Hello, and good morning, everyone. Thank you for joining us again on our Bottom Line Matters CFO Call Series, where similar to our CEO call series, we invite CFOs to discuss financial strategy, the financial model, capital return, and financial priorities. Before we get started, I need to mention that conflict disclosure as related to the individual companies or securities discussed on the call today can be found on the call invitation. We're gonna keep this call to about 50 minutes. With that, I'm super excited to welcome Jim Kavanaugh, who you all know. Jim was appointed CFO of IBM in January of 2018. Prior to this role, Jim was SVP of Transformation and Ops from 2015- 2018.
He does have a really rich operational background and has done, you know, a lot of the work behind what you see in what has happened with the transformation of the company from a financial perspective, and a lot of the decisions that have supported the strategic changes that the company has undertaken. Previously, he was also IBM's controller from May of 2008- 2015 and has held various finance leadership positions that have included responsibility for IBM sales and distribution worldwide, IBM Americas Group, and just a broad swath of experience here. Jim, welcome. We're really honored to have you here today, and thank you so much for taking the time.
Thank you very much, Wamsi, for having me, and thanks for the kind opening remarks. We'll hopefully try to live up to that here. Thank you.
Well, you guys as CFOs have been navigating a lot of different crosscurrents over the last few years. This is just, you know, it's a nice little break from all the work that you do, hopefully.
Yes.
Well, maybe a good place to start would be, you know, just the overall macro environment and how are you thinking about the sustainability of enterprise demand in 2023, and how are you in particular looking at IBM, position for a potential downturn?
Yeah, as you say, a great place to start. You know, it's an understatement to say the last few years have been interesting, especially as a CFO in trying to deal with many different dynamics overall, but I think when you look at enterprise demand in the macroeconomic environment right now, I think every company is challenging traditional forms of competitive advantage to try to understand how to emerge stronger. If you think about it, you know, internally in IBM and many of my peers that I talk to, the macroeconomic environment is posing many different challenges and opportunities for clients, whether it's demographic shifts, labor shortages we're all still dealing with, inflation, some supply chain dislocations, cybersecurity challenges, all the way through to increased sustainability requirements.
Underneath it, we have a firm belief that technology is the source of competitive advantage, and really it aligns to our four strategic convictions that we are building this company on. First, technology, we believe, is the only deflationary force. It's why this is so important and why you see technology always outstripping GDP by 3- 4 points. It's the number two driver of GDP overall behind healthcare. Second, AI is the vehicle for productivity. Everyone is jumping in and moving from experimentation to scaling. Three, right at the core of IBM now is digital reinventions are all requiring a heterogeneous and hybrid environment, and we play to that. Four, and you go back to what we did with the Red Hat acquisition, open source is now becoming the new innovation model for all companies.
When you look at that, the dynamics, the challenges, the opportunities facing many clients around the world, we feel pretty comfortable that technology will continue to outstrip GDP in 2023 because of that deflationary force and productivity impact overall. To IBM overall, as you started, as a CFO, you know, our job is to always run multiple scenarios and looking at all facets of both exogenous impacts and internal execution. Underneath it, you know, when you look at challenging economic situations, IBM has fared relatively well, and I think that's a result of the macroeconomic model that we have built around, one, geographic diversification. We operate in 170 countries around the world. It pretty much provides us a natural hedge because every market goes through different curves. Second, we participate in 17 different industries with pretty broad-based penetration.
Third, probably most importantly, is our client segmentation focus on enterprise. We're not consumer, and we served over 95% of the Fortune 500 companies. Fourth, kind of wrapping up here, is our business model. That transformation you talked about upfront of how we changed our portfolio and our business model, we now have a high-value recurring revenue stream here in IBM that represents over 50% of our portfolio, and that buffers us and provides us some stability in revenue, profit, and cash over time. We feel pretty good about the environment we're in and how we can capitalize on that.
Oh, thanks, Jim. That's a, that's a really fantastic, you know, backdrop to start the discussion here. IBM, you guys just reported really strong revenue growth in 2022, and you've guided for 2023 revenue at the low end of your midterm model. Can you dissect the growth by segment and what the underlying drivers are for each? We get a lot of questions around this.
Yeah. Great, again, place to start overall. When you look at, we're pleased with 2022's performance. It's behind us now. We're entirely focused on 2023. I think there are some important components underneath 2022 that really position us for 2023 and that confidence in our guidance overall. First, it was our first full year of what we call today's IBM, and that is a much more focused, streamlined, hybrid cloud platform-centric company with a compelling integrated multiplier effect across our software, our hardware, and our consulting businesses overall. You see how that played out in 2022. We delivered, I think, what, $60.5 billion of revenue, up 6% at actual rates, up 12% at constant currency, and that included about 4 points of the incremental Kyndryl contribution.
Even without the Kyndryl contribution, we're up 8% above our mid-single- digit model. Underneath it is what makes us most exciting about the work that we've done to change this company to a sustainable growth level. When you look at it, we've had good global demand throughout 2022 that was pervasive across our segments and across our geographic markets, representing the value of our hybrid cloud and AI offerings. Second, our growth vectors, that being software and consulting. A big part of that portfolio transition, that is now over 70% of our business portfolio, and we had very nice growth, up 6% in software last year and up 15% in consulting overall.
Third, that recurring revenue, which is not only a high-value, annuitized-based stream, is we saw nice acceleration of that growth throughout the year, and we finished last year growing 8% in our recurring revenue stream. It's very important, I'm sure we'll get back to a little bit later, of the marginal profit dollar and multiple that that gives us. All of those facets give us the confidence in our guidance in 2023, as we talked about a few weeks ago, that we expect to be on our mid-single-digit model. Although I did say as CFO, prudent in the month of January entering the year to be on the low end of that model. By the way, to your point, that was a take-up from the average street analyst by about over $2 billion of revenue.
You get underneath it, you asked about segments. Let's talk about our three major segments real quick, and we can go into deeper detail if you want later. Around, let's start with software. Software, over 40% of IBM's revenue. We guided to our model a mid-single- digit. That will generate 3 points of IBM's mid-single- digit growth. That's really gonna come out of the culmination of that strong accelerating recurring revenue stream and also a very healthy ARR book of business, $13.3 billion exiting the year with a nice NRR well over 100% that we've been able to capture. We got some good momentum there that gives us confidence. Second, consulting. Consulting, we guided to be at our high end of our high single- digit model. Again, coming off of a mid-teens growth in 2022.
We still see very good demand in the marketplace around digital reinventions, around application modernizations. We've got exiting the year over a $9 billion book of business in hybrid cloud, that's up 23%. Strong growth driven by application modernization. We also have accelerating trends in our strategic partnerships with our ecosystem velocity, in our scaling of acquisitions, which are doing extremely well in consulting right now, and our Red Hat practice, which continues to accelerate. I think inception to date, we signed a book of business of $7.4 billion over three years. We exit the year with a pretty strong book-to-bill. I think that gives us confidence. Third, our infrastructure segment. As we always said, innovation drives growth.
We had some very nice receptivity to our new innovation around our mainframe platform in 2022 and around our Power architecture in 2022. We'll wrap on that in 2023. We acknowledge that, and that's gonna probably cost us about 1 point of IBM growth. When you look at that mid-single- digit growth, 3 points out of software, 3 points out of consulting, and about 1 point headwind around our infrastructure as we wrap on the cycle.
No, that's great. Maybe, maybe just to focus, Jim, on software. Maybe the one of the ways to think about it might be to think about Red Hat, where there is a lot of investor focus about transaction processing, where there seems to be a change in trajectory and then the rest of the business. If we were to sort of segment it in that way, maybe starting with Red Hat, how should investors think about the confidence of this asset driving mid-teens growth?
Yeah, I mean, let me start with software overall because I think it's.
Okay
important for our investors to understand the portfolio and the composition. Software definitely is the foundation of our hybrid cloud platform-centric business. $25 billion worth of revenue. Last year growing 6% overall. Good strong performance. I talked about that ARR book of business, $13.3 billion, of which Red Hat's a big piece of that, and a strong accelerating NRR component built off of our modernized and optimized Cloud Pak technology. Let me dissect software, and we'll get into TP, transaction processing, Red Hat, and the rest of our IBM software business overall. At a backdrop, our software business overall is about 80% high-value recurring revenue and about 20% transactional business. We offer many different monetization models on the transaction business from perpetual license sales to subscription businesses to SaaS-based businesses, et cetera.
That software book of business, high value, 80% of it is recurring revenue. When you look at 2022, that recurring revenue, as I stated, nice acceleration throughout the year, exiting the year growing about 8% overall. We also, as expected, had a very solid and strong transactional year because we entered 2022 at the beginning of our ELA cycle. When you look at that growth of software in 2022, growing a little bit north of 6% above our model, by the way, it was driven by about 4 points out of recurring revenue and about 2 points out of our transactional business. Kind of as expected, team executed well. When you get to 2023, our 2023 guidance is to be on model, mid-single-digit. The underlying revenue contribution mix is going to shift.
That nice accelerating recurring revenue, which by the way drives high, like 90 points of marginal profit dollars, that is gonna contribute 5-6 points of our overall software growth. Why? When you look underneath it, about half of that is gonna come from Red Hat, a very compelling subscription-based model that's the foundation of our hybrid cloud platform with Linux at its core, with RHEL, with our Red Hat OpenShift, and with great receptivity in our Ansible Automation Platform that's growing very nicely. I think in January, I talked about Red Hat OpenShift for the first time exceeded $1 billion of ARR. Red Hat grew 17% in 2022, and we guided to mid-teens. That 5-6 points of recurring revenue, about half of that's gonna come out of Red Hat at mid-teens.
I would tell you, I expect Red Hat to actually accelerate throughout the year. We're probably gonna start the first half a little bit below the mid-teens. Why? Because in 2022, we were on the down cycle of our renewal year. We now enter an up cycle on all of our renewals on subscriptions in 2023. We'll see a nice acceleration in Red Hat delivering that mid-teens growth. The remaining half of that 5-6 points of recurring revenue is gonna come from us capitalizing on that accelerating trend in 2022 off of a strong renewal year and capitalizing on the successful mainframe platform cycles that we've had over the last handful of years. Our installed MIPS capacity are up around 40% year-over-year, and we're seeing nice acceleration and attach rate to that overall.
Third, this is the area we have pricing power, and 2023 will be a pricing optimization discussion that we built into our guidance. 5-6 points of that software growth's that high-value recurring revenue, and it's that Red Hat transaction processing and our pricing leverage. The remaining 1 point of a headwind is we acknowledge that we're coming off that strong ELA cycle overall. Now ELAs don't peak one year and come down the next year and then normalize. They build up over the year, and we saw the beginning in 2022, and we'll start coming down gradually in 2023 and then 2024 and then build back up. We've got all that embedded into our model overall.
Okay. No, that's a lot to think about. Maybe just Jim, can we just talk a little bit about the ELA comment that you made at the end. When you think about the headwind to growth as investors think about maybe 2023 and 2024 from an ELA perspective, how much of a headwind would that create, or how much is kind of currently being baked into the model?
Like I said, when you look at the composition of our software business, again, 80% high-value recurring, stream-based business. That's our subscription models, that's our transaction processing business, our SaaS-based business. 20% is that transactional business, and of that transactional business, I would say give or take, Wamsi, about 50%-60% of that is ELA-driven. Roughly the remaining half is your normal volume-based perpetual license sales, again, across our high-value components of automation, data, AI, security, parts of our portfolio overall. When you look at it in 2022, you know, we probably penetrated about 60% of our ELA cycle. The remaining 40% will be in 2023 and in 2024, 2024 being the tail end of it.
When you think about those optics, 20% overall of IBM, we're about 60% through our ELA cycle, another 40% to go the next two years. That's how we get to our 1 point headwind that we're planning on right now. Obviously, our job is to execute and over-deliver on that, but I think that's prudent as you enter the year overall.
Okay. No, thanks for that color, Jim. Just on the other comment you made around pricing, right? Typically, you always are able to capture the pricing given the value that the assets are generating. As you think about 2023, is there something different about pricing? Is this an incremental increase in pricing, and was any of that realized in 2022?
Yeah. When you take a look at the first question we talked about, every company, every CFO is dealing with dynamics around inflationary costs of their business, right? We saw that play out. We talked a lot last year about our consulting business, which is a human capital-based business by definition, right? I think we were pretty honest that rate and pace was the discussion of consulting in 2022. We saw some very nice green shoots around our pricing optics in consulting, which is where we started in the second half of the year, third quarter. In fourth quarter, our price margins were up nicely, and we expect that to continue into 2023. When you look at our technology business overall, we've taken into account we took very little inflationary-based price optimization decisions in 2022, consciously.
One, we needed to get back the incumbency position coming off of this very successful last couple cycles of our mainframe. When you get into 2023, you know, just given the economics of what we're all dealing with in this inflationary environment, we've taken up our normal price actions by about 3- 4 points overall. It's in areas where we do assess price elasticity curves. You know, I always say that, you know, pricing follows the differentiated competitive advantage that you have in your technology. If you don't have that differentiated competitive advantage, you know, we all know what happens to price elasticity curves. In areas like our transaction processing software, our mainframe-based software overall, we do have incumbency strong value propositions, and we'll see that pricing power play out throughout 2023 and probably more so in the second half of 2023 overall.
Hopefully, that helps answer some of your questions.
Yeah. No, absolutely. That's very clear. Then, Jim, just to go back to transaction processing, there is a change in trajectory over a year. It might be helpful for investors to understand what's actually driving that change in trajectory. Outside of pricing, is there something else that you can share with us?
Yeah, sure. I mean, transaction processing is a critical component to our model overall. Why? One, it's a value vector. It's about 30% of software's overall business, right? We went through some very different dynamic changes over the last three or four years as clients changed their buying behaviors. More upfront perpetual license versus more annuity stream over time, and that was really due to certainty and visibility of the macroeconomic environment, we truly believe overall. There was a very important inflection point as we went through 2022. One, it is that value vector. It's important to us because it is a high profit, high cash generation engine that provides us financial flexibility to reinvest back into our growth vectors of our hybrid platform and solution offerings around Red Hat, automation, security, data, and AI. In the last few years, we've been dealing with what?
Down mid-single digits in that arena. That has been quite a pressure on not only the top-line software portfolio, but on our bottom line profit and cash. That changed in 2022. Now let's put it in perspective. We got back to flat. Much better than the trajectory of down mid to high single- digit over the last few years. What makes us confident in 2023 is the underpinnings of what we've been seeing underneath that. One, our renewal rates over the last 18 months have been the strongest in the last five years, and I think that's a testament to the value of innovation that we brought to that software part of our portfolio. Second, it is a reflection of the great success we've had over the last two mainframe cycles, which have been well above our historical performance.
We have about 40% more installed MIPS-based capacity. Read that as an opportunity pool. We have a very strong moat incumbency position that provides us a tremendous leverageability of driving that multiplier effect of getting that attach rate, renewal rate up, and that demand capacity. You take those inflection points, and now you point them to 2023, and we actually guided because we feel pretty confident that we see transaction processing returning to growth at low single digits in 2023. Big statement to our overall top-line software revenue position, and also a very big statement because it carries about 90 points of marginal profit dollar for each revenue dollar overall. Thanks for bringing that up. Very good question.
Jim, just to wrap on that one point, is that something that you see as sustainable on a go-forward basis where this is just a change in trajectory for the business, such that investors should now think of transaction processing as accretive to aggregate IBM and software growth? That would really be a big difference from, you know, mid to high single-digit decline over the last several years and maybe what investors are underwriting for the aggregate growth of that piece of the portfolio.
Yes, definitely. We feel very confident in that multiplier effect of transaction processing that's built on our mainframe platform stack overall. The innovation that we've been building into that portfolio, now our transform go-to-market model. By the way, our sellers, we've aligned up and down to revenue growth, to annuitize stream-based business. We understand that carries different multiples. To your question, we do see sustainable growth going forward. We started out at low single- digit. Let's get to that growth profile first. It does drive, you know, over time, I think it's about 1 point of IBM top line revenue growth on a $60+ billion base, and it's could be up to maybe 200 basis points of profit contribution to the overall IBM model. It has a very big investment thesis to that point.
Yeah, absolutely, and I don't think that's well appreciated. Jim, maybe just to go back to one more of your comments around the renewals dynamic that you spoke about around Red Hat. What actually is causing the renewal dynamic to be such where you saw the sort of shape of renewals to be, you know, maybe deceleration in 2022 and then an acceleration in 2023?
Yeah. Well, let's put Red Hat in perspective overall, right? You know, we've got a book of business that over a three-year period is over 2x the revenue contribution from pre-acquisition. By the way, 3+ years in, we just had our board meeting last week. We are on our business case 3+ years on a $34 billion acquisition. Cumulatively, over three years, we're growing high teens, and we just finished last year at, what, 17.5% revenue growth. We feel very confident that the instantiation of this hybrid cloud platform-centric model is really playing out. More importantly, you know, it's not only the Red Hat portfolio and the contribution that it's been driving in of itself, look what it's done to our overall software portfolio.
You know, a portfolio pre-Red Hat that we were struggling to grow low single- digit. Now as we've invested to modernize and optimize our software on top of that Red Hat platform, which was the investment thesis overall, you've seen a nice acceleration in our overall software portfolio. When we look at 2022, it shouldn't surprise you, given the culture and the dynamics of IBM around our software ELA cycle, three-year type cycles, we embed part of that value thesis, right? We went to the market back in 2018 when we announced the acquisition, is the global breadth and scale and distribution of the IBM go-to-market model for that Red Hat technology. Yeah, we capitalized on that over time. We kinda expected that to play out because that cycle quickly flipped to a cycle analogous to an IBM.
There's good and bad to that, and we'll have to deal with that. The underlying fundamentals of what happened, you know, 2022 was a down year. Our bookings were low teens overall on a total bookings level last year, which is about what we expected. By the way, even on that total booking, our NRR was close to 120% overall. Why is that important? You get into 2023, and we're on an uptick of a strong renewal cycle. By the way, kind of opposite of the ELA, kind of, so it kind of gives us a natural hedge to the IBM Blueworks Live. As you get to that upcycle in 2023 with that strong NRR, that positions 2023 and also 2024's revenue just given the subscription-based model and a highly annuitized-based model. Hopefully, that answers your question.
That's yes, absolutely, and that's a lot of color. Really appreciate that. Maybe switching to consulting, you guided to the high end of your consulting model in terms of revenue growth for 2023. What sort of demand environment are you seeing in consulting? I know you shared a little bit of color around that. What's giving you the confidence about continued strong revenue performance in consulting? When, you know, the context, maybe the broader context, Jim, there is just that a lot of consulting companies are talking about a significant deceleration in their own, in their own projections.
Well, first of all, very pleased with our performance top line. More work to do, rate and pace on the operating margin, and we know that. But again, as I talked earlier, nice green shoots, and we guided to operating margin acceleration in 2023. To your question of top line, I think this goes back to our first question, and we talked about what are the fundamental drivers that clients are looking at today in light of the challenges and opportunities in the marketplace around demographic shifts, labor shortages, high inflation, cybersecurity? Every company's trying to reinvent themselves for sustainable competitive advantage, and that gets to digital transformation. That gets to application modernization. That gets to journey to cloud. We have... You know, you started upfront about all the work prior to me stepping in the CFO role.
I had the chance to step out of a core finance role after being controller. I think I was the longest standing controller in the IBM history for eight years. I had a chance to step out and really lead the next evolution of IBM, and consulting was an integral part of that because we had to do a lot of work to transform the offerings, our growth platforms, our delivery models. Now when you look at consulting, it's a fundamentally different business profile overall. What do I mean by that? Which gives us confidence in 2023. Number one, you know, about a $9 billion book of business built around hybrid cloud. That's application modernization. That's capitalizing on opening IBM up to strategic partnerships or hyperscalers. That's our Red Hat book of business.
I talked about $7.4 billion over three years that we've signed overall. That's acquisitions, right? I still remember, you know, taking over the CFO role in 2018, having drawn out debates with our heads of consulting about acquisitions spent in consulting. It was zero because I was not gonna put a dollar of capital allocation until we fundamentally reposition that business model, so we can ensure that we get the financial return. As we got through that, we opened up the aperture, what, 18 months ago, two years ago, and we're seeing tremendous success and acceleration built around those strategic partnerships, ISV capabilities, hyperscaler capabilities. I think all of those pieces coupled with where did we finish the year? You know, it's a, it's a sign and book and bill type business, as we all know.
We finished the year with a very strong book-to-bill off of a 15% revenue growth. Our book-to-bill ended up at over 1.1. Fourth quarter, our strongest in most recent history of a 1.3 book-to-bill. We grew our signings for the year, both large deals, double digits, small deals, double digits. I think it's a testament to that differentiated offering capability. We entered the year looking at our backlog. Our backlog right now, yes, in a consulting business, that's about 60% to 2/3 of your full year under contract. Yes, we need to look at the backlog realization, the churn rates, the new sell and bill. All of that points to us being at the high end of our high single-digit model overall, so we feel pretty good about that.
Definitely, we all know in any challenging macroeconomic environment, these are areas that, on a discretionary perspective, get cut first. We are looking at all the KPI indicators, but as of right now, we still see pretty good growth overall.
Okay. No, that's great color. I do wanna touch on infrastructure, but maybe before that, since you brought up acquisitions, you know, IBM did, you know, close to 10, but I think eight acquisitions last year. What is your philosophy around M&A and what type of companies, capabilities, sizes, multiples, whatever you can touch on would be helpful color for the folks listening in here?
Yeah. Well, I mean, it all starts with having confidence in your capital structure overall to ensure that you've got the appropriate financial flexibility to continue to invest in our business. You see we've been doing that over the last 2+ years as we transform our portfolio, our business model, our operating model overall. You know, when you look at it, you know, we have a pretty good source of cash in this company overall, and M&A is a very integral part of our growth thesis and a very integral part of our capital allocation methodology. Why? Because it provides us, you know, a way to get at incremental value for our clients around either assets, IP or, as I just talked about on consulting, skills and capabilities to provide a multiplier effect across the rest of our portfolio.
A lot of questions that you packed into there. First, let me start with the criteria. Criteria for us hasn't really changed overall. As you would expect, right? It has to have strategic fit. We have to be very, very focused. We are a hybrid cloud AI company. You know, arguably, years ago, we got distracted on capital allocation. The beauty about Arvind coming in here is we are absolutely focused on where we can win, how we can win, and where the market is moving, both in terms of revenue pools and profit pools. Strategic fit first. Second, beauty of a CFO is I run every Thursday deal committee review. That needs to drive a synergistic effect to our hybrid cloud platform overall. I lost Wamsi. Are we still on, Wamsi?
Yeah. You are. I can hear you.
Okay, good. Yeah, my picture changed, and I don't see your face anymore. No problem. Second is that synergistic effect across that hybrid cloud platform. Think about it, when we allocate capital, we've got an integrated multiplier effect. For every dollar of capital allocated, we've got that multiplier of $3-$5 of software for every platform we land and $6-$8 of consulting. It's got to have synergistic effect to it. Third, as you would expect, financial returns are essential overall and quick accretive value. Now, when you think about... I think you asked about capabilities. Just look at what? Over the last 2+ years, we've acquired 31 companies, all built around that hybrid cloud platform thesis.
Think about how we extend the value of Red Hat, how we drive new capabilities in either automation, data and AI, and security, and then also how we build new skill and capability around partnerships to lever a win-win relationship, whether that's ISV capability or hyperscaler capability. Those are the capabilities that we focus in on. When you look overall, you know, the market right now, very, very different profile to our first question, right? Over the last 12 months, continued, I think, appropriate rationalization of valuations, making many more targets much more attractive. I would tell you, are we busy daily on our acquisition target list? Absolutely. I guess we'll leave it at that.
Okay. No, that's helpful color and context. One follow-up maybe just on, you know, the size. I mean, what is it from a leverage perspective that you think is the right leverage for the company? You know, if something was super strategic and met all the criteria that we just discussed, would you be willing to take on incremental leverage? Maybe just talk about the dividend in that context too.
Yeah. You know, first of all, size has never been a strategic determinant of our acquisition strategy. I think we would be foolish to just think about size. A very viable question to be asked, so let's take a step back. First, it starts with capital structure. We feel very comfortable and confident in our capital structure overall. That affords us the ability to continue to invest in our leadership around hybrid cloud and AI. That's both organically and organically, but also maintain a very attractive return to shareholder policy with a secure and modestly growing dividend. That's about $6 billion per year. Third, we want to maintain a solid investment grade balance sheet. We have a very strong balance sheet, ample liquidity position, and we've got enough financial flexibility and firepower to make a difference where we need to. Now, you asked about leverage ratios.
We're right now about 2.5, give or take, about a leverage ratio right now. We're about a low single A- overall. You know, we've done a lot to your question about my prior role. We've done a lot to change the profile of this company. When you look at it, we feel very confident that we can operate this company at a solid investment grade level. Can we absorb a notch down or two notch downs? Yeah, we've got enough capacity if the right deal was there following those three sets of criteria around that strategic fit, around that synergistic value of our hybrid cloud platform, and around the right financial returns, including the quick free cash flow accretion. You know, size would be taken into account around our sets of criteria.
We've got the capital structure and the confidence in the way we've been able to transform our business overall, that we can run and have enough firepower to really make a big dent.
Okay. No, that's great color, and appreciate that, Jim. I mean, looking at Red Hat in retrospect, I mean, it really was a kickstarter for transformation, and you guys have done an amazing job with that asset and that acquisition. Maybe just touching on a few other things that I know are top of mind for investors. One is on the free cash flow guide of $10.5 billion for 2023. Maybe it'd be helpful if you can walk through some of the puts and takes of how do you bridge from 2022 to 2023?
Yeah. You know, to our point, over the last few years, we've done a lot to change this business, right? The focus around that was to align a portfolio, align an operating model, and align a business model to transform this company to a sustainable growth level, to drive operating leverage, and to drive strong free cash flow generation overall. Our financial model and investment thesis lines up to that, right? Mid-single-digit revenue growth, with about 0.5 point of operating margin improvement per year, and high single- digit free cash flow generation, about $750 on our base per year. When you look at 2023, we guided to $10.5 billion.
That's up, what, $1.2 billion year-over-year. Really underpinning that free cash flow guidance is really our confidence in what we've been talking about the last half-hour here around the underpinnings of a sustainable revenue growth model and a operating margin leverage given our portfolio mix, productivity, and efficiency that we've been driving in this business. The underpinnings of how we exit it and the confidence in that guidance of mid-single-digit revenue growth and that confidence in that 0.5 point of operating margin, that will generate roughly $800+ million of free cash flow of that $1.2 billion. The remaining $400 million will come out of working capital. We will have realization above 100% again. Really, Wamsi, that was a result of our strong transactional performance exiting the month of December.
I think I said on the earnings call, we accelerated our growth throughout the fourth quarter from October to November to December with a very strong finish on our transactional side that inevitably left more working capital on the balance sheet. Glass half full in 2023, we have more opportunity to collect that working capital, and that's gonna generate about $400 million worth of cash contribution in 2023. There are a couple other dynamics that I think I talked about on the call, they both kinda offset each other. We'll get a tailwind that we've been talking about the last two years on structural actions, that will offset. We've got a cash tax headwind. Both of those are, you know, a couple hundred million dollars overall.
That cash generation in 2023 is gonna be driven by the operating fundamentals of our business revenue growth and operating margin. You know, we talked about, what? Over 2 points of operating margin improvement in software we're guiding to and over 1 point in consulting overall. That strong operating margin performance with that revenue growth would drive about 2/3 of that free cash flow, and the remaining 1/3 is really the volume dynamics of what happened in December.
Okay. No, that's really helpful. I think you kind of maybe answered this already, just really quickly, when we think about your expectation, like, you know, a year and a half ago, I guess, was to generate cumulative $35 billion. I know on the last call, you sized the profit and free cash flow impact from currency and exiting Russia at about $2.5 billion or a two-year period. Given this dynamic, does that change anything from your overall capital allocation priority at all?
No. I mean, to our earlier discussion, we feel very confident in our capital structure overall, our ability to invest in our business, maintain that attractive dividend through our dividend policy, both secure and modestly growing and maintain a healthy balance sheet with an investment grade. That gives us a lot of firepower still overall. Our capital allocation philosophy hasn't changed. When you think about you know, sources, I think I touched a little bit about this, but, you know, we finished with a pretty strong balance sheet and exiting the year, about $9 billion of cash on hand. By the way, that's over 2x our minimum operating requirement. We generate strong free cash flow. Again, to guide to the last question, $10.5 billion, up $1.2 billion year-over-year.
I think the third thing that, you know, goes back to how we've changed this company and made it much more of a sustainable growth orientation that can deliver operating leverage and cash. We've done a lot of work around focusing and streamlining our captive financing business. I still remember, I walked into this job in 2018. We had about a $30+ billion financing business that was involved in many different facets that put a tremendous strain on our debt, our access to markets. You know, we exited last year with $13 billion. That gives us a lot of flexibility when you couple that with our cash on balance sheet and the strong free cash flow generation.
It provides us a lot of opportunity to make those investments, and I think you're seeing that play out, 30 acquisitions in the last, you know, handful of years. By the way, it's not only the acquisition side. We continuously evolve this portfolio to get focus on where we can win and how we can win and how we can extend value for our clients and shareholders. We divested 17 different businesses over the last two and a half years. That has created incremental value at the end of the day.
Is there anything else that you think is sizable enough, material enough that is non-core or something that you would consider divesting?
Nothing to the size of a Kyndryl separation overall. I mean, I think you've seen we divested our healthcare software, data analytics, software assets here in 2023. You know, something as big as that, probably not. Smaller, yeah, we're gonna continuously look at our portfolio on how we allocate capital, where we get the best returns for that capital, how that portfolio plays to the integrated value thesis of that hybrid cloud platform. There are a few pieces still remaining in that portfolio that I think you'll see us try to take advantage of here around those assets, but nothing to any great magnitude.
Okay, great. That's helpful. I don't wanna keep you on time, but I'm gonna ask you two more if I could. One on the profit guidance for 2023. You'd indicated a slightly different first half, second half skew relative to history. Could you walk through some of the puts and takes over there and what gives you confidence about the second half ramp?
Yeah. Yeah. We spent a lot of time on the earnings call around this, and, you know, I know with my outreach to many different investors, this has been top of mind. I appreciate you asking this question, and we get to it. First, let's put this in perspective, right? Overall, you know, our two most important measures, revenue growth, operating cash flow generation. On the revenue growth side, and by the way, to drive high single- digit free cash flow, we have to get operating profit and operating leverage in our business. On the revenue side, we see a pretty normal seasonality throughout the year, first half, second half. Yes, it will come in different components to our earlier discussion.
Our two growth factors are software and consulting will compensate as we start wrapping on our mainframe cycle in the second quarter and into the second half. We see a pretty normal year on top line overall. What we talked about in earnings was around our operating profit. Now let me put this in perspective. We typically in IBM, and it's a function, you know, not for the sleight of heart, but being a CFO in a technology industry, about 40% of our profit comes in the first half, 60%-ish in the second half, and we all know that that's skewed a lot to the fourth quarter. When we look at 2023, there are a couple dynamics that are playing out that I will walk through here in a minute to make sure we get absolute transparency overall.
We said we see probably about a 4-5 points more skew to the second half in 2023. Call that maybe 35%, 65%-ish year in 2023. Let's talk about what some of those dynamics are. Number one, we announced, as you heard, during our earnings, that we are gonna take a restructuring charge, $300 million, to address the remaining stranded costs that are still with us from the portfolio actions that we've made over the last couple years. Predominantly, the separation of Kyndryl, which by the way, will anniversary our TSA agreements here in 2023. We're getting ahead of that stranded cost that's still left. Second, as I talked about our healthcare software assets, we still have stranded costs there. We're gonna get after that. Now with that charge, it obviously skews the dynamics.
We said it would pay back within the year, but the first half will have a $300 million charge into it, and the second half will have a return profile. That's number one. By the way, that's about 2 points of that 5-point differential to history. The second gets into currency dynamics. We're gonna try to keep this pretty simple with a complex area. We talked about currency top line, just given what happened to us, we spent a lot of time in 2022 about the rate, the breadth, the magnitude of the U.S. dollar appreciation in 2022. We talked about the guidance in 2023, that on top line, it was gonna be fairly neutral to maybe a slight tailwind for the year at current spot rates on January 25th.
Underneath that, it is a headwind in the first half and a nice tailwind in the second half. The dynamics of first half to second half is currency will be a drag on our profit in the first half compared to normal history, and it will start to be less of a problem in the second half. We still have to wrap on the hedges from last year, but it'll be less of a profit. Read that about a 60% hurt in the first half and about a 40% hurt in the second half overall. That's another 2 points of that 5-point differential. 4 of the 5 points are the dynamics of just what's happening with the restructuring charge and the currency dynamics that play out in our P&L.
The remaining 1 point gets at some of the things that you and I talked about earlier. It's the base underlying confidence in our portfolio from an operating point of view about, one, pricing leverage, where we have differentiated value. We're gonna see that play out throughout the year, much more in the second half than the first half. Second, as you know the economics of our mainframe cycle, we get the upfront hardware placement and profitability associated with that through the last three quarters, and that will wrap in 2Q. The second half will now start seeing that platform economic value multiplier play through, which is our mainframe software, high marginal profit dollar, and our high-value maintenance business overall.
2 points from restructuring charge, just the dynamics of the charge and return, 2 points of currency, just based on where spots rates are, and 1 point, underlying fundamentals really due to price and the mainframe cycle dynamics. Hopefully, that made sense to you, Wamsi.
Very clear. No, thank you so much for that color, Jim. Really appreciate it. I know I promised to be done five minutes ago, so I'll make this the last question, and I really appreciate you taking the time to go through in such detail, all these questions. Jim, look, IBM's made big strategic changes to the business over the last few years, and you really seem to have turned the corner on revenue growth after a decade. Maybe you can close out sharing with investors from your seat what makes IBM a different company than it was in the past, and maybe what investors are missing about the IBM story.
Yeah, great place to end. Thank you all for taking the time here today. These are very important discussions to continue to have and be open and transparent about our business and the confidence that we have in our business overall and how we've changed. We are a fundamentally different company, and I always talk about the investment thesis of today's IBM, which granted, yeah, we're five quarters in post-separation, so our job is to continue that sustainable growth execution. The investment thesis of IBM is a higher revenue growth profile company, stronger operating margin profile company, strong free cash flow yield, lower capital intensity-based business, and a higher return on invested capital. That is the investment thesis overall.
When you take a look at our performance in 2022, the portfolio, our growth vectors and how we're accelerating growth, strong recurring revenue that provides a nice annuitized-based stream that we get high margin profit dollars on. We've done a lot around our operating model, transform go-to-market. I think one of the most underappreciated strategic pivots that Arvind has made in this company, and again, it goes to the core of being a hybrid cloud platform-centric company, is he's opened up IBM to strategic partnerships and ecosystem capabilities. That has had a tremendous effect on inflecting the revenue growth and the change in the sentiment of our clients, which are most encouraging. Our NPS scores are the highest they've been in the last five to 10 years, and I think that's been a big piece.
Our job, as I continue to tell our teams internally, is to drive that sustainable execution so we continue to build credibility to that thesis. Second, we can debunk some of these reversion to the mean crowds that are out there in the marketplace today. Thanks, Wamsi. I really appreciate the conversation here today.
Jim, that was amazing. Thank you so much for your time. Thank you for all the clarity and transparency and going into so much detail about all these questions. Really appreciate the time and, yeah, looking forward to the new IBM executing here in 2023.
Sounds great. You have a great day. Take care. Stay safe.
Thank you so much, Jim. You too.
Okay. Bye-bye.
Bye-bye.