James J. Kavanaugh
Chief Financial Officer and Senior Vice President, Finance and Operations at International Business Machines
Thanks Arvind. Let me start out with a few of the headline numbers. We delivered $16.7 billion in revenue, 58% operating gross margin, operating pre-tax income of $3.5 billion and operating EPS of $3.35 for continuing operations. Last January, we said we expected performance to improve over the course of 2021 as we start to benefit from the actions we've taken. We have seen progress in our constant currency revenue growth rate every quarter and now again in the fourth. This is the first view of IBM post separation.
We had solid revenue performance, up nearly 9%. I'll remind you this includes the incremental revenue from the new commercial relationship with Kyndryl. And we said we would be transparent on the contribution to our revenue growth for the first year. This quarter, our revenue growth includes about 3.5 points from the new relationship. Excluding this, IBM's revenue was up 5%. We have aligned our operating model and segment structure to our platform-centric approach. In the fourth quarter, software was up 10% and consulting was up 16%. These are our two growth factors and together represent over 70% of our annual revenue.
Infrastructure, more of a value vector, tends to follow product cycles and was up 2%. The software and infrastructure growth each include nearly 5 points from the new Kyndryl relationship, while there is no contribution to Consulting's growth. Our platform-centric model has attractive economics. For every dollar of hybrid platform revenue, IBM and our ecosystem partners can generate $3 to $5 of software, $6 to $8 of services and $1 to $2 of infrastructure revenue. This drives IBM's Hybrid Cloud revenue, which is up 19% for the year. Post separation, revenue from our full stack cloud capabilities, from infrastructure up through consulting now represents $20 billion of revenue or 35% of our total.
Looking at our P&L metrics, our operating gross profit was up 3% and the $3.5 billion of operating pre-tax profit was up over 100%. Operating net income and earnings per share also grew. Let me highlight a couple of items within our profit performance. First, the year-to-year pre-tax profit reflects $1.5 billion charge to SG&A last year for structural actions to simplify and optimize our operating model and improve our go-forward position. We're continuing to invest to drive growth.
Throughout the year, we have been aggressively hiring with about 60% of our hires in consulting. We're scaling resources and garages, find engineering centers and customer success managers, all to better serve our clients. We're increasing investments in R&D to deliver innovation in AI, Hybrid Cloud and emerging areas like Quantum. We're ramping investment in our ecosystem. And we acquired 15 companies in 2021 to provide skills and technologies aligned to our strategy, including capabilities to help win client architecture decisions.
Regarding tax, our fourth quarter operating tax rate was 14%. This was up significantly from last year but roughly 2 to 3 points lower than what we estimated in October due to a number of factors, including the actual product and geographic mix of our income in the quarter.
Let me spend a minute on our free cash flow and balance sheet position. Our full year consolidated cash from operations was $12.8 billion and free cash flow was $6.5 billion. These are all-in consolidated results and include 10 months of Kyndryl and the cash paid for the 2020 structural actions and spend charges. IBM standalone or baseline free cash flow for the year was $7.9 billion, which is aligned to our go-forward business. This excludes Kyndryl charges and pre-separation activity, but includes the IBM portion of the structural actions. Payments for these IBM-related structural actions and deferred cash tax paid in 2021 contributed to the year-to-year decline in the standalone results.
Our balance sheet remained strong. And I'd say the same for our retirement-related plans. You'll remember that over the last years, we've shifted our asset base to a lower risk profile. In 2021, the combination of modest returns and higher discount rates improved the funded status of our plans. In aggregate, our worldwide tax qualified plans are funded at 107% with the US at 112%.
Now I'll turn to the details by segment. And I'll remind you, we have put in place a simplified management system and segment structure aligned to our platform-centric model. And within the segments, we're now providing new revenue categories and metrics that will provide greater transparency into business trends and drivers.
IBM Software delivered double-digit revenue growth in the quarter. This was driven by good revenue performance in both hybrid platform and solutions and transaction processing, the latter benefiting significantly from the new Kyndryl content. Software is important to our Hybrid Cloud strategy and our financial model. Our Hybrid Cloud revenue and Software was up 25% for the year to more than $8.5 billion. And subscription and support renewal rates continue to grow again this quarter, contributing to $700 million increase in the software deferred income balance over the last year.
Hybrid platform and solutions revenue was up 9%. This performance is an indication of the strength across the software growth areas focused on Hybrid Cloud and AI. It's worth mentioning, this includes only a point of help from the new Kyndryl commercial relationship.
Let me highlight some of the trends by business area. Red Hat revenue all-in was up 21%. Both Infrastructure and App Dev in emerging tech grew double-digits, as well an OpenShift address enterprises' critical Hybrid Cloud requirements. With this performance, we're continuing to take share with our Red Hat offerings.
Automation delivered strong revenue growth, up 15%. As Arvind mentioned, there is strong market demand for automation. We had good performance in AIOps and management this quarter as we address resource management and observability. Clients are realizing rapid time to value from Instana and Turbonomic, two of our automation acquisitions. And Integration grew with continued traction in Cloud Pak for integration.
Data and AI revenue grew 3%. We have particular strength in data fabric, which enables clients to connect siloed data distributed across the Hybrid Cloud landscape without moving it. You'll recall we talked about the data fabric opportunity back in October. We also had strong performance in business analytics and whether. Within these solutions, clients are leveraging our AI to ensure AI models are governed to operate in a fair and transparent manner.
Security revenue declined modestly in the quarter, driven by lower performance in data security, while revenue grew 5% for the year. As we called out in our recent investor briefing, security innovation is an integral part of our strategy. In December, we launched a new data security solution, Guardium Insights, with further plans to modernize the broader portfolio throughout the year.
This quarter, we also completed the acquisition of ReaQta, which leverages AI and machine learning to automatically identify and block threats at the endpoint. Putting this altogether, our annual recurring revenue, or ARR, is now over $13 billion, which is up 8% this quarter. This demonstrates the momentum in our hybrid platform and AI strategy, including Red Hat and our suite of Cloud Paks.
Moving to transaction processing, revenue was up 14%. This is above our model, driven by a few underlying dynamics. First, all of the growth in transaction processing came from the new Kyndryl commercial relationship, which contributed more than 16 points of growth. Second, I'll remind you that we're wrapping on a very weak performance in the fourth quarter of last year, which was down 26%. And lastly, we had some large perpetual license transactions given the good expansion in the IBM Z capacity we've seen this cycle.
While the new capacity is important, what's just as important is the continued strong renewal rates this quarter. These are both good proof points of our clients' commitment to our infrastructure platform and these high value software offerings. Looking at software profit, we expanded pre-tax margin by 12 points, including nearly 10 points of improvement from last year's structural actions.
Turning to consulting, revenue grew 16% with acceleration across all three revenue categories. Complementing the strong revenue performance, our book-to-bill was 1.2. Clients are accelerating their business transformations powered by Hybrid Cloud and AI to drive innovation, increase agility and productivity and capture new growth opportunities. Enterprises are turning to IBM Consulting as their trusted partner on this journey. They are choosing us for our deep client, industry and technical expertise, which drives adoption of our Hybrid Cloud platform imposed through key technologies.
Consulting's Hybrid Cloud revenue grew 34% in the quarter. For the year, cloud revenue is up 32% to $8 billion. Offerings and application modernization, which are centered on Red Hat, contributed to this growth. The Red Hat-related signings more than doubled this year and are now over $4 billion since inception. This quarter, we added over 150 client engagements, bringing the total since inception to over 1,000. Our strategic partnerships also drove our performance. Revenue from these partnerships accelerated as the year progressed and was up solid double-digits in the fourth quarter, led by Salesforce, SAP, AWS and Azure.
Turning to our business areas, our Consulting's growth was led by Business Transformation, which was up 20%. Business Transformation brings together technology and strategic consulting to transform critical workflows at scale. To enable this, we leverage skills and capabilities in IBM technologies and with strategic ecosystem partners such as SAP, Salesforce and Adobe. Our practices are centered on areas such as finance and supply chain, talent, industry-specific solutions and digital design. This quarter, we had broad-based growth reflecting strong demand for these solutions.
In Technology Consulting, revenue was up 19%. Technology Consulting architects and implements cloud platforms and strategies. We leverage Hybrid Cloud with Red Hat OpenShift and work with providers such as AWS and Azure in addition to IBM Cloud. This quarter, we continue to see good performance in application modernization offerings that build cloud native applications and that modernize existing applications for the cloud.
Finally, Application Operations revenue grew 8%. This business line focuses on application and cloud platform services required to operationalize and run in both cloud and on-premise environments. Revenue growth was driven by offerings which provide end-to-end management of custom applications in cloud environments.
Moving to Consulting profit, our pre-tax income margin expanded about 8 points, including just over 9 points from last year's structural actions. We're in a competitive labor market and we continue to have increased pressure on labor costs due to higher acquisition, retention and wages. While we still expect to capture this value in our engagements, it will take a few quarters to appear in our profit profile.
So now, turning to the new Infrastructure segment, revenue was up 2%. The Kyndryl commercial relationship contributed about 5 points of growth, which is higher than we expected in October. In this segment, we brought together Hybrid Infrastructure with Infrastructure Support, which was formerly Technology Support Services. This allows us to better manage the lifecycle of our hardware platforms and to provide end-to-end value for our clients. Hybrid Infrastructure and Infrastructure Support revenue were up 2% and 1% respectively with pretty consistent contribution from the new Kyndryl relationship.
Hybrid Infrastructure includes IBM Z and Distributed Infrastructure. IBM Z revenue performance, now inclusive of both hardware and operating system, is down 4% this quarter. This is the 10th quarter of z15 availability. And the combination of security, scalability and reliability continues to resonate with clients. This program continues to outpace the strong z14 program and we ship more MIPS in the z15 program than any program in our history. Our clients are leveraging IBM Z as an essential part of their hybrid cloud infrastructure.
And then in Distributed Infrastructure, revenue was up 7%, driven by pervasive strength across our storage portfolio. Looking at Infrastructure profit, the pre-tax margin was up over 9 points, but essentially flat normalizing from last year's structural action.
Now I'll wrap up with the discussion of how our investments and actions position us for 2022 and the longer-term. We've been laser-focused on our Hybrid Cloud and AI strategy. Our portfolio, our capital allocation and the moves we've been making are all designed to create value through focus for our clients, our partners, our employees and our shareholders.
We took significant steps during 2021. The most impactful portfolio action was of course the separation of Kyndryl. We've also been allocating capital to higher growth areas, investing in skills and innovation and expanding our ecosystem. We've aligned our business to a more platform-centric business model. And we're simplifying and redesigning our go-to market to better meet client needs and execute on our growth agenda.
Bottom line, we're exiting 2021 a different company. We have a higher growth, higher value business mix with over 70% of our revenue in software and services and a significant recurring revenue base dominated by software. This will result in improving revenue growth profile, higher operating margin, strong and growing free cash flow and lower capital intensity, leading to a higher return on invested capital business.
We also continue to have attractive shareholder returns through dividends. In October, we laid out a model for IBM's performance over the medium-term to finance 2022 through 2024. The model is focused on our two most important measures of success, revenue growth and free cash flow. As we enter the new year, I'll talk about our expectations for 2022 performance along those dimensions.
Starting with revenue. We expect to grow revenue at mid-single digit rate at constant currency that's consistent with the model. On top of that in 2022, the new commercial relationship with Kyndryl will contribute an additional 3 points of growth spread across the first three quarters. Currency dynamics unfortunately will be a headwind. At current spot rates, currency is roughly a 2-point headwind to reported revenue growth for the year and 3 points in the first quarter.
For free cash flow, we expect to generate $10 billion to $10.5 billion in 2022. To be clear, this is an all-in free cash flow definition. The adjusted free cash flow view we provided in 2021 was useful, given the significant cash impact associated with the separation and structural actions. Now in 2022, despite the fact we still have nearly $0.5 billion of impact from the charges, we're focusing on a traditional free cash flow definition. The $10 billion to $10.5 billion reflects a year-to-year improvement driven by lower payments from the structural actions, a modest tailwind from cash taxes, working capital improvements and profit growth, resulting from a higher growth and higher value business mix. With this performance, we're on track to our model.
So now, let me provide some color on our expectations for segment performance. Because this is a new segment structure, I'm going to spend a little more time and provide perspective on constant currency revenue growth and pre-tax margin in the context of our segment models. In Software, as we benefit from the investments in innovation and our go-to market changes, we're seeing progress in our software growth rate. In 2022, we expect growth at the low end of the mid-single digit model and then another 5 to 6 points of revenue growth from our external sales to Kyndryl. We expect software pre-tax margin in the mid-20%s range for the year.
We have solid momentum in IBM Consulting revenue and expect this to continue into 2022 as we help clients with their digital transformations. This momentum and our book-to-bill ratio support revenue at the high end of our high-single-digit model for the year with double-digit growth in the first half. We expect low-double-digit pre-tax margin for the full year with improving performance through the year as we make progress on price realization.
Infrastructure revenue performance will vary with product cycle. In 2022, with the new IBM Z introduction late in the first half, we expect performance above the model and a slight contribution to IBM's overall growth. On top of that, we're planning for about 2 to 3 points from the external sales to Kyndryl in 2022. This supports a high-teens pre-tax margin rate for the full year. These segment revenue and margin dynamics will yield about a 4-point year-to-year improvement in IBM's pre-tax operating margin for the full year and 2 to 3 points in the first quarter.
In terms of tax, we expect a mid to high-teens tax rate, which is a headwind to our profit growth. Bringing this altogether, we expect mid-single digit revenue growth before Kyndryl and currency and $10 billion to $10.5 billion of free cash flow for the year, both in line with our mid-term model.
Patricia, let's go to the Q&A.