30 billion in sources. When we consider the uses for the year, we mentioned a $3 billion charge for structural actions in 2021, plus one-time charges for the separation against that $30 billion. We also talked about $8 billion in debt maturities and a $6 billion dividend. Altogether, that amounts to about $16 billion to $17 billion. From a cash source and use perspective, we believe we have the flexibility to continue investing and competing in the market, both organically and inorganically, while reducing debt to maintain a strong balance sheet with a single A rating, alongside delivering a secure and modestly growing dividend for our investors. What you observed in the first quarter reinforces that position. We ended the quarter with over $11 billion in cash on the balance sheet, after accounting for $5 billion in debt maturity, $1.5 billion in dividends during the quarter, roughly $600 million in one-time charges, and over $1 billion in acquisitions. We are confident that we will seize any inorganic opportunities as they arise, as evidenced by the 11 acquisitions since Arvind took over. We will continue to pursue initiatives that create the right value for our clients and for IBM at the right economic terms moving forward. We are not limited by our cash sources and uses.

Thanks, David. Sheila, we are past the top of the hour, but why don’t we take one more question.

Thank you for fitting me in, Patricia. I appreciate it. Jim, I wanted to follow up on that question. Could you discuss the factors driving the change in underlying cash flow for this year? What are the key metrics, and how should we view your cash generation capabilities for the next fiscal year? I'm excluding the charges related to the separation, so if you could elaborate on that, I'd appreciate it. Also, Arvind, since I'm last, I wanted to sneak in one more question. You've mentioned GBS growing in mid-single digits. If I were to consider a number of 5%, could you clarify how much of that is driven by mergers and acquisitions? Specifically regarding application maintenance, are you anticipating that it will grow within GBS? Given that the industry seems to be struggling for growth, I'd like to understand why you think application maintenance can grow within the GBS framework. Thank you for taking my questions.

Thanks, Keith, for the question overall. So let me handle the free cash flow and then Arvind can talk about GBS. As we said 90 days ago, which we reiterated here tonight on the call, we feel confident in the forward-looking guidance of $11 billion to $12 billion of adjusted free cash flow in 2021. And if you remember 90 days ago, to give the investor a perspective of the sustainability, just given the $3 billion worth of charges we would have from the structural actions in the fourth quarter and the upcoming spin separation charges, we gave a perspective of 2022 that that would accelerate to $12 billion to $13 billion of adjusted free cash flow. When you look at the underpinnings of both 2021 and then 2022, I think you start seeing the fundamentals of our business model. And that is returning back to revenue growth, the operating leverage that this business can generate with some level of sustainable level of revenue growth, the underlying mix contribution of that and the continued productivity that this business drives. You will see profit growth and also I remind you Red Hat, which we achieved be it free cash flow accretive in the first year, will continue to drive improvements. Now, we have been making great progress on working capital efficiency and I would tell you our collections rate. We didn’t talk about it, although in the prepared remarks. I talked about our record deferred income given the strength of our software renewal position overall. All of those will continue to generate improvements going forward. But that is going to be needed in 2021 because we got about a $1 billion cash tax headwind with all of that in front of us. With I would say, probably, 60% to 70% will hit in the second quarter. So once we get through that cash tax headwind here, we feel pretty comfortable and confident in that cash generation machine, leveraging sustainable revenue growth and operating leverage in the business on our way to $12 billion to $13 billion next year.

Thanks, Keith. You asked about our growth expectations for GBS, and we're forecasting mid-single-digit growth in the near term. Our aim is to exceed that. The M&A segment could add a couple of points to this growth, but that would be the maximum, and we might not see all of it this year. It's hard to gauge how much those properties will grow once integrated into IBM. Therefore, don't expect more than that. This is part of our strategy to drive GBS growth beyond the mid-single digits. Regarding AMS, its significance varies depending on how you define it. If you see it as managing and maintaining applications from five years ago, it will likely decrease, as there's an expectation for significant productivity without growth in that area, reflected in the numbers. However, the relevance of incumbency comes into play. With in-depth knowledge of that application base, we can assist clients in their cloud transformation, turning older application assets into new growth opportunities through AI, workflows, and cloud initiatives. This can contribute to growth both in the near term via consulting and over the long term through AMS or in global process services in the medium term. This mix is crucial, and that’s why AMS is vital for fueling GBS's growth. Thus, we are confident in achieving mid-single-digit growth for GBS in the long run. So, Keith, thanks, but since we are well past the hour, let me just make a couple of comments to wrap up the call. We had a good start to the year. We expect to continue our progress over the course of the year as we execute our strategy and realize benefits from the investments and actions we are taking. We will exit 2021 in a stronger position than we started the year and I look forward to continuing this dialogue with you.

Thanks, Arvind. Sheila, let me turn it back to you to close out the call.