So it's 8 o'clock, so why don't we get started here. Welcome everyone, excuse me, to Day 2 of the Flagship Morgan Stanley TMT Conference. My name is Eric Woodring. I'm the lead hardware analyst here based out of New York. I'm very delighted to welcome Jim Kavanaugh, CFO of IBM, with us today. Been at IBM for almost three decades, held a number of different roles, been a mainstay here at the conference. So Jim, thank you very much for coming this year.
Great. It's a pleasure to be here. Thank you very much.
Of course. So, before I begin, just very quickly, I need to mention that important disclosures can be found at Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So why don't we start at the top, and maybe just do a quick look back on 2023. And maybe my question is, you know, how would you characterize the year that just ended? Where did you maybe outperform your expectations and strengthen the value you're delivering to customers? Where did you fall short and feel like maybe you need some work to do in 2024? And we'll go from there.
Yeah. Great place to start, Eric. And again, thank you for, for having us here today. I think 2023 proved the continuation of solid execution around our hybrid cloud and AI strategy. If you look at the underpinnings of our performance, one, sustainable revenue growth led by our two growth factors, software and consulting, that now make up over 75% of IBM's portfolio, very different portfolio from where we've come from.
Two, a solid recurring revenue base, high multiple-based business led by high-value software that's grown mid-single digit overall. And three, our innovation. We've invested significantly to capitalize on the opportunities that are in the marketplace. You see what we brought out to the market with our Gen AI solution in watsonx. Well, we've infused AI across our entire software portfolio overall. And we've also invested in Red Hat around Gen AI capabilities.
Coupled with that, we've also seen continued velocity acceleration with our strategic partnerships overall, which are an essential element not only to consulting, which is delivering tremendous value, but also to our software and our hybrid cloud, book of business. All of that's led to pretty solid fundamentals in 2023. When you look at the underpinnings of our revenue scale, our operating leverage, and our productivity initiatives, which were well in excess, we actually took our productivity up to $3 billion by the end of 2024 as an annualized exit run rate. That delivered very strong gross profit margin performance in 2023, up 130 basis points year-over-year, and pre-tax margins that were up 50 basis points. All that led to a very strong free cash flow generation.
In 2023, $11.2 billion, up $1.9 billion, our strongest free cash flow, by the way, since 2019 overall. That underpins a very solid balance sheet and liquidity position for us to continue to invest in our business and return value to shareholders. But you talked about some areas around underperformance, and I would actually recharacterize it. I would call out two areas, one, an execution gap. Two, an opportunity gap. On the execution gap, we've got work to do in security. We've been investing significantly to reposition that portfolio and reinvigorate it with SaaS-based solutions.
We expect improved performance in 2024. On the opportunity gap, it's really around storage, and it's aligned to the explosive growth in Gen AI right now. We actually delivered well in excess of 20% growth in storage in the fourth quarter, but we've had uneven performance throughout 2023, and we're looking for that to be consistent in 2024. But Eric, I'll tell you, you know, we're two-thirds of our way through our midterm model, 2022 and 2024, when we reintroduced IBM post-Kyndryl spin.
We laid out our financial model. Two years into that now, one, our revenue growth is on a compounded basis at the high end of our model. All of our segments are at or above their individual respective models. Our operating pre-tax margin's up 350 basis points over two years, and our free cash flow generation over a two-year period is north of $4 billion. So I think you're seeing a fundamentally different IBM today.
An IBM that's focused on the two most transformative technology shifts, we think, hybrid cloud and Gen AI. We built a platform-centric business model that has a very attractive economic multiplier across hardware, software, and consulting. That really leads to wrapping it up, our investment thesis of today's IBM, higher revenue growth company, higher operating margin company, strong free cash flow yield. And a higher return on invested capital. So we feel pretty good about 2024 given 2023's performance.
Perfect. So we'll dig into a handful of those points that you just made. If we maybe take a step back, and I kind of asked you something similar last year, which is the market in the world is kind of rife with a number of, let's call it, like, micro and macro cross-currents, right? On one end, we continue to hear about some macro uncertainty, constraints on budgets.
On the other end, enterprises are clearly leaning into technology investments as a way of, call it, differentiation and competitive advantage, especially, obviously, like we heard last year, generative AI. So how are you or how is IBM thinking about the strength of enterprise technology demand this year relative to last year? You know, what are you hearing from customers, and how have you positioned yourself as IBM to capitalize on those trends specifically?
Yeah. I would tell you today's environment can be defined by one word, change. I think every enterprise is rethinking traditional forms of competitive advantage in this marketplace. Why? Everyone is faced with a set of opportunities but also challenges, to your question, specifically around the macroeconomic environment, whether that be interest rate uncertainty, inflation, demographic shifts, supply chain dislocations, geopolitical conflict uncertainty. But I would tell you, to the heart of your question, and you, you, you called it out, we believe technology is a source of competitive advantage. It is a driving force behind global economic and business growth. And that's why IT always outstrips GDP growth overall. But if I take a step back, Eric, in all of my conversations, and I do many with my peers all around the world.
Talking about their business, talking about the macroeconomic environment, it really has validated the power of technology. Technology to clients, the way they view it, are seeing, one, a way to scale their enterprise, two, how they create new sources of revenue growth and new business models, and three, in my CFO world, is a whole new way of driving efficiency and productivity that creates this flywheel effect so they can reinvest in innovation in their business. All of this kinda aligns, and we talked about this last year.
We called out about three years ago our four convictions around our strategy, hybrid cloud and AI. We said, one, technology will be the only deflationary force, and I think that's being proven out here today. Two, and real pertinent to today's world, AI is gonna be the most powerful form of productivity. Three, hybrid cloud architecture architectures dominate the journeys to digital transformation. The world is multi-cloud, multi-environment. And four, one of the reasons we bought Red Hat is open source is now the new paradigm of innovation.
So when you take a look at this overall, we're looking at 2024 from a macroeconomic environment, and you know we run many different scenarios around our business, client buying behaviors, propensity models, price optimization. We're actually thinking 2024 will play out pretty similar to 2023 overall. But we do see continued solid demand in areas that's gonna create technological advantage and business competitive advantage. And that is around, and none of this is gonna surprise you, AI, hybrid cloud, automation, digital transformation, application modernization, all those areas we're continuing to invest in because we see that's where revenue and profit pools are actually shifting.
Okay. Perfect. So let's get into the numbers and maybe a little bit more specific into each of the business lines. So for 2024, you've guided the market kind of low end of mid-single-digit, fairly similar to 2023. But I think there are some different moving pieces under the hood as there are every year. And so help us understand, how should we be thinking about the growth of software versus the growth of consulting versus the infrastructure? And underpinning that, obviously, you have a fairly robust M&A engine. How is that contributing to each of those different segments this year?
Yeah. Great question as now we get into 2024. In our January earnings call, we guided on what we believe are the two most important measures around our business, and it's how Arvind has aligned our entire operating business and financial model and the incentivization, by the way, of all of our leaders. And that is around revenue growth and free cash flow. Revenue growth, to your point, we guided to on model at mid-single digit, albeit prudently, I think, in the beginning of the year at the low end of that. I'll talk a little bit about the composition of that. Two, we guided to a free cash flow of about $12 billion on our model, which we stated is about $750 million of free cash flow growth.
Yeah.
Each year, right, which we overdelivered the last two years. But let's take a step back to your question and break out the composition 'cause that's at the heart of your question. When you look at that mid-single digit revenue growth model, it let me start with software. Software, we actually guided to above our mid-single-digit model. And that's gonna contribute three points of growth to IBM overall in that mid-single-digit model growth overall. Underneath that, the drivers are around, one, our solid recurring revenue book of business that's gonna generate about two points of that software growth.
Two, our acquisitions are scaling nicely overall. That's gonna be about another two points of that software growth. Three, given our second half 2023 subscription bookings in Red Hat, we see a nice acceleration throughout the year in Red Hat. And Red Hat will deliver about 2.5 points of that software growth overall. And finally, our value vector transaction processing, we called an inflection point about 18 months ago. We had nice growth in 2023. We see that continuing in 2024 on our model at low single digits, and that's about another 0.5 point. So you add all that up, we're a little bit north of 6%.
Yep.
Above our model, right?
Yep.
But software overall, about three points of IBM's model. Now let's go to consulting. Consulting, we guided in January a range of 6%-8% overall, which, by the way, in the marketplace, I will tell you, is a take-share position against where the consulting competitors are at right now. Underneath that, that's 6%-8%, we see kind of an accelerating growth throughout the year coming off of about 5%-6% in the second half of last year. Now that is gonna drive another three points of growth to IBM. So you got three points out of software, three points out of consulting. What's driving that consulting growth? One, we finished a very strong signings year in 2023, up 17%. We exited the year with a book-to-bill north of 1.15.
We continue to see very good velocity acceleration in our strategic partnerships. Revenue and signings were up strong double digits, including Red Hat, by the way. Three, we see continued very good demand in application modernization, and now we're starting to capture the beginnings of Gen AI that were a nice contributor to our second half signings overall. And four, acquisitions similar to software, acquisitions will deliver about two points of consulting's growth overall.
Okay.
So three points out of software, three points out of consulting. Now we're, as you know quite well, we're on the back end. Of our infrastructure hardware segment product cycle. That is gonna cost a little over a point of IBM growth. And then finally, I think you've seen at the end of January, we closed on the divestiture of our weather assets overall. That's about a half a point impact to IBM's growth. So you add the composition of those pieces up, that gives us the confidence in guiding on model at mid-single digit in 2024.
Okay. That's perfect. So now we're gonna break it down even further.
Oh.
So let's do software first. You exited 2023 growing 2%. You obviously just expressed how you think the underlying drivers of the business will pan out in 2024. Can you maybe spend some time helping us understand what gives you the conviction in that reacceleration? Well, and specifically maybe, you know, again, touching on the trajectory of Red Hat, you know, hybrid platform and services, HP versus TPP, again, the underlying building blocks, really why you're confident today that off of 4Q, we should see that curve kind of reaccelerating back up.
Yeah. Great question. It's a question we've been getting here since the January earnings. We've had extensive outreach to all of our investors overall. First of all, let's take a step back. Software is an integral part to IBM's overall hybrid cloud and now AI strategy overall. A little bit north of about a $26 billion book of business.
That's about 45% of IBM's revenue composition and, more importantly, about two-thirds of our profit composition. It is a growth factor within IBM, as we just talked about, contributing about three points in our guide in 2024. And if you look at the last couple of years, we're actually on a compounding growth rate at the high end of our model, about 6% overall. But more importantly, it drives a very attractive economic multiplier in our hybrid cloud and AI strategy. For every $1 that we land on a platform, that be in Red Hat OpenShift or now watsonx on Gen AI.
We get $3-$5 of software leverage, that flywheel effect that happens. But let's break out our software book of business to your question. We've got two vectors, hybrid platform and solution, which really is houses our hybrid cloud and AI platforms, Red Hat OpenShift and watsonx. And it also has our software innovation areas that span everywhere from our application layer, read that, Red Hat OpenShift and RHEL, to our data and AI layer, which has watsonx.
Data fabric, data management, to our management layer, which is observability that has Instana around ARM. It has Turbonomic around APM. It has Apptio now, which is off to a great start. And it has Red Hat Ansible around automation. And then finally, what fills out that portfolio is our security layer around Guardium, around data security, around QRadar, around Threat. That composition, by the way, is 70% of our software portfolio. And the model for that is high single digit growth. And what drives that? One, we have north of a $14 billion ARR book of business that's grown 7% exiting 2023, which is a great indicator of why we feel confident in being above our mid-single digit model. But two, we've been executing with that flywheel, flywheel effect around a very solid NRR.
Well north of 100%, which talks to that economic multiplier effect. Red Hat OpenShift now is a $1.2 billion annual recurring revenue stream, growing 25% overall. And finally, this is where all of our investment goes into software around high-value innovative solutions where we bring the market both organically with watsonx as an example or inorganically where we've acquired, what, 39 acquisitions over the last four years, about 60% of that being in software, and that plays to the hybrid platform and solution. So that, that's 70% of our portfolio.
Transaction processing is the remaining 30%. That runs all of our mission-critical software on our hardware platform systems overall. It's a value vector. It is a high-margin, high-profit-based business, and it carries a tremendous moat in incumbency value to drive that platform economic model in hybrid platform and solution. Now that model is low single-digit growth, as we talked about a little while ago. By the way, 18 months ago, we called that inflection point, right?
Yep.
That model previously was a model that was down mid- to high-single-digit, and we saw the inflection point overall, which is very important from one evaluation perspective because of the profit and cash it generates, but also from a value differentiator to our clients overall. So when you take a look at those components, now you break down why we're so confident in guiding above our model.
I just walked through the software breakout, but let's talk a little bit about Red Hat. Red Hat, we finished the year growing 7% in the fourth quarter. But second half, it's a subscription-based business. 80% of that business is subscription, that is, Red Hat Enterprise Linux, Red Hat OpenShift, Red Hat Ansible overall. We grew high teens in our bookings in the second half of the year. That gives us visibility into 2024. About 60% of our revenue. We see nice acceleration in Red Hat beginning here in the first quarter, which gave us confidence to double-digit growth for the year. Again, that's gonna contribute about 2.5 points of that software growth overall.
Yep.
And then finally, TP, to your point. We called that inflection point. Why? Well, we've seen a very fundamental shift in the success of our mainframe platforms over the last couple of cycles. We've invested significantly to bring innovation into our mainframe platform, read that, pervasive encryption, first-ever quantum-safe encryption, cloud-native capabilities, energy efficiency.
And that has driven a successful mainframe cycle, the last two, that has generated now a 2x of our installed MIPS capacity out in the marketplace. So think of that as the cue for us to go capitalize on growing our mission-critical transaction processing software. But we've also been able to continue to drive strong renewal rates. And strategically, as we talked throughout 2023, we strategically focused on price optimization in that arena. I see that continuing into 2024.
Okay. That was perfect. Very detailed. Let's shift to consulting. So the strength of that business has been quite notable, especially when you compare it to most of your peers out in the market. Maybe my question is why are you now outperforming your peers? What has IBM done to either reposition the business, whether it's the strategic partnerships that you have? But what has changed about this business such that you're outperforming now?
Yeah. I'm glad you asked about consulting. A lot of focus here. I would argue very important right now in this technological shift to both hybrid cloud and AI. But before I get to the differentiating point, let's put some numbers behind.
Sure.
Our outperformance overall. We grew 6% in 2023, taking share in the marketplace. A market, when you look at all the consulting competitors, was probably somewhere plus or minus flatlined overall. Over a two year period, 2/3 of our way through our mid-term model, we're growing at 10%. So pretty strong performance for a couple of years overall. In addition to that, we've seen continued improved fundamentals in our consulting business. Our margins were up nicely, over 100 basis points, both on gross and pretax margin, pretax margin about 100 basis points overall. And I see, I think you're seeing the productivity initiatives play out around revenue scale, price optimization, utilization. But underneath that, what gives us confidence in what we guided to that 6%-8% in 2024 is we still see very good solid demand.
In the areas around where we've been repositioning our portfolio. That be in digital transformation, that be in application modernization, hybrid cloud architectures that ended up with a very strong, our strongest backlog position in probably seven years, up 9%. Now with that, as we stated in January, duration is up a couple of months. So that backlog realization will play out more later in 2024. But the underpinnings of that backlog are very healthy.
Our churn rates at our all-time low, our delivery excellence, and our erosion is at all-time low. So we're actually executing quite well. And then on top of that, you talked about strategic partnerships. The strategic partnerships now represent over 40% of consulting's business. We grew strong double-digit, both signings and revenue growth. And in addition to the strategic partnerships, we still are capitalizing on a very strong Red Hat book of business.
In four years since the acquisition, we've signed over $11 billion of a book of business starting from zero. Now we've got over a $2.5 billion ARR book of business in our consulting business overall. When you look at consulting, consulting is a very integral part of that hybrid cloud and AI strategy. One, it capitalizes on that economic multiplier. Like software, in consulting, every dollar we land on a platform, we get $6-$8 of services. And we see that playing out, just look in the Red Hat book of business we've been able to sign. But two, it's a very integral part of being at the tip of the spear to drive scale and adoption of our platforms, but also pull through IBM's technology.
Now to the heart of your question around differentiation, and I spent a little time in the January earnings talking about this. I think first, the integrated value thesis is really resonating in the marketplace today. When you take the combination of IBM's technology stack and a consulting book of business at scale globally, it's a very powerful value proposition as clients are looking on their journeys, the digital transformation and now Gen AI. Second, and I think one of the most underappreciated things that Arvind has done, and he's done a lot for our company around portfolio repositioning, around operating model, around culture, around skills, talent, capabilities, is, he's opened up IBM.
To strategic partnerships. And just in a handful of years, we have built multi-billion-dollar book of businesses around AWS, around Azure, the hyperscalers, well on our way with Google, and also around key ISVs. We always had a big book of business around SAP, but now we're well on our way with Salesforce, with Adobe, with ServiceNow.
And if you dial back, Eric, just about four or five years ago, we weren't even on the map with hyperscalers and key ISVs 'cause they thought that we were a captive-selling IBM platform. And that was a focus of the company at that point in time. Now we're in the top 10 for every hyperscaler in most of the key ISVs. I would tell you, glass half full, a lot of headroom still to go. And then finally, on differentiation, I gotta talk to execution.
You know, we repositioned this portfolio about three to four years ago around where we thought revenue profit pools were gonna go. We changed the operating model, the portfolio, our service lines, our offerings, really focused around business transformation, technology consulting with our strategic partners, around application operations, and around cybersecurity. And I think given our differentiated performance, you're seeing us capitalize on the IBM platform, on hyperscaler, and around key ISV solutions that we expect to continue to go forward in 2024.
Perfect. So something you've mentioned a handful of times now, and a key topic of both this conference and last year's conference is generative AI. So after this conference last year in May, you had your Think event, you launched watsonx to the world. Maybe I think it would be helpful just at a very basic level to what is the value proposition of watsonx, and why would a customer use IBM watsonx offering from IBM versus going to a competitor? Then the second question is, you know, as you have conversations about watsonx and generative AI with your customers, you know, what are the key areas where they're utilizing this software suite? Is this cannibalistic to other areas of spend? Is it incremental? I know that's like a three-part question, but it's an important topic.
We're used to those multipart questions on earnings, but great topic to talk about, right? You know, we are extremely excited about the secular growth opportunity of Gen AI. As I stated, we have repositioned IBM around what we believe are the two most transformative technologies, one being Hybrid Cloud and one being now Gen AI.
In the synergistic effect of those two. We built a platform-centric model to capitalize on the multi-trillion-dollar TAM opportunity out there. To your point, in May of last year, we brought to market our Gen AI platform, watsonx, which is an enterprise-ready AI data model overall with a whole suite of AI for business around watsonx.ai, which is a next-gen solution around clients building, training, tuning, deploying solutions, around watsonx.data, which is a fit-for-purpose data store.
That's optimized for AI workloads on open source. And most recently, in December, we announced watsonx.governance, which is an end-to-end toolkit around governance and compliance for future regulations that are gonna come out. We monetized the value around the platform. We also monetized the value around embedding AI into our software solution and to our third-party ecosystem partners. You saw we've announced partnerships with SAP, with Adobe, with EY, with Qualtrics, with Sirion. I can go on and on. And by the way, there are gonna be many more as we go forward. And then third, we which we just finished on, probably most underappreciated right now in the scale, is we monetize it through consulting.
To do.
To drive scale and adoption. But to the heart of your question, what's the differentiation? And I would call out four points for IBM today. One is that integrated value thesis. We are the only provider today that brings a Gen AI tech stack and a consulting business to bear to our clients to scale, to build, to deploy AI solutions. Why is that important? We were talking prior to getting up on stage. This is hard work.
This is about how you reinvent companies, both for one, value creation and create new business models, new sources of revenue. But it's also how you generate efficiency and productivity in reimagining how you do things like HR and finance and supply chain and procurement. Underneath that, we believe that right now we're in this phase of what I call Digital Transformation 2.0.
You know, Digital Transformation 1.0 was all around hyperscalers and application modernization and migration to the cloud. Now we're in 2.0. Consulting is at the heart of that because this is hard work around data architectures, around security, around compliance, around governance, around reinventing workflows. So I think the first piece is that integrated value. The second differentiator, we think Gen AI, the winners will be multi-model focus.
Okay.
We support IBM models, proprietary models, hyperscaler models, open-source models, client models. We support all facets of that game, right? And third, which I stated earlier, is hybrid cloud is synergistic with AI. Flexibility of deployment is essential. And many of the clients, in fact, McKinsey came out with a study a few months ago. Over 60% of enterprise clients plan to deploy Gen AI in a hybrid multi-cloud environment arena. Many of the conversations I'm having with clients, thousands of them, because of trust and security, they're looking first at an on-prem solution. And we're one of the first, if only, that provides an on-prem solution overall. And then finally, fourth, I think to the core of the brand of IBM, that's around governance and trust.
We were the first to market, and I think right now, correct, I can be corrected, one of the only few that indemnify all our models, all our data, all our algorithms with absolute transparency in the marketplace. So I think that's the core differentiation of what we bring to market. Now you asked about what's resonating out there, thousands of interactions with clients right now. I would call out three specific use cases. And it's really built around our platform, around our embedded AI solutions, and around consulting, enabling, and being that tip of the spear. One is around code modernization with watsonx Code Assistant. We're seeing in our initial engagements a 30% productivity in DevOps and over an 85% code acceptance rate overall. Phenomenal out-of-the-gate results being driven out of that.
A lot of interest on how clients bring new innovation to market faster at a much more efficient rate of operation. Second is, is and this won't surprise you, customer service, IT support, call center support. We're seeing 75% or more tasks being automated today with a 25% mean time to repair, faster time to repair overall, tremendous quick ROI payback. And then third is around our digital labor and watsonx Orchestrate. That is around HR, which I think you got a chance to see at Think last year. We're seeing not only in HR but procurement and supply chain and now next up finance, 90% automation rates and 40% productivities in a very short period of time. So for CFOs, tremendous innovation, tremendous payback, good value, great speed, and it provides a flywheel effect overall.
And to wrap up your question, cannibalization, we get asked this a lot, but you know this quite well. In every technological shift in the history of the IT industry, there's always gonna be lift and shift. It's gonna be a combination of both. We definitely believe that this is gonna be a net incremental opportunity. I think you start seeing that play out in our second half results in 2023 and in our guide in 2024.
Perfect. Very detailed. Let's shift to the free cash flow performance. So not just in 4Q, but the 2024 guide of $12 billion. Obviously, judging by the market reaction after earnings, did catch the market by surprise. So maybe my question is, can you break down, as we look to 2024, you know, the contribution from profit growth versus working capital and any nuances to call out specifically for that $12 billion? And secondarily, when we think about that free cash flow conversion rate, it has been increasing. You know, why is that sustainable as we look forward?
Yeah. As I stated upfront, it's one of our two key measures of success for our company: revenue growth, Free Cash Flow generation overall. By the way, our model is revenue growth mid-single digit. Free cash flow high-single-digit. So by definition, you have to get the operating leverage and productivity. I couldn't be more proud of the entire IBM team about what we executed in 2023: $11.2 billion of free cash flow, up $1.9 billion year-over-year. Many dynamics underneath that.
We gave increased transparency to the market around Adjusted EBITDA. Why? To show the quality and sustainability of that free cash flow generation. And that Adjusted EBITDA was up $900 million year-over-year, above our model of roughly $750 million year-over-year. But let's talk about 2024. Coming off of that success in the operating discipline that we've got humming within our organization, we were confident to guide to about $12 billion.
Basically, that's on our model, $750 year-over-year. The underpinnings of that is predominantly gonna be driven by the fundamentals of or business. That's our revenue scale at mid-single-digit. That's continued driving operating leverage and productivity with pre-tax margins guided to be up another half a point overall. And that's gonna generate an Adjusted EBITDA very similar to 2023, albeit above that $750 model. Now, in addition to that, we've got benefits from what we've done to change our retirement plans. But we also have some headwinds. I would probably restate that word: investments.
Okay.
Around capbacks that we're gonna be making and around cash tax and around other balance sheets. So when you take a look at the $12 billion, it's fundamentally gonna be driven by the profit, cash, revenue source, and that productivity initiative underway. But let's take a moment to talk about realization 'cause there's a lot of discussion around realization. I would tell you where we started this discussion, we're a fundamentally different company.
Our business, our portfolio, our operating model, given the strategic pivot in 2019 to acquire Red Hat, the spinoff of Kyndryl. 39 acquisitions over the last four years, 60% software, 40% consulting. If you look at the last five years, Eric, ex-Kyndryl, we've been roughly about 120 realization. Why is that the case? Well, number one, our business mix shift to software. We went from a software book of business five years ago that was about 20% of our portfolio to now it's 45% of our portfolio. And by the way, 80% of that is high-value recurring revenue. That recurring revenue generates deferred income. That we continue to expect to grow. We ended 2023 with a little over $1 billion of deferred income. That generates about a 10-point realization gap.
Okay.
To net income. So that's the first step. The second step, and again, it talks to how Arvind has repositioned the culture, the mindset around IBM. And he's aligned our compensation and incentivization system around much more equity. For the value of winning long-term sustainable value for IBM and for our clients. About five, six years ago, we had a stock-based comp that was about $500 million. We exited 2023 at $1.01 billion. That's about another 10 points.
Okay.
So just between those two components, put sales cycle working capital aside 'cause I, I agree, long-term, that's not a sustainable growth driver overall. But those two components say that our sustainable growth rate is gonna be somewhere around the 120 realization level.
Okay. Okay. That's perfect. We have 30- seconds. So I'll, I'll give you the final dance floor here is, to wrap up, maybe just we've talked a lot about the portfolio, new technologies, drivers of the model. You know, as you sit here today in your investor conversations, you know, what, what do you still think is maybe most underappreciated, about the stock, about the company?
Well, I, I would finish where I started. Fundamentally different company, portfolio, operating model, culture, leadership. Two, all in on the two most transformative technologies, hybrid cloud and AI. And you see us capitalizing on that now, gaining share. And three, I would tell you, the people, the execution, which leads us to what do I believe is the most underappreciated is the tremendous secular growth opportunity of Gen AI. And I think we're a very attractive valuation play in AI, but more importantly, a very attractive differentiator in what we're gonna deliver to clients overall to capitalize on that multi-trillion-dollar TAM opportunity.
So we could probably sit here for another couple hours and talk about this, but our time is up. So Jim, thank you very much for joining us today.
Appreciate it. Thank you very much, Eric.
Thank you.
Thank you.