“On the high end, at 8%, we said that, that 80% revenue, we see continue and accelerate. We accelerated from 7% in the first quarter, 8% in the second quarter, and we see this going to about 10% in the second half.”

In context

“James Kavanaugh : Absolutely, Brent. Thanks for the question. Let me just frame the components about the guide overall. One, we said revenue guide now 4% to 5%. On the low end, it's about 1 point plus takedown. On the high end, give or take, it's pretty damn close to where we were at. I talked about maintaining free cash flow in either case because we have built this around prudently, the low end of the range to show the operating leverage and productivity and, by the way, the investment capacity we have in the company to drive that level of profit, that level of cash, which, by the way, both will be in high single-digit level overall with record margins. And that basically says we're taking up our operating pretax margins by 100 basis points. But let's unpack the 4% to 5%. Number one, underneath it, we see tremendous momentum playing out in infrastructure overall. That infrastructure guide 90 days ago, we said was going to be down low to mid-single digit, coming out of first half, given the mainframe, albeit fell short, the mainframe is still at 129%, 130% of the prior program. It assumes the confidence that we see in all the demand indicators, and we can get into that later, that we maintain that level and that we continue to see the tremendous growth opportunity that we have prudently protected the supply chain to optimize on Distributed Infrastructure. So guide to guide, we're up about 2 points there. In software, 6% to 8% for the year. The lower end was an anchor. That says nothing changes, and I'll get into that in a minute. The high end says that we basically are approaching double digits in the second half. So let me break down those 2 because we can get into consulting later, but there's basically no change there. When you take a look at the scenarios that we ran on software, one, as I talked about in prepared remarks, we -- and we think this is a competitive differentiation. We have a software portfolio that plays at the heart of the infrastructure software that we allow our clients flexibility in how they want to buy. They can buy perpetual license models. They can buy subscription models, they can buy consumption models. And albeit although it's a very small percentage, we offer SaaS-based components, right? Underneath that, we have -- our business is roughly 80-20, 80% high-value recurring revenue, and that is think of our portfolio, Red Hat subscriptions, our acquisitions that are mostly subscription consumption-base, our Gen AI portfolio and watsonx and parts of our data automation portfolio that operate on consumption models. Our remaining 20%, that's the piece, transactional revenue that leverages perpetual license sales, enterprise license agreements that, that is our mainframe moat and incumbency, provides tremendous value to IBM because it creates that multiplier effect I always talk about with every dollar of hardware revenue we land, we get $3 plus of software with long-term commitments. Now how do we construct the ranges? On the high end, at 8%, we said that, that 80% revenue, we see continue and accelerate. We accelerated from 7% in the first quarter, 8% in the second quarter, and we see this going to about 10% in the second half. That is good acceleration, and that talks to the value and innovation we bring to clients in that part of the portfolio. In the transactional piece of the business, make it very clear, the second quarter slipped deals we had, by the way, typically, we only close about 75%. Arvind stated already in 3 weeks, we're about 1/3, 40% already closed of those deals. Our high-end range as we close all of them, which, by the way, we haven't really lost maybe 1 of the deals, maybe 2, but we close all those deals, then we've taken a look at all of our demand indicators, propensity to buy models, our pipeline closure rates. We entered the second half with a relatively robust net new business pipeline that's growing double digits. We have -- Brent, to your question, we've taken a discount off of our traditional historical rates. That's why we're sitting at [ 8% ]. I think that's prudent. But back to Amit's question, the KPIs will tell how we finish third quarter, how we get into the fourth. The low end of the range, like I said, I can't stress -- it's the anchor to get profit and cash stable to our last guide and maintain that level of profitability. That basically assumes we get modest acceleration in our high-value recurring revenue and our 20% transactional. We see similar buying behavior in yields, right? That's not what we're seeing here, but we're basing our framework of our business model, so we can drive the right management actions, the right level of productivity to create incremental financial flexibility to go invest to capture that growth opportunity. Hopefully, that helps you.”