International Business Machines Corporation (IBM) Earnings Call Transcript & Summary

Perfect. Good afternoon, everyone. My name is Amit Daryanani, IT hardware and networking analyst here at Evercore, and I'm delighted to have IBM here for our next fireside chat. And from IBM, we have Rob Thomas, SVP of Cloud and Data Platforms, here with us. Really excited to get the opportunity to spend some time over the next 30, 35 minutes, which is the duration of this fireside chat, really to learn a little bit more about IBM broadly, but really more specifically around cloud, data platform, really the software business that Rob is in charge for.

But Rob, before I get into these questions that Irvin and I have prepared, maybe it's helpful if you want to just spend a few minutes talking to us about what does your responsibility and the scope of them pale at IBM? And if memory serves me right, this was a role that was announced a little over a year ago at this point. Can we just touch on that a little bit? And we'll then do the questions from there.

Sure. Amit, great to spend the time. Appreciate you having us. And yes, so think about IBM's strategy, hybrid cloud and AI. I have the software components of that. And if you think about our software business today, I'd say it's 4 major areas. It's automation, it's data and AI, it's security and then AI applications, basically how AI is being applied. I've been with IBM a little bit over 20 years. I started in consulting, spent a number of years in microelectronics, 2 of those were in Asia, living in Japan. And came to software in 2007, a guy named Arvind Krishna at that time hired me into software actually, and did a bunch of different roles in software, from engineering, sales, business development, I ran our -- I was GM for our data business. And then last year, when Arvind took over as CEO, I took over for software.

Got it. Perfect. The way you described this was you basically own everything that matters at IBM right now. So not yelling with my words. But if I think about -- so Rob, IBM's sort of performance, and I think there's always a lot of focus on IBM's software business more than anything else. And last quarter, I think the performance was really strong, especially for cloud data platforms, I think that segment was up about 10% in the realm of the overall segment being up 1% or 2%. Perhaps, if we take a broader perspective, how do you think about the state of IBM software portfolio, of your software portfolio? And perhaps you can just touch on how do you think the stack of software portfolio, where those products are in their upgrade and modernization life cycle?

I think we're at the start of what I would call a new era of innovation of IBM. Why is that? Well, the acquisition of Red Hat was, I'd say, transformational for IBM. The thing that doesn't get talked about as much is we're now building all of our software on Red Hat OpenShift. And that creates massive development productivity because when you have a common monitoring, common logging, common observability, all these different capabilities and what it means to have a common platform to build on, we can have a lot more throughput in terms of how we deliver products. And I think you've got a taste of this, I think at Think this year, where I think you saw probably more announcements in software than we've had in any other year. We are starting to get some momentum going in terms of how we deliver products. I think that's great. I think we're also at a new era in terms of how we work with IBM Research. To give you an example, a few years ago, we did Project Debater, which was the first AI system that could debate humans. And in less than a year, we got that into product. So it showed up as part of capabilities in Watson Discovery, which is now being used by customers all over the world. So a combination of common way to develop, a lot of productivity from that. The engine with IBM Research is working really well. And we're also doing a lot of new things in IBM. We have an incubation program called HyperBlue, where anybody in the company can bring forward an idea to get funded inside of IBM. So we're doing a lot to encourage organic innovation. It's led to things like some bets that we're making in software-defined networking as an example. So it's a new era of innovation, but the core of the software business is what I described before, it's data and AI, it's automation, it's security and it's AI applications.

Got it. And then, Rob, a question we get fairly often, it's a broader question, but how has the demand environment altered through the pandemic? And one of the aspects on our part our about this is, I think, IT budgets, especially as you go past the pandemic here, are going to start going from being more tactical at the onset, because also the pandemic was more about give me my camera, my mic and my laptop and make sure no one breaches anything, to perhaps becoming more strategic on how do you support this hybrid environment. So I'd love to understand, how has the demand environment changed broadly? And how is IBM helping clients in a post COVID world, especially as budgets, I think, will go more strategic in nature versus tactical?

Look, I think there's no question that the demand environment was challenged last year. And we see a continued shift for preference for OpEx over CapEx. You saw that in some of our perpetual performance. And look, our strategy is we think we need to deliver a mixed business model because some customers want subscription, some want perpetual, some want as a service. And I think that's what being a modern software company about is about providing choice. I will say that the thing that surprised me on the demand environment was areas where we had been making progress that completely took off with the pandemic. One is using AI for customer service. We have a product called Watson Assistant. We had over 100 companies go live in a period of 45 days. I've never seen adoption like that before. And kind of culminated in some of the big ones that you've heard about, PayPal is one that uses Watson for all their customer service. We've also got CVS that's using Watson for the COVID-19 vaccine rollout. So I think there's areas that really accelerated. Another one is application modernization. Every company started thinking about how do I get my applications to the cloud. You've seen examples like Delta Airlines, we're doing that with them. And the third one, maybe a bit of a surprise is something like financial planning and budgeting. When all the finance teams become distributed, there's a good opportunity to use AI to, I'd say, fine-tune how you do budgeting and planning. We're seeing a lot of new customers come to IBM with this, which is customers like Ancestry, Netflix, DoorDash using IBM software. Most people wouldn't think of names like that. But they saw the advantage to using AI with our planning and analytics product. So it was new types of business that accelerated. But clearly, look, the demand environment has been a little bit -- like I said, sometimes people prefer OpEx, sometimes CapEx, so we have to be ready for that.

I think IBM has been a big proponent of hybrid cloud as a logical destination for most enterprises eventually. I would argue, IBM sort of is ahead of a lot of the companies that are talking about it today, too. But a question I often get, because it does seem the reality is we will be more hybrid first, the question I get from investors very often that I'd love to ask you, Rob, is yes, hybrid cloud is the reality, but tell me why is IBM better positioned to enable customers to get there versus some of your peers?

So maybe we level set first on what is hybrid cloud. If you believe that companies are going to take 100% of their data, 100% of their applications turn off all data centers and move everything to one public cloud, then you probably don't need hybrid cloud. Let's acknowledge that. We don't think that's what the world is going to look like. Our thesis is actually the opposite, which says, customers are going to have multiple public clouds, multiple private clouds, many different SaaS applications. And I don't think that is -- like you say, I think that's pretty common thought now, although we've been talking about it for a couple of years. So that's what the world is going to look like. So if that's what a customer wants, what are you going to look for in a partner? Well, you're going to look for who's building an open hybrid cloud platform? Who's using open source? That's IBM. Who's using hybrid cloud technology that can run the same on any cloud, public or private, or even on the edge? Could be an automobile or could be a retail store. That's IBM. When companies are building on a new platform, sometimes they need somebody to help them. We have GBS to help deliver skills around landing that platform. We think that's a differentiator. And then let's not forget, the operating system for cloud and specifically for hybrid cloud is Red Hat Linux. So I feel like we're really well positioned here as the world moves in this direction. Now where are we? Analysts say probably 25% has moved to public cloud now. I think there was a time when people said, "Hey, 100% is going to be on public cloud." I don't think anybody really believes that anymore. So there'll be more work on public cloud, but we think the value is going to be how do you integrate all these pieces and get it operating as a single cloud. And I think technologically and skill-wise, we're advantaged for that.

Fair enough. Rob, maybe I'll just ask you to add on this a little bit more, which is you are seeing some of the hyperscale companies, the public cloud first companies, like the Amazon Web Services, offer things like the Outposts, right? And I think Microsoft has something as well. What is the shortcoming of that model versus IBM kind of going from on-premise to hybrid versus those folks coming from the public cloud to the hybrid world?

I think they have a bit of a strategy tax, right? Meaning their strategy is public cloud. Therefore, when they do something on-premise or private cloud, it's a one-way street. It only connects back to their public cloud. I'm not sure that's where customers are. When I talk to customers, they want to be on multiple private, multiple public. Some of the examples we talked about, we worked with Lufthansa as an example. That's their strategy. That's where they're going. With a one-way street between what you do on private cloud back to only 1 public cloud, you can't do that. So I think they face a little bit of a strategy tax. Now that said, they are also great partners for us. Red Hat has significant presence on the major public cloud providers. So they're big partners for us. So I don't think it's something that we need to battle for with them per se. I think they will do public cloud. That's great. We see a big opportunity for IBM doing hybrid cloud. And we think our story, because it's multiple public, multiple private, is differentiated.

No, that was a great point, which is the multi-cloud is almost as important as the hybrid cloud in these discussions. And if you're AWS, it's a single point of cloud, which could be a shortcoming in the model. So that's really fair. Maybe I want to shift a little bit to Red Hat, which the person that hired you at IBM did make an intention to purchase Red Hat. It's obviously a very big focus for IBM. And certainly, the -- so far, the transaction appears to have gone rather well for IBM. I would love to understand, from your seat, though, how has Red Hat helped your business in terms of deal activity? And then as you think about the Red Hat transaction broadly, where is the progress of Red Hat so far surprised you to the upside? And where do you think there's an opportunity that still remains ahead for you?

Look, I think it's really changed perception. It's changed the discussion to everything we just talked about for hybrid cloud. When customers start to think about hybrid cloud, for software, they've really got 1 easy answer, which is IBM software on Red Hat. So I think that's been a big advantage. I would say a positive surprise to me has been how it's changed the dimension of the partnerships that we're doing. You saw the announcement with Palantir as an example, where they're now building on Cloud Pak for Data. And as we work with them in the market, any time we sell Palantir, the customer becomes a customer of our Data Fabric, which is Cloud Pak for Data, which means they also become an OpenShift in Linux customer. I'm not sure that deals like that would have gotten done without Red Hat being part of the family because I think those partners see value in being hybrid cloud and multi-cloud. Because they were interested in that, then they got, I would say, opened up to the world of what IBM could provide in terms of, in this case, a data catalog, a data fabric. So it's really changed the nature of partnerships. You've also seen ones like Schlumberger, Siemens, to name a few. These are partnerships you haven't seen from IBM in the past. So I'd say that's the positive surprise in this. But look, the operating model of Red Hat is simple. I prefer Red Hat. When I build software, I prefer Red Hat. Red Hat does not prefer me. Our desire is to keep Red Hat independent so that they can work with anybody in the market. And I think that's a key part of the value proposition.

I wanted to ask or to tack on a question about Cloud Paks, if I may. IBM has been building Cloud Paks for the past couple of years now. Can you touch on what this suite of software products entails? Should we think of them as next-gen middleware solutions differentiated with OpenShift? Or do we view Cloud Paks as something that's product-driven or perhaps a product suite that's driven more by end market verticals?

So Irvin, I would say it this way, before -- let's talk about what the world was like before Cloud Paks, and I'll give an example from Data. We had 200, 300, 400 different products in data that solved one part of the problem. We had a database. We had data integration. We had data movement. We had master data. We had data science. We had AI. We had all these different components. With Cloud Pak for Data, what was multiple components becomes 1 platform, where everything I just described is just a service that you call once you're inside the platform. So the ease of use has improved dramatically. So what does this mean for a customer? So if I'm a Db2 customer today, and I only use Db2, one, I could take that Db2 and I could containerize it. But that doesn't do much. I mean it gives me a modern version of it, but it's just containerized. Whereas if I use Cloud Pak for Data, I have access to Db2, which means now I have access to all of the Watson data science. I've got access to all the Watson Knowledge catalog. I got access to MongoDB and Cloudera because they're ecosystem partners that we've connected in with Cloud Pak for Data. So it's completely changed the dimension. That customer went from being a user of a single product of IBM to they have access to an entire data and AI stack. That's what I refer to as a flywheel effect, which is we're going to see the dimensions of consumption and adoption change dramatically. Now look, it's still early days. So we are just getting started on this journey. It takes a while for this to play out. But you can see how customers will start to adopt a lot of different pieces. Another example in automation. We've got Cloud Pak for Watson AIOps that we announced last June. Then we announced the acquisition of Instana. And recently, we announced the intent to acquire Turbonomic. So Instana optimizes applications, Turbonomic optimizes everything below the application, how you optimize compute, network, storage. So again, you're using AIOps, but now you will have access to what we're doing in Instana and down the line with Turbonomic. So it completely changes the pattern how customers consume and utilize the products, which I think is really exciting.

Got it. And I see a question in the queue on the opportunity presented by AI. Your CEO, Arvind Krishna, he speaks of IBM as a hybrid cloud and AI company. Can you elaborate on the AI aspect of your business? Can you perhaps just spend a couple of minutes talking about how IBM is driving value to clients via AI?

For sure. The -- yes, let me put a lens on it. I think one of the most important investments that we made about 18 months ago was in a team called Data Science Elite. And it was an observation that customers want to do AI, but they don't necessarily have all the skills that they need to do that. And this was kind of the first step in what has now become our big modernization initiative around our go-to-market. But the idea was we can deploy the best data scientists in the world to work with customers to help them organize their data and to do data science. One example would be T-Mobile Sprint, where they had data in 100 different repositories. They're able to use Cloud Pak for Data to federate all those different repositories, make it look like 1 data fabric. And then they've built models in Watson on top of that data fabric to do all of their aftermarket service. So now they can optimize how they're doing parts delivery and aftermarket delivery. That's just 1 example of what we do with a deeply technical go-to-market like that. So where are we today in AI? Over the last year, I'd say there's 5 main use cases that are jumping out. Number one is customer care. I talked a bit about that when I talked about CVS and PayPal. Number two is financial budgeting. I gave you a few examples on that, like Ancestry, Netflix. Number three is employee experience, using AI to better service your employees. IBM, ourselves, are one of the best examples of that as we have Watson rolled out, doing a lot of our customer -- our employee care internally. Number four is regulatory compliance. So using AI to help you be compliant with regulations and financial services or telco. And then last is AIOps, meaning using AI to run your IT systems. Those have been the 5 major use cases that I've seen developed over the last year. And we've got a lot of momentum that I think will continue in each of those 5.

And if I can squeeze one more on AI. I know you made some announcements at Think, including one about Watson Orchestrate. Can you just talk a bit about that solution? And how is IBM thinking about creating a new AI for enterprise?

So the notion beyond Watson Orchestrate is very simple, which is how do we democratize AI so that any of us watching this, even if you're not a data scientist or you're not an IT, can put AI to work for you? That was the idea. Orchestrate was built out of IBM Research. And the simple idea of this is you can ask it to do things for you. Right now, it's got skills like scheduling or creating a service ticket or creating meetings, or it could be some other skill that you train it on. And it's all done through natural language. So I can literally go in and type in a box, schedule this meeting or open a ticket doing this, and then Orchestrate will make sure that gets done in the background. So anybody can do that. Kind of back to your question, Irvin, on the Cloud Paks, we've decided to make this an ingredient available to all the Cloud Paks as opposed to a separate stand-alone product. Because my view is, once a customer is on the journey with Cloud Paks, they're just going to want this as an ingredient to add on to what they're already doing. But it's a good example, I think, of bringing AI to the masses where you don't have to be a programmer, you don't have to be a developer. You don't even have to be technical, you just have to know how to write that natural language, which I think all of us can do.

It almost sounds like AI for Dummies, which I should sign up for, actually.

I think we all should.

Rob, maybe you could teach the class. I could be in the back of the room. That's the way this would work out. Listen, you've been at IBM for a while, so is Arvind. I feel like I sense [indiscernible] of excitement within IBM when I talk to folks within the company really, and this is -- I haven't seen this, but there's almost this conviction that it's your time, it's IBM's time to seize the opportunity that's ahead, be that hybrid, be that multi-cloud. It seems like there's more excitement around this. Given your tenure there, I would love to understand, and maybe you can touch on, what has changed from a culture perspective or go-to-market perspective really since IBM -- since Arvind has taken over IBM? Because it seems to be more exciting than it has been in the past.

Well, I think you're right that there is something in the water, if you will, and there is a lot of excitement. I think it stems from a couple of things. One is Arvind does promote a very open culture. So he does office hours. Anybody can come in and ask a question, anybody in the company. There's no rehearsal, there's no preparation. And he does it on-the-fly. And I think it's very authentic and people see that. And if he doesn't know the answer, he says, I don't know the answer. And so I think he's opened a very -- a culture of candid feedback, discussion. "Hey, if you got problems, tell us about the problems, that way, we can go solve them," that type of an approach. I think that's made a big difference. I think secondly is, look, Arvind is incredibly deep. I mean came from IBM Research, ran engineering for a long time. And so when we get into product reviews, he's poking at the essence of what's happening. What are customers saying? What are partners saying? How do you know this technology is differentiated? And so it's really forcing everybody to, I'd say, up their game in terms of how they're engaging to meet demand in the market. And despite his depth, I would say, he's also very good at stepping back and really boiling it down to what are the simple things we have to get done. And he's kind of made it clear there's 3 things. And they're things that you've heard about. One is innovation. We've got to build great products, and we're doing that. Two is around ecosystem. We talked about some examples about that. And then third is the go-to-market transformation and modernization, which is really about creating a go-to-market that is more experiential, more hands-on, more technical, rolling up sleeves, solving the customer problem. And so he's kind of taken what could be a very complex strategy and just said, "Look, if we do these 3 things really well, then IBM is going to be successful. We can be #1 in hybrid cloud. We can be #1 in AI as we do those things," and I think it's built a lot of energy in the company.

I love having hearing about open office hours. I wish more companies did that because one of the things I've always -- when I talk to companies, by the way, this topic has been it's the ability to find problems before they became a big disaster and solving them early enough. And I think it's something that you get out of these open office discussion, which is great to hear. I know we're coming up on our time, but I want to -- before I wrap it up, I want to go back to the Red Hat discussion for a minute. You spent a lot of time talking about what are you really excited about Red Hat in the next 1, 2, 3 years, right? I want to ask you, did COVID broadly push out any of the integration or any of the synergies you had expected when the deal was initially done? And as the world opens up, did those things have to come back and get more material in manner for you?

I think we've made great progress on all the synergy that we envisioned to start with. So short answer to that is no. I think if anything else, it gave us a lot of time to really focus on getting that right out of the gate. But I would say we're just getting started here. So kind of go back to the examples I talked about. When we sell customer care, that customer is using AI to automate how they serve customers. They don't even know that they're using Red Hat technology, but it's there under the covers. So we're planting seeds all over the world for what can become huge expansions for what we're doing with Red Hat. So it's given us a lot of time to focus on the product, talked about the go-to-market, which we're still in process of doing. I'd just say, look, overall, we're really excited about the synergy with Red Hat, but there's also still a lot of work to do that we have to keep focused on.

Understood. And then Rob, as we think about -- as you think about, not we, as you think about the next 5 years, what are you the most excited about what IBM is working on? And maybe in that, you could weave into how are you working with IBM Research to bring these solutions to market?

So there's a long list of things that come to mind. Maybe I'll try to keep it short. One is obviously quantum. Time will still tell how -- exactly how that market plays out. We certainly have a technology advantage right now. So that's very interesting. Two is, I'm actually really excited by AIOps. I know that may not be exciting on face value, but if you think about it, using AI to solve IT problems, I think you'd agree that IBM has brand permission to do that. I know we have the technology to do it. It's a $34 billion market that's growing double digits. I think that's an enormous opportunity for us. And then as I think broadly around AI, I talked about the top 5 use cases, but there's other things like trusted AI. We won some deals recently, I can't talk about them yet, but it's things focused on AI bias, AI governance, AI explainability, how do you use AI in hiring but do that in a responsible way. These are really interesting problems. And we have great technology. We introduced AI Fact Sheets, which is, I like to think of it as the nutrition label for your AI. How do you know what's good? How do you know what's bad? What do you have to fix? And so there's a lot of different areas going on between my team and software and research, but those are a few to name them.

Perfect. And we're up on our time. We have like 90 seconds left here, but I'm going to pause here and maybe turn this back to you, see if there's any closing comments you had, anything we did not touch on that you want to address or call out. But before I do that, I actually do want to thank you for your time. This has been extremely informative for me, and I'm sure Irvin, to spend some time listening to you talk and actually learning about IBM software all the more. So thank you for that.

Look, it's been great to spend the time with you. I would just emphasize, one of the investments we made at the start of this year as part of go-to-market is in what we call a customer success team. And this is a team that is technical that engages after the sale. And something we'd kind of experimented with before, but now we've decided it has to be a critical part of our go-to-market going forward. And I give that example because I think it kind of rounds out everything we've talked about, which is about how do you get customer -- new customers? How do you get customers upgraded and modernized? And ultimately, how do you get them consuming software and really loving the experience? And so we've put our money where our mouth is in terms of the go-to-market on that aspect, too. And I think it's a key part of our strategy. But like I said, all this is early innings. We've had good success with Cloud Paks, but we're just at the beginning. We've had good success with Red Hat, but we're just at the beginning. So we will keep going here, but we're really excited about the future.

Perfect. With that, let's wrap this up, and thank you very much for your time, Rob. Really appreciate it.

Thank you.

Thank you.