Shares of IBM trading near their lowest level since November 20th, 4th September 2024. The company doubled back its full year sales forecast after a pretty steep drop in mainframe sales, which weighed on results. Joining us from New York is the co-host of Bloomberg's The Close, Romaine Bostick, alongside IBM CEO Arvind Krishna.
Arvind. You've seen the reaction amongst investors. Here are some concerns here about that lowered sales forecast overall as well as softness in software. You've characterized this as basically a shortfall for one quarter that is limited to CapEx sensitive areas of the portfolio. But that's still a meaningful area of your portfolio where sales coming into that quarter, was that pipeline overstated?
I don't believe so, because when we look at all the deals that didn't close, I think we have done enough verification, including with the clients, to know that they were very real. And it was a reprioritization of the CapEx spend at the end of the quarter. This was pretty confined to, I'll call it, the Fortune 100. The deals that were, but then a subset of those. Now, one third of what didn't happen has already come back. So that tells us that this was a reprioritization. And those deals were very real, as opposed to us being optimistic in our projections. And I would also add, I think that maintaining a free cash flow tells us that we have levels around productivity and conviction and confidence in the business, and that is also, I think, going to serve our investors well. But the next few months will tell us that.
Well, on that cash flow figure. Yes. And that certainly pleases a lot of analysts and investors out there, that billion dollar number of projected free cash flow growth. You're maintaining the dividend as well. But you're largely done that so far by cutting costs. So that raises the question that if we are anticipating slower growth on the revenue side, does that mean more cost cuts are in store?
So, one week, the bulk of our cash flow growth over the last four years has actually been on adjusted EBITDA. So that tells you that this is mostly true revenue growth. And our model has always been that the last dollar is more productive and more profitable than the first dollar. So we have been growing revenue 4 or 5%, and we've been growing cash flow up in the seven, eight, 9%. So that's kind of our model. And we intend to keep maintaining that. Now, right now if we drop revenue by one point because we said 4 to 5 instead of five plus, we can absolutely make it through productivity. Cost cuts is an interesting question because it doesn't always come down to a reduction in headcount. Our headcount has been more or less flat over the last many years. I think there's a lot of third party spend where we are going to get a lot more efficient with that third party spend than we have been.
Big tech is live on Bloomberg Television and Bloomberg Radio. And we're speaking with the IBM CEO Arvind Krishna. Good morning. You want to focus on accelerating revenue growth and accelerating profitability. And just really simply, I'd love to hear what you're asking the team to do differently now in response to all of the factors that you outlined.
So, Ed, really? So if I look at our software business, 80% of it is already an energy consumption opex based business, 20% of it is a CapEx business. If we think that the CapEx headwinds are going to continue, but 80% is already growing at about 8%, we want to put a lot more focus. So we are going to direct a lot of the team with forward deployed engineers, with people all focused on deploying the software at clients, much more technical help, and make that 80% grow even faster. Products like RedHat, Confluent, Hoshi all fit that model. On the CapEx side, we have to make sure that while we can continue to do it, don't depend upon outsized growth on that side to go there. Then on the supply chain, can we leverage all of our capability in supply chain to make sure we have enough distributed infrastructure in storage, in unique systems that people can fulfill all of the demand? Because we came out of the second quarter with half a billion dollars of backlog in that part of the portfolio. So those give you an idea of the kind of changes that we're making already, not just for the rest of the half.
You summarized the state of the world beautifully. You said that customers shifted spending towards servers, storage and memory in late June. And when I posted on social media that you're coming on the show, the question from the audience was really simple. Did that trend continue from June into July? And for how long do you expect it to last?
We have not seen it in July, but I would tell you, look, the semiconductor pricing memory is up 3 to 4 times over the last 18 months. Networking infrastructure is up 60 to 80%. Fiber is up, connectors are up. I do think that some of these trends on the underlying components are going to carry on for some more time. That works its way up into those things. So people are going to have those prices. Now the question is, is that going to maintain a representation of the CapEx spend? If I take the signal that a third of our deals closed, then that says, no, people are going to get more careful about how to spend that CapEx. If that goes into September, because a lot of CapEx does get committed at the end of a quarter, not always through, then it means that that car is on for some more time. And that is why we gave a guide of 4 to 5%, depending upon if that carries on will be at the lower end of the range. But if some of it comes back, that will be at the high end of the range.
So, so, but I know there's a big focus right now on the clients that did not necessarily materialize in the quarter. With regards to the existing clients that you have, and I'm primarily referring to your mainframe business. I mean, can you share like sort of what percentage of those clients are actually increasing their spending? Is that going up still?
