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

Hi. Good afternoon, everyone. Thank you all for joining us at the BofA Tech Conference. Again, welcome to our afternoon sessions. We're delighted to welcome IBM to this session. We have from IBM, Paul Cormier, Red Hat President and CEO. Super timely to be talking about Red Hat in the overall context of IBM. So we're delighted. Paul, thank you so much for joining us today.

My pleasure. Thank you, Wamsi.

So Paul, you spent many years as part of the Red Hat team and building up the business and the technology to where it is today. Can you share a bit about your role and background to start off?

Sure. So as you said, I'm currently President and CEO. I've been at Red Hat for about 20 years, just over 20 years. I've been the CEO -- President and CEO for about just over a year. Prior to that, I was the President of Products and Technology, which meant I was responsible for all of R&D and the CTO's office, product support, product management, marketing, everything that goes with the products. I think I was employee 120 or so when I came into the company 20 years ago. I was -- really, the one when I came in was really the sort of reboot we did with Red Hat, where we moved from a consumer-based focus to an enterprise-based focus, and that's where we started RHEL. It really was a reboot of the company. And at the time, we saw a huge opportunity where Linux was really having the ability to move the market to more of a commodity play. I mean it really started as a commodity play against the UNIX and risk stacks out there where UNIX was so powerful out there. But what's happened over the last 10 or 15 years or so is that Linux has become so popular, open source development so popular that everything you see now is built in and around Linux. And so that's sort of the way we've been riding in here over the last number of years.

Now that's great. So Paul, and I was sort of in a call with Arvind maybe a month or so ago, and Arvind spoke a lot about hybrid cloud. I was hoping maybe you can talk about why hybrid cloud, why now? How do we know that this is the world that is going to play out versus some other way of people structuring their infrastructure?

Yes. Hybrid, I really characterize it really now is hybrid multi-cloud. It is really the way we're going right now. It's really the only practical way. One of the things that we -- many people may not know, we started down this hybrid path 8-plus years ago. I think I would mention it really, Wamsi. Even OpenShift, OpenShift has been started in 2011, 10 years ago. And we sort of had an advantage because the whole cloud world is built in and around Linux, as I said. I mean the cloud just wouldn't be here had it not been around Linux and open source development. So we've been the leaders there for 20-plus years, and we were working with our customers as cloud first hit the scene maybe 10 or 12 or 13 years ago. As cloud first hit the scene over that time period, we were working with our customers as they started to look at what applications they wanted to move to the cloud. We're working with them. We're helping them. And I think together, we sort of along the way with that experience realized that the only practical way was hybrid, because you just don't move an application to the cloud overnight. You really have to take stock of things and look at what your architecture is, what are the best applications to move. Some may not be great candidates to move due to security limitations, data limitations, compute limitations, whatever. And so as people start to look at that, we were working alongside of them, that's where we really, really determined it was going to -- the only practical way was a hybrid way. I think one of the things that maybe we didn't know 8 years ago, we know now from that experience as well is, it's also going to be a multi-cloud world. Because as more than one cloud has become viable out there, now we see our customers saying, "Look, I don't want to," for many reasons. Sometimes it's -- I don't want to be locked into one cloud. Other times, one cloud may have a better service in AI or data or something like that than in other cloud. And that one cloud may be in a geography that they need, another cloud may not have. So it's really going to be a multi-cloud architecture out there. And just looking at it, the way the clouds are built, the way the clouds are built, they really are built as a vertical stack. And even though the -- many of them are based on similar technologies or even the same technology, in some cases, they're all different. And so customers really couldn't afford to have those 5 or 6 or whatever number of silos out there. They wanted a common development environment, a common operations environment, a common security environment. And so that's why we're so convinced -- we're also convinced that hybrid is here to stay. Cloud is becoming part of the CIO's infrastructure and not necessarily the entire infrastructure.

Yes. That makes a lot of sense, and we're seeing some evidence of that as well in our CIO surveys. So maybe, Paul, can you talk a little bit about how Red Hat has evolved under IBM? Obviously, big change from an external standpoint. But internally, maybe you can shed some color on how things might have changed from a culture perspective, from a go-to-market perspective? And any surprises that you had when you joined the company?

Sure. Well, the goal in the beginning was to not have those changes. That was the goal from our side, but it was also the goal from Arvind's side as well. I mean Red Hat remains Red Hat, where we're much the same. We've maintained our culture. We continue to work on that. We continue to work at the technology road map that our customers need. We drive that road map, not IBM. But it's good for Red Hat. It's good for IBM. I mean for simple reason, if you're going to be a hybrid cloud leader, you need to be able, by definition, you need to be -- have strong partnerships across lots of other players in the ecosystem, most including all the cloud providers. And so that partnership with them remains strong has to be based on neutrality. We can't do something for IBM that we wouldn't do for one of the other cloud providers or one of the other GSI partners or et cetera. So that was really the strategy from both the IBM and the Red Hat side going forward. And so we've really worked on that. And so I can honestly say it really hasn't changed all that much. So what IBM brings to the table for us is scale. And when we started in the commercial Linux space with RHEL, it was -- there were just 3 players. The other 2 are even smaller than us. So we took great market share there. As times gone on, really, Linux and everything built around Linux and open source development has become totally mainstream. So we just couldn't keep up, was growing fast enough. So IBM gives us that scale that we really need to reach parts of the market and the customers in the market that we might not have been able to get to in time on our own.

Now that's maybe a good segue to think about just Arvind's comments on Red Hat and the growth trajectory there in sort of the mid to high teens. What gives you confidence in that? And sort of what are the synergies maybe that have been realized or are yet to come? What innings are we in?

I mean I still think we're in the early innings. I still think we're in the very early innings of both hybrid cloud and then our joining with IBM. And so I mean, look, we're growing it, as Arvind said, mid-teen, mid- to high teens. We'll continue to do that. This year was the first year. I mean starting in January, it was really the first year where we had the opportunity to really work and line our field teams up to work more closely together when we came in initially sort of in the middle of our fiscal year, et cetera. So we really worked coming into the new year to line our go-to-market. Teams up together. Even IBM sales has quota on Red Hat products as we speak in this current year. So we really look at that as great runway ahead of us to really get the scale that this technology we're leading in is really poised to roll out here. So I think that's really -- I think that's why really we have the confidence here. That was the strategy going in, was that IBM was going to be very opinionated on our technology, but not the other way around. We treat IBM as a partner as we have other partners as well.

So Paul, when you think about the history of partnerships, and you just alluded to the fact that you got to be pretty neutral with all your partners over here, how do you think about the partnerships with hyperscalers? In particular, how important is that to Red Hat? And maybe can you give us some use cases or customer use cases that sort of can help investors think about the relevance and the trajectory?

Well, the partnership with hyperscalers is critical and absolutely essential. I mean -- and we had great partnerships with the major hyperscalers going in and we still do. I mean running -- and that's actually one of our strengths as a hybrid player that I think we have over other players out there as well. Because I mean, as I said, each of the clouds really think of the clouds as really a vertically aligned stack. And it's not like a mainframe. And you think about that, they each have their own hardware layer, their own operating system layer, their own middleware layer, services layer, et cetera. And build an application to that stack, it's going to run in that stack and not necessarily just going to go run somewhere else. So us being able to neutralize that, giving that common environment for developers, operations, people and security people is one of the big parts of our value add. But in order to do that, we do that with OpenShift. In order to do that, you have to have deep partnerships with the cloud providers So you can lay that platform down on their infrastructure. We have deep engineering relationships with Microsoft, with IBM Cloud, with Amazon, with many of the regional cloud providers. We have 127 regional cloud providers in our ecosystem that we work with. In other parts of the world, there's small cloud providers out there. But just talking about the majors, deep relationships with them. And it's critical that that's the case. So our platform runs well on their clouds, even business relationships with them. For example, we have a managed service with OpenShift on Microsoft called ARO. It's looked at from -- they sell it as well. It's looked at as a Microsoft product. We're I think -- we just announced at the summit where in the Amazon AWS, we're in their console as listed as a service or an Amazon service. I think we're the only non-Amazon service in the console that our customer can come in and just select OpenShift. We're in the console of OpenShift of IBM Cloud. So really important for us to retain that with the hyperscalers, and that's just a reason why neutrality is just so important here. And this is what our customers want.

So maybe that's a good segue, Paul, to talk about sort of OpenShift as a Kubernetes-based hybrid cloud platform. When you think about that, why is that the best solution versus what some of these hyperscalers are providing or going to do with your version of Kubernetes?

Yes, there's a couple of things. Let's take the hyperscalers. Let's take the DIYs first, and then we'll go to hyperscalers. Kubernetes is just a piece of the platform. I mean it's an important piece but it's a piece of the platform. It's the orchestration piece of the platform. It's actually becoming the orchestration layer, the control layer. Computes attached to Kubernetes, storages attached to Kubernetes, networking attached to Kubernetes. But this is -- in the open source world, this is one of the biggest confusion factors. The difference between an open source project and a product. And I can best explain it in Linux terms, and it really is the same exact thing here because Linux has been around longer. I mean you see there's basically 3 commercial providers of Linux: there's RHEL, there's SUSE and there's Ubuntu. We all work upstream on the same set of projects like the kernel, for example. I mean we all work on that, that's our development project, our development environment out there. But as we bring that from development, we all make choices of which file systems to package, which other systems we're going to package around us, what's our developer environment going to look like, what's the life cycle going to look like? When do bugs get fixed, life cycle, all of that kind of thing? We all make that separately, right? Unless we all did the same things at the same time when we came from project to product, they get out of sync from each other. It's the same thing with Kubernetes in that it's an upstream project. Unfortunately, we confuse that now. We've sort of melted in projects and products. It's an upstream project, but it has the same characteristics that I talked about as Linux. And so they're all different. Now what's also really key here, too, is that containers are Linux. It's a Linux OS just carved up differently. That is very much attached to the Kubernetes that it's being orchestrated by. So every one of the Kubernetes vendors out there has to build their own Linux as well. So they're all different. So with us, it's common across everything in the hybrid world, the Linux piece. It's common -- it's RHEL, whether it's bare metal. It's RHEL if it's an on-premise virtual machine. It's RHEL if it's an on-premise container in a private cloud. It's RHEL if it's on any of the public -- 4 public clouds or even 127 other small cloud providers we work with. So that means for application consistency, it's the same. And so one of the challenges of -- as now -- even the hyperscalers are seeing hybrid as the way to go. They're starting to try to come on-premise. But we've got a 20-year head start on that. The -- for them to go across all the different types of hardware out there, et cetera, that's running on-premise, it's a challenge. For them to go land their platform, their Kubernetes and/or their Linux platform on one of their -- on a competitor as a hyperscaler, that's going to be difficult for them as well. So I think that's one of the advantages that we have or the hyperscalers because we're looking at it from a hybrid perspective, not from just a vertical perspective. On the DIYers, it's really easy. With Linux, it was sort of possible, but even it was difficult then because it was a contained box product. But as a DIYer, now you're becoming a Linux vendor, you're becoming the Kubernetes vendor, you're becoming a storage vendor, you're becoming -- which means you have to develop it. You have to develop it. You have to support it, et cetera. So as the platforms have gotten much more complex for a DIYer, it's much more complex and almost impossible for them to be able to build the engineering skills for it. I mean sure. Amazon can do it, Google can do it, Facebook can do it. But as I can count on one hand the number of companies that really have the resources and the expertise to do it.

Yes. No, that's a great point. I think when you go back and look at some of the on-prem solutions from the hyperscalers, it doesn't really take away your issues of vendor lock-in and that sort of still remains. On the DIY side, I guess, a good analogy could be what's happened with OpenStack, for example, where I think that the number of things that you've got to keep track of in terms of just the life cycle of development, just got so out of hand and so challenging that, that's what you're spending all your time on rather than actually supporting the infrastructure that you originally wanted.

Yes. It really is the difference between a project and a product, and it's just gotten more complex over the years.

Yes. Yes, absolutely. Maybe, Paul, you could talk a little bit about the competitive environment, particularly if you think about VMware as a competitor, like how do you think about a market evolution, you noted before about sort of the success in Linux for Red Hat. But in a lot of these markets, there's a winner-take-all type of phenomena. Do you think that would be true in hybrid cloud? And can you just talk more broadly about the competitive landscape?

Yes. I mean I think there's going to be -- hybrid is going to be driven by a small number of players. It will be more than one, but I think it's driven by a very small number of players. I mean if I look at the competitive landscape, I mean, the hyperscalers, to some extent, great partners. But in some cases, their competitors, right? But I think we really try to focus on we have a different value proposition. And I think that's how we -- they see it as well. So I think it works pretty well. Our value proposition is hybrid. We can give you the same across all. In terms of VMware, I mean, it's an interesting one. They've got a great installed base. I mean they grew up on virtual machines. I mean the idea of virtual machines initially was to get better use out of your hardware. But what VMware really turned into is a management company based -- coming off the lock hold they had on virtual machines that I provided have been proprietary from the beginning. But I think if you look at the world and really how it works here, there's really 2 parts of an OS. There's the part that works with and integrates with the hardware, and there's a part that integrates with the application. The hardware side is the kernel and the hypervisor, et cetera, and that's where VMware focused. They never really focused on the Linux side and the part that works with the application, integrates into the application. Moving to a cloud and a hybrid world, it's all about the application. Customers now are looking at -- in many cases, their business units are driving which technology to use because there are applications coming out of the business units by what's driving the business. And so I think one of VMware's challenges now was getting into the Linux space. I mean overnight, they have to become a Linux provider because containers are Linux. It's just carved up in a different way. And you just don't become a Linux provider by downloading the bits and you're now a Linux provider. I mean you really -- if you're going to really affect where these upstream projects are going because that's your development environment, you have to have really -- that's got to be in your DNA. You have to be embedded in these projects and really make that a key part of your environment. And so I think that's one of the challenges of VMware as becoming a Linux -- a commercial Linux provider overnight. I mean I always say we have a 20-year head start on that. And us working in an open upstream way is just part of the DNA. We wouldn't know how to do it any other way. And so that's key. And so for a competitive -- I mean, VMware is a really strong company, especially on their installed base. But I think in that case that I just outlined, I think that's one of the advantages that I think that we have in this new world where it's just all driven in and around Linux.

Yes. Well, that's an interesting point. Paul, when you think about security, I think you mentioned it briefly earlier, how are you thinking about security in the broader context of hybrid cloud? And how -- what is Red Hat specifically doing in security that might be different from what others are doing?

Well, we've always had strong security within the products. And I mean, SELinux, which is a part of Linux -- SELinux, which is part of Linux, is really the strongest security mechanism in Linux. We actually developed that, I don't know, 15 or 16 years ago and actually worked with the NSA on that as part of Linux. But now in the hybrid world, you really have to look at security across the platforms and where they sit. Because if you think about it, what really hybrid has been driven by is, as CIOs move part of their infrastructure or their applications out to clouds, they don't move the responsibility of that application running, being the right application staying up. They still have that responsibility. And so whether they have -- in many cases, our applications running on bare metal on virtual machines in their own data centers across multiple clouds. So that's their new data center now even running out there. So we've concentrated on especially container security that spans that OpenShift platform no matter where it's running. We did an acquisition, StackRox acquisition, it was focused on container security. And the thing we really liked about that acquisition is it was native to Kubernetes and container native. So we're really looking at security from the Kubernetes and native container perspective as opposed to other companies out there where they were really looking at different and older, more legacy security technologies and trying to melt them into containers. StackRox kind of took a fresh start and looked at it from that perspective. And so we think security across from a CIO's perspective, across their hybrid infrastructure is really key, and that's our focus and as evidenced with the StackRox's acquisition that we did.

So Paul, we briefly spoke about RHEL. Obviously, you alluded to some of the advantages of understanding Linux at its very core as sort of a differentiator. But why is RHEL still relevant in a hybrid cloud world?

As I said, containers are Linux, and that's the big reason why. And so I mean, even our container operating system, which we took some things when we acquired core OS around that, mainly around over-the-air updates and instrumentation, et cetera. But one of the things that we replaced in core OS was the RHEL kernel, the RHEL container piece as well because it's the same Linux in there. And as I said earlier, with the 3 Linux provided, SUSE, Red Hat and Ubuntu , each of the Linux has their own flavor. Ours is RHEL inside. So from a developer perspective, from an operations perspective, securities perspective, when we have a bug, we have to fix, whether it's operationally or security, we fix it on bare metal RHEL. It's the same fix on the virtual machines. It's the same fix in containers wherever they run. And so that's why Linux is so important to us because all the technologies around cloud, whether it's hybrid or just native cloud, are Linux technologies. So well underneath is that proven enterprise-class Linux that we've proved over the last 19-plus years. And that's why it's so important. It really is an innovation and a development environment now that's built in and around Linux.

That makes a lot of sense. Can you maybe just talk about the relevance and importance of open source? I mean clearly, you guys have done a phenomenal job looking backwards with the way that supported the open source community and then sort of really contributed very strongly to it as well. How does -- how do you think about that sort of in the future? And I think IBM is a big open source proponent as well. So maybe you could talk about that in the context of IBM.

Yes. I mean IBM has been a big open source contributor even when we started in RHEL. I mean they were one of -- they were our first partner with RHEL, with Linux even pre-RHEL. But I mean open source really, the problems we're solving today and driven by Linux and open source, including cloud, I'm not sure that they could have been developed by one company. They're just too big, the problems are too big to just -- for just one company. And one of the key premises of open source development is the best technology wins. And I think that's why, as open source started to gain steam, I think that's why the innovation you're seeing today in the infrastructure specialty space is almost exclusively driven by open source is because it's not one company's agenda. It's -- and so you don't hold things back because it might not be good for that particular company from their either installed base or whatever. It's the best idea wins. So open source is going with those best ideas. So just bringing all those ideas to the table, but more importantly, letting the best one come out because you can't bring a company agenda into that is why innovation is really so strong in the space right now. So I think that's why, I mean, open source, if there's any question about it, especially in the space we're in here, it's here to stay. And it's going to continue to not just be the development environment of the future, it's the innovation engine of the future here. And IBM from the beginning, one of the things when we first came into IBM, they had actually developed a multi-cluster container management product that was beyond what we had been doing. And we moved that whole project, people and all over to Red Hat, and that's now a Red Hat product. And so they've -- as you said, have a long history, they have a long history here as well. So it really is a difference in how you're thinking. It's really going to be in your DNA to make it work. You just can't -- you can't have a proprietary mindset one day and move that to the OpenShift -- open source mindset, sorry.

Yes. Yes. That makes a lot of sense. We're almost out of time over here. So Paul, I really appreciate you taking all this time. Maybe to wrap up, given that you just had such a phenomenal legacy year up until now on just looking at the technology landscape and seeing the evolution of it and really being able to capitalize on that from both a product and market perspective. Just curious if you had any predictions or what are you most excited about in the technology landscape in the next few years.

One of the things that we're -- that's really hot right now is moving out to the edge. And by that, I mean, it pretty much is vertically focused. So for example, in the telco space, the edge might be on the cell tower. In the manufacturing space, it might be on the factory floor. In the retail space, it's all the way out to the branch stores. But the cool part about the edge right now is CIOs now that they start to build cloud into their infrastructure, into the 4 walls of their data center are now going away. That moving up to that edge now is really under the hybrid umbrella. So I think that also tells us that hybrid is here to stay. What's going to drive the edge is Linux, is containers, there's orchestration of those containers. And it really is an extension of the cloud and the data center. So that's something that's moving very, very rapidly. It's being driven very rapidly in this telco space right now as well, but it will go out to the other -- it is going out to the other verticals as well. So that's something that we're really excited about.

That's great. Well, unfortunately, Paul, we're out of time here. So really appreciate you taking the time to speak with all of us today. Thank you to all investors who are able to join. And if anyone has any follow-ups, please let us know. Paul, once again, thank you so much.

Thank you. Thank you, Wamsi. My pleasure.

That's it for me. Thank you.