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

Great. Thank you, everyone, and good afternoon or good evening, if you're in Europe, and thanks for joining the day 2 of the UBS Global TMT conference. My name is David Vogt, I'm the U.S. enterprise hardware and networking analyst here at UBS, and we're pleased to have with us today Rob Thomas, SVP of Global Markets, where he's responsible for IBM's global sales and client satisfaction worldwide. Prior to this role, Rob was SVP of IBM and their cloud and data platform, with products like Watson and Cloud Paks under his leadership. Interestingly, Rob was with us back in 2019, pre-COVID, so hopefully, this is a good sign that we can get back to in person meetings. So we're excited to have him to dig into sort of an interesting time in IBM, following his stint off of Kyndryl. So Rob, thank you again for joining today, and welcome.

David, thank you. Great to see you again, and appreciate the time here.

Sure. Great. So maybe just to level set for investors, there has been some significant leadership changes at IBM over the last 6 months, you are in a new role. I think it would be helpful for our investors before we get into this sort of the need of the discussion to kind of help them understand what your role entails, what's under your purview today and sort of the experience that you've taken as an IBMer to your new role, and what that means kind of going forward, particularly [indiscernible].

Sure thing. So as you alluded to, back in June, I was running IBM Software, and I did that for quite a bit. And then in July, I took the role of Senior VP for Global Markets, which basically means leading IBM's go-to-market. So I've got all of our sales resource around the world. That includes all the countries that we operate in. So it includes our business-partner relationships around the world, and a number of other items. So really excited to be on the front end now of what we are doing, to remake IBM, and so you can [ always be at ] your best talking to clients, so that's the great opportunity I have in this role.

Great. That's a great way to start. So maybe let's just start about digital transformation or enterprise transformations, and we hear a lot of that in every conversation that we have with corporates, with investors, seems to be a pervasive, outside of supply chain, probably the most pervasive conversation that we have. When you think about digital transformation, as it pertains to IBM's sort of strategy going forward, when you talk to customers, and you talk to your clients, what are they looking for, and what does IBM bring to the table? How do you help that sort of achieve these sort of digital transformation goals and sort of what sort of assets do you bring to bear, to that conversation?

So if you step back, the minute I get into a discussion with a client on -- in this area, it kind of comes down to 3 areas that I hear over and over again. One is, they do want to help digitizing their business processes. And I've seen estimates of, say, 50%, 60%, 70% of business processes will move from manual to digital in the next 3 to 5 years. Secondly is, they're trying to understand how do they unlock the value of their data. Those 2 things are related, because you can't really digitize a process, if you don't have an understanding of your data, and how you would do that. And then third, which is also related is, clients just want speed and flexibility out of their technology infrastructure. So those are kind of the 3 topics we always end up discussing. So when it comes to digitizing business processes, the way that we repositioned IBM around technology and consulting, that gives a client everything they need to do this, from the technical capabilities to the transformation skills we bring to consulting. In terms of unlocking the value of data, think of data as 2 pieces; one is the core data. Second is, what do you do with it, which is the AI capabilities on top. I saw an estimate, I think it was from McKinsey that said, AI will unlock $16 trillion of productivity in the next decade, and we certainly see that starting to occur. I can share an example on that. And look, speed and flexibility is all about hybrid cloud. How do you move to cloud native, but do that anywhere that you want? And I think 2 good examples, just to kind of bring these 3 points to a head. We recently announced a partnership with DISH network. And here's what's interesting, the Wall Street Journal wrote about it, and they got it right. Many people said, 'hey, DISH is building a network on AWS.' And it's absolutely true that AWS is the infrastructure. But if you look at the value of building a 5G network, it's much more than the infrastructure. That's where we come in. We're actually providing technology and consulting skills to help them do things like network slicing, network automation, basically, all the functions that you have to have to run a proper 5G network on a cloud infrastructure. So I think it's a good example of how we are bringing value to any cloud environment in that case. I think another good example is CBS, who has, I think, done a tremendous job in leveraging automation to deal with problems that nobody could expect. So we're working with them to automate their customer service around the COVID vaccine rollout. And literally, in a period of 60 days, they were able to get live, answering questions. You can imagine the number of inquiries that you get on a daily basis, for a chain like CBS. So those are kind of 2 examples that -- in both cases, it is digitizing business processes. It is about a flexible technology stack, and both of those, all the values and the data and how you bring that to life.

That's a great place to start and very helpful. So when we think about digitization, unlocking the value of the data and the flexibility, when you go into a big [ offer ], when you bring to bear the IBM assets, what's the key pitch? What's the differentiation? Is it leading with the hybrid cloud infrastructure perspective and functionality? Or is it the -- you're basically bringing to bear all of IBM's consulting. You mentioned consulting, infrastructure, as the complete set of solutions that really kind of sets you apart when you talk to customers, I just want to get a better understanding of, what are the key kind of deciding factors that bring a business to you, versus maybe to a competitor at this point?

Look, if you're a client and you believe you're going to take all of your technology and move it to a single public cloud, then let's acknowledge, you probably don't need hybrid cloud because you're going to put everything in a single place. I think 5 years ago, that was the view of many, and the insights that we had going back -- almost 4 years now was, we thought clients were going to want a balance of some things in public cloud, some things in multiple public clouds retain some on private cloud. That is the hybrid opportunity. And I will say, it has been encouraging to see a lot of others start to talk about this now. There was actually an article just this week, and I was reading from Erik Bernhardsson, where he was talking about how cloud is reshuffling and infrastructure is becoming a profit pool for cloud providers, but a lot of the value is, what do you do on top of that. So it's things like managing across multiple clouds, AI, security across multiple clouds. And the good news is, that's really been the strategy, the direction that we've been on. So specifically on your point on -- on your question on differentiation, I think there are 3 places. One is, we have invested a lot in R&D and acquisitions over the last 3 years, to position ourselves to have the best software and technology capabilities to run across hybrid cloud. Starts with Red Hat, open source, open standards, but then it's capabilities like data, security, automation. Second is around modernization of the mainframe. We have massive incumbency in many clients. We do all their transactional workloads or most of them in the mainframe. That is a big opportunity for us to say, now, how do we extend that to a private cloud, multi-cloud, hybrid cloud environment, so that incumbency is a big differentiator. And then thirdly is skills, which kind of brings us back to consulting. We've seen amazing momentum in the consulting business, which you could see in our results last quarter, which is clients are realizing they need to do the things we're talking about. They don't have all the skills to do it, and we've been able to create big partnerships in consulting, as well as do training on things like Red Hat, where we've now done in the last quarter, a couple of hundred engagements on 1 quarter alone around Red Hat. So we have real momentum in providing skills that help clients realize these outcomes.

Maybe just following up on that plank. So when you think about consulting and skillset development as a differentiator. The market, historically, from an IT services perspective, has been somewhat fragmented. And it seems like the strong are getting stronger, as evidenced by your cloud growth that we've seen over the last couple of quarters within GBS or new consulting -- sorry, [indiscernible] is the right terminology. How do you think about the marketplace for talent, it's tight out there, competitiveness, right? A large number of players seems to be getting smaller. There seems to be significant M&A in the space. And, how do you think that plays out? Does it become like a more traditional technology landscape, where it's dominated by 5 to 10 vendors and IBM is one of the leaders in that particular sort of industry, for lack of a better phrase, or does it stay relatively fragmented and talent has more opportunity to go different places, given how rare, how valuable some of these skillsets might be?

Look, I think we have a great value proposition in IBM for employees, which is why we continue to attract the voice. It's things like, you can work in consulting or technology, or you can start in one place and move to the other. Very few companies offer that as an alternative. It's global scale. As I talk to a lot of people in the market, they want to work around the world in different locations, have different career opportunities. I think we've really seen that play out in the last year, with the hiring that we've been able to do. People are kind of curious about what is IBM doing. They've seen new innovations that we've launched in areas like AI, security that I mentioned. We've got a truly good value proposition to attract employees. So I feel like we've done a really good job on that.

Right. That leads me to my next question. That's a good segue to what is IBM doing. You touched on it briefly, IBM's need a very large bet on hybrid cloud. As part of that hybrid cloud bet, the company has sort of repositioned the assets by spinning off Kyndryl. So maybe we could touch on today in your seat versus 12, 18 months ago, when you think about the opportunity set with consulting, with Red Hat, with infrastructure as it's kind of configured, how would you compare and maybe contrast IBM today to an IBM of the past? Effectively, let's call it, not to be -- this is sort of the old IBM pre-Arvind and kind of how you think about attracting talent, you said, it's a great place to bring talent in. What has been the perception in the marketplace today? Obviously, it's a relatively newer story from a Kyndryl perspective, but still kind of getting out there in the marketplace from a communication perspective?

Look, I think there's 3 keys that are not only what's different about IBM, but they're critical to the growth plans that we've shared externally. One is, it's all about innovation, and I think we know that. In the technology world, if you're not constantly innovating and delivering new product, then you fall behind. And one of the first decisions Arvind made, was putting more investments into things like R&D. So look at the announcements we made last year, things like Watson Orchestrate, which is new capabilities around automating business processes. We've now added ESG capabilities into our Maximo and Sterling portfolio. We've built an entire business around AI ops. We've released a new product around data fabric. The innovation engine in IBM, in terms of new products is working in a way that it hasn't worked in a long time. So I think that's super encouraging. Next is the ecosystem, we made a conscious decision to say, we are going to be ecosystem first and approach partnerships, probably in a different way than we have in a long time. It kind of started with the decision to go out and aggressively partner with Microsoft on Azure and AWS, and then it extends into new ecosystem partners. We announced the partnership with Palantir. We've now built up partnerships with companies like MongoDB, Cloudera, Box. It's a new IBM, in terms of how we partner and I can see it in terms of how partners are reacting and engaging with us. Our value prop for partners is very simple. We will help you distribute your product and grow your business. Who would not want that? But there is a catch, which is, we're working with partners that are building on OpenShift, Red Hat OpenShift, or building on our Cloud Paks, because then it has a flywheel effect, where as we drive that partner in the market, we're also driving IBM technology. So second is the ecosystem. First, innovation, second ecosystem. I'd say third is go to market, which is obviously my focus now, which is really about how do we create a more technical salesforce, growing the capacity of our technical skills. We've created new teams like customer success and client engineering, which are roll up your sleeves, technical skills that are helping clients be successful with our products. We've changed the incentive program. We put an emphasis around driving revenue growth, but also flexibility in terms of business model, subscription, SaaS, as well as perpetual investment, a big change to incentives. And then lastly, kind of in go-to-market, it's just around what do we measure? Jim talked in the quarterly earnings last time about NRR, and how that's a new focus and how we're measuring the business, a look at things like productivity, looking at motions like land and expand, how do we start with small deals and then grow those over time. So if you think about those 3 things, innovation, ecosystem, go-to-market, I think it's a very different IBM than it was even a year ago.

That's helpful. And you mentioned, so as your third point, go to market, new incentive systems that was pretty clearly laid out last year. So when you think about revenue growth and driving revenue growth, Arvind is on record pretty consistently talking about mid-single-digit revenue growth. So without getting into the specifics of the numbers on how we get there, you touched on innovation ecosystem. Are those the key drivers of how we're thinking about this new IBM can grow sustainably organically in that sort of range, where maybe historically, it's been a little bit tougher to maintain that level of revenue growth? Are those kind of big drivers of that sort of -- that underpin that mid-single-digit revenue growth that IBM has focused on and putting all his efforts into it over the next couple of years?

Yes. I'll just add, though, think about kind of the overall stack of how the economics would play out, meaning if a client decides to spend $1 on hybrid cloud, so they're buying into this notion that they're going to run in multiple public and have a private cloud. That creates an opportunity of $6 to $8 for us in terms of services, of $3 to $5 in terms of software $1 to $2 in terms of infrastructure. So you can pretty quickly see how a multiplier of a client interest of $1, just in hybrid cloud, creates an opportunity of $13 to $15 for IBM as we've aligned the strategy. So I think kind of those overall stack economics are an important way to think about it.

Got it. And I know maybe it's early days, but do you have any sort of, maybe test case or any sort of examples that you might -- you are not bringing obviously the full $13 or $15 today, but any sort of anecdotal conversations where someone leads with Red Hat, Hybrid, and now there's an engagement that you might not have had in the past on the consulting side from a GBS perspective? I mean -- can we have more comments?

Yes. I mean, let's look at what we announced with Schlumberger, oil and gas company that's moving more aggressively into alternative energy, and they were looking for a way to run products across multiple clouds. So OpenShift was a great answer for that because it gave them all the openness of technology and the flexibility to build to run where they want. But then you come to, all right, so how are they actually going to implement with clients, that created a big opportunity for us with consulting. So I think that's one example. Ernst & Young is another one that we announced, where we built a financial services center of excellence that then expanded into a due diligence platform, that leverages Watson AI. So that one kind of started with services and then moved into Watson AI software capabilities. So I think we see this playing out in a lot of different areas. I think here's the one thing I think maybe some people haven't internalized yet about the strategy we're on with software and Cloud Paks. So today, if a client is using DB2, it's a great database, they can use that for everything they want. But if they then decide to move to Cloud Pak for data, they get access to those DB2 capabilities as micro services on OpenShift, but they also get a whole different set of capabilities that were not in the core DB2 product, things like data science with Watson Studio. They get access to our data virtualization, so they can now correlate data sets across different repositories. So what was before just a DB2 client that was just going to renew DB2, now they've got all this additional capability. This is all sold on a capacity basis. So when I was talking about creating a customer success organization, if we can help them use DB2 in micro services and then start to use data science, you can see how that starts to create a flywheel effect around their consumption and adoption of our products. So I think that's another dimension that people are starting to notice, as certainly as we see clients using Cloud Paks.

So I mean, that obviously would suggest that it creates a stickier, more revenue retention model. What kind of revenue uplift could you see from that, obviously, as customers take more and more incremental services like what's -- I know it's really difficult to quantify, and they're one-off examples. But if a customer is a DB2 customer and they're paying X, what's the likelihood that they could move to a slightly more integrated, deeper model with you? Is it early days? Is it 1 out of every 10 customers or clients that you talk to? Just trying to get a sense of how this plays out over the long term, not necessarily over the next couple of quarters, but thinking 3, 5, 10 years out. What kind of attach points do you think you could get to, without getting into specific numbers for incremental services that drive stickier revenue, that ultimately should be positive for the business and ultimately, the multiple for the stock?

The first step, remember, is always -- so they're using a point product. The first step is actually to get them on the microservice version of that product, because back to my point at the top, that gives them a lot more flexibility, modularity around how they deploy and use the product. Once they get there, now they're running on OpenShift. So now they can use operators inside of OpenShift, they can start to use Ansible. So we've completely changed how they're using the product today, because it's gone from a standalone product, typically on-premise, to now they have a cloud-native product, that completely changes the used cases, that it could be used for. And then you get into -- so how will people adopt it. I'd say signs have been encouraging so far. As I look at the customer success team we've built, we can start to see how we can chart out repeatable patterns for client starts here. Now they move here, now they move here. One big area we've invested in is AI ops. So think of it as a Tivoli client today, that's now moving to modern AI-ops capabilities on OpenShift. You can certainly see how there starts to be a multiplier effect over time.

Do you -- just to be clear, do you -- and the go to market, do you still sell standalone offering, or the focus has been primarily to move away from sort of standalone sales agreement for, let's say, DB2 or Tivoli and the push right now is, to get them on OpenShift effectively, is kind of a selling notion?

We definitely do both. I mean, I think Jim talked about on our last call, how strong our renewal rates have been as of late. We -- clients love the products that they get from IBM. So we want to encourage them to keep renewing that. They grow capacity. If they have more data coming in, they need more DB2 capacity, don't want to discourage that at all. But when they make this decision, that now they want to start to move towards cloud native, we think we have a really simple answer for how they get there. So it's not one or the other. I think -- and if you look at a lot of the companies that have filed S1s in the last year, people are kind of coming around to, I guess they call it our model about flexible approach. For a while, everything was about -- everything is subscription. You see all the companies following now, they offer different flavors of that. They offer subscription. They offer perpetual, they offer managed-as-a-service. That's the model we're in right now. I think providing choice here, is actually a differentiator for us. Depending on how the client wants to consume, for a given that's out there.

Right. It's interesting because you're right, for like 5 to 10 years, it has never been about consumption choice, it's about subscription being sort of forced and effectively pushed to the customer where, that's the right model. And it sounds like a little bit of a retrenchment where the customer is right, effectively where how they want to consume technology has changed, both on the software side, hardware side, whether it's as-a-service, on-prem, across the entire cabinet. And I think that puts you in a pretty unique situation, given your background and sort of your suite of products. So I think it's probably a little bit underappreciated right now.

I agree. Look, we do -- I think we've always been known for this, but we do the hard stuff. We do enterprise infrastructure. We're not doing social media apps. We're not doing consumer apps and when you tackle these hard problems, clients want to think about -- so how will I maintain a security posture over time? How will I do upgrades on this? It drives a whole different set of requirements. I think that's the kind of stuff that we're good at, but you need to deliver a business model that's modern and flexible, and I think that's one place we've made a lot of progress in the last year.

Great. And maybe just maybe taking that a step further, and I know Kyndryl doesn't fall under your purview, the prior Kyndryl, but when you think about what Kyndryl was doing within IBM, at least in your perspective -- maybe this is a tough question, but how do did not fit in going forward? I understand sort of the economics of this as a relatively lower profit pool, a slower growth or potentially negative growth business, it's not core to what Arvind wanted to focus on, and it doesn't necessarily fit into this flexible consumption model. But it did have incremental skillsets and implementation abilities that customers want. So maybe you can kind of share your thoughts on, maybe why it could necessarily fit in with kind of the new IBM, and how it's being positioned in the marketplace today?

The new IBM, and you've heard Arvind talk about this, is a platform centric strategy. The platform is OpenShift. The capabilities that run on top are our software, and then we've got differentiating infrastructure below that, and services around it. The actual management of the infrastructure, which was the core business that Kyndryl was in, it's important for clients, but is not core to the strategy that we need to deliver around technology and transformation. So it's really about focus. I think -- and I told my team this over and over, a focused IBM is a powerful IBM and you can start to see that in the momentum we're getting, as we focus more around these motions of technology and consulting and the management of it, in the long term, really is a completely different motion. And so the biggest value to us, is the benefit of focus. Now that said, Kyndryl is one of our biggest partner and client right now. So we still work closely with them. That will not change. But it has enabled us to focus how we spend our time day-to-day.

Got it. That makes sense. So maybe just turning to the core business, with what's left here in RemainCo, with the new IBM. You wore a bunch of different hats within IBM. Maybe can we just drill down some of the different segments? Arvind has talked about this, and Jim has talked about this. Maybe start with the less growthy part of the business, somewhat more cyclical infrastructure. When you think about how that fits into the portfolio over the next 3 to 5 years, it tends to have some cyclical waves in terms of new product introductions. Can you maybe help us understand how that fits into that new strategy that you just sort of laid out, in terms of focus on a core platform, while managing sort of that inherent peaks and values, I guess, for lack of a better phrase in that business, and how that plays into the longer-term dynamics from IBM?

When I talked about in our go to market, how we're building a more technical team. When we go talk to clients about their architecture, we talk about key technology decision points, things that they are using to drive how they make decisions in their business. There's different components to that. There's Z as one example. Because mainframe houses 80% of the transactions for many of our clients today. We just -- we're right towards the tail end of one of our most successful Z cycles in a long time, 3.5x installed capacity growth in the last decade. So this is one of these, I'd say, assets that continues to accrue value over time. Now many clients say to us, how do we continue to modernize what we're doing that? How do we connect this to hybrid cloud? That's an enormous consulting opportunity. So I would say Z is at the core of the infrastructure strategy. Then you move into things like storage. So any client that's focused on a data problem or digitizing a business process somewhere in that decision cycle, you have to go through, how am I going to store data, how am I going to make it flexible, how do I prevent ransomware, how do I recover if there is an issue, I think we have the best storage portfolio we've had in a long time right now, and you can see that in the results. That's another piece of infrastructure. And then third piece, I'd say is, what we're doing around our cloud for regulated industries, with a specific focus on financial services, which is, again, we kind of stepped back and said, what part of the market is unaddressed. We saw 2 things; one was hybrid cloud. Second was regulated industries have a lot of requirements on cloud workloads that the other industries do not. And we've been able to launch big partnerships, public partnerships with clients like Caixa and BNPP and Bank of America who've all seen the value of a public cloud answer, that conforms to what they do from a regulatory perspective. So those are the 3 big things that stick out to me in the infrastructure space, where we are seeing good growth.

Is that -- I mean, without getting into the specifics, because I know Jim talked about this at the investor briefing. But it certainly sounds like from your commentary that, that business is sort of a leading indicator for the rest of the business or maybe -- I don't want to say a loss leader, because it's incredibly profitable collectively, but it's not going to have the same growth dynamics longer-term that maybe consulting would have and/or the broadly defined software space. I mean, is that a fair characterization of how to think about infrastructure? It's key to the total solution, when you bring it to a customer, but it's not going to grow at the same rate, that the platform is going to grow at, going forward?

Yes. I think Jim has been clear on that, so I won't repeat that. What I would say that we do really well is resiliency. And as you think about those different aspects, clients that are buying services, like I talked about in terms of automating business processes, core data assets, they really want to know that this thing is going to work, and working means, if something goes wrong, can you recover it quickly. So having key infrastructure assets is part of being able to deliver resilient solutions. I think that's part of what we're known for, it's also why people come to us. So I think it can be a differentiator for us.

Got it. And then maybe just touching on software, sort of near and dear to your heart, I would imagine. Can you kind of help us understand outside of the Red Hat platform and OpenShift, how you thinking about -- you touched on it earlier, sort of the DB2 example of moving customers to sort of a different consumption model. But when you think about software holistically outside of Red Hat, how should we think about the portfolio, in terms of where the growth drivers are within the software stack that you offer, and is everything moving in a way that's going to be consumed in the stretchable model that you sort of articulated earlier? Or there are still a pockets that are just traditional term licenses and really don't lend it up to the sort of consumption model that you referenced?

I think it's important to think about segments and markets, where are the big markets, where is the growth happening? And when you -- so take hybrid cloud as kind of the base, which you mentioned with what we're doing with Red Hat. So if you think about what are the big pools of growth and market opportunity on top of that, to me, it really comes down to 3 areas. It comes down to data, automation and security, and that's where we've really been putting a lot of the investment in software over the last few years. In terms of data, we've launched Cloud Pak for data. This is, I think, to this day, still the only multi-cloud data product that also delivers data science, data governance, all the things that a client needs to run at scale and production. Then you've got things like Maximo and Sterling, which are managing different kinds of data, data about assets, data about supply chain. I think we have great assets in the data category. There's a recent win we had with Citi, where they talked about how they're using Watson Discovery, and OpenPages. So 2 different software assets of ours, on top of Cloud Pak for data, to drive really their whole regulatory AI infused controls is what they call it. So it's a good example of data as the base, but then value-added capabilities that we have on top of that. So that's data. On automation, there's really 2 pieces there. One, we've been in the market for BPM and RPA for a long time. Did an acquisition last year to accelerate some of that. I think that market will continue to grow at a healthy double digits, because every client is trying to automate business processes. So we feel pretty good about where we are there. The one I'm really excited about, is this whole area of automation of IT, meaning AI ops. And it kind of gets back to your point before on hiring and skills. We all know we're in a market that's very tight right now for skills. So if you can use something like AI-Ops to automate -- your IT is running, there's immense value there. It's a $40 billion market. I would say there is no leader today and so we made a pretty intentional plan about 18 months ago, to build a product, which is Cloud Pak for Watson AI ops. Then we did some acquisitions, Turbonomic for optimizing infrastructure. Instana for optimizing applications. I think at this point, we have the best portfolio in the world for AI ops. So that's a huge growth opportunity. So I put that under the automation category. Last is security, and I think -- I don't have to tell you, but security is almost an unlimited market, because any client is willing to spend money to protect against potential threats. We've just launched QRadar XDR. So how do you take clients that are using QRadar as their SIEM environment and then actually extend that, to start to cover detection, response, how do you respond when there's actually an issue. We just closed on the acquisition of ReaQta, which gives us a capability and Endpoint Security. So I think security is a great market for us. We've seen good growth there, and that will continue. So those are the 3 big areas. Data security -- as well.

Yes, that's great. That's helpful. So when I think about these 3 big areas, data, automation, security, the growth rate should be meaningfully faster than what the core software portfolio has been doing. Obviously, do we get to a crossover plan, where they become big enough collectively that they actually are the drivers of the X sort of hybrid cloud, Red Hat OpenShift part of the portfolio, if I look at sort of the P&L of the business, right? So that's part -- when I think of software for IBM, historically, it has been sort of a low single-digit-ish growth. These are growing significantly faster, in many cases, double digits. So we're going to get a natural uplift for the growth rate over the next couple of years. Is that the right way to think about it, that maybe there's like a crossover point in a couple of years where, the business grows, maybe not double digits portfolio, but you get to more of a mid-single-digit growth rate in that -- in the non hybrid cloud software portfolio?

The key thing for us was to get positioned in big markets with high-growth rates. So if we've been talking 2 years ago, it probably would have been a different discussion. But we made a very intentional decision, that we believe those 3 areas will be significant for IBM, and we're starting to see great signs of that. It's also why, Jim, on the call last quarter was talking about NRR, because each of those areas, we've got this mixed model, some subscriptions, consumption, some perpetual, some service capability, some managed service, that gives us a different way to start to drive the business, which is, in many cases, if you get small wins, small footprint, you can grow those over time. That is a different motion for us, than what we've been in the past. But yes, I feel very confident that those are the right 3 areas for us.

Got it. And then maybe just -- to Red Hat for example. We get this question all the time. You know, Arvind talks about this, love the perspective. What are you doing today with Red Hat, that could not have been done, if Red Hat was a standalone entity and that you had a strategic relationship with Red Hat? You talked about Cloud Paks, we've talked about the pull-through from GBS and that dollar revenue from hybrid cloud, ultimately equated to $12, $13, $14. Is there anything that you can kind of point to over the last couple of years, that you think, look, this is a perfect textbook example, why Red Hat makes a concept within the IBM Umbrella? We still get this question from years ago, and so it's kind of an interesting topic of discussion.

Got it. There's a few different angles to look at that. We're now, I think 2 years removed from the acquisition, and we've had obviously great momentum since we did it. And I'd say #1 is, I talked at the start of this discussion about how we built partnerships with AWS and Azure. I don't think we'd be able to have the confidence to go partner with them, deploy our software in those environments, without Red Hat being part of the family. Because when we go deploy on those clouds, they're running on OpenShift. And so we know that we can rely on that infrastructure, that capability to be there. So therefore, it's a good return on our investment from an R&D perspective. So I think one is just how, Red Hat aligns so closely to the IBM product strategy. That's a big advantage. Second is, we're looking at things that I think we do really well. That we're still near infancy of Red Hat, things like inside digital sales capabilities. We're supporting them through that, because we've got a scale operation with really good returns on investments, and something Red Hat had not done as a stand-alone company. So that's a good area of extra growth. Then you look at things like GEO expansion, getting footprint for Red Hat in markets and countries, where they were not before. That makes a difference. So go back to kind of the basics about Red Hat. Every client, generally speaking, is looking for an open architecture, something that's interoperable, flexible, but secure, they kind of have like 3 options. One is they can build this themselves, that becomes really expensive. 2, is that they could do it on a singular public cloud, but then all of their innovation is tracked on that one cloud, which may or may not be the right decision for that company. With Red Hat, we say you can build your capabilities and you can run the money in public cloud, you can run them on private cloud, you can run them on edge devices. It is really a game changer for how we deliver IBM technology, but also how, through IBM consulting, we can actually help clients with things like application modernization. Because the minute you start that discussion around application modernization, the client is thinking about the economics, how is this model going to work for me? How am I going to maintain security and do upgrades over time? And the assets of Red Hat, really make that bulletproof. So that's why it has been a real game changer for us.

Got it. Okay. So Rob, the interest in time, I have 2 more questions. One, obviously, the portfolio is undergoing a massive transformation over the last 12 months. As you look at it today, what if anything else that needs to be done or could be done, that you think would be sort of incrementally additive going forward over the next 3 to 5 years? And is that accomplished through the R&D motion, potentially M&A? Arvind has got a decent number of deals over the last couple of years, and you mentioned, for example, in AI ops, doesn't sound like you're sort of a market leader, and you guys see that as greenfield opportunity. Are there opportunities to get bigger in those particular markets, whether it's security, automation, through targeted M&A for -- or 2 to 3-year R&D cycle? How do you think about what the next steps are over the next 3 to 5 years, that you think we should be looking out for?

No, look, I think you said it well. One is we're aggressively innovating internally, working with IBM Research, how do we deliver new product to market in really short time frames, meaning less than a year. We actually have some great examples just in the last 18 months of where we've gone from, I'll call it, core ideas and rough technology and IBM Research, into product, meaning revenue generating. I don't think we ever had that fast of a pipeline. Things like Watson Orchestrate came out of IBM Research. The new AI capabilities that we've delivered in security, as part of Cloud Pak Security -- for security came right out of IBM Research. So we have that innovation engine working. Secondly, to your point, yes, we're always looking for opportunistic, strategic M&A that we can build into the capabilities that we're delivering. Talked about the recent one in security, but we're always looking for ideas. We did container security, a company called StackRox, which was folded in with the Red Hat OpenShift capabilities. So we're always looking for new opportunities there. We've done a lot of M&A in consulting, which is really about expanding skillsets, the partnerships that we built in consulting. So I would say all of the above, in terms of how we think about growth opportunities.

Got it. And then just in the interest of time, I'd like to give my presenters an opportunity to kind of leave investors with the key takeaway or anything that we didn't touch on, and kind of any points that you want an investor to know about IBM today and where it's going over the next couple of years from your perspective? So the floor is yours.

Sure. So I would kind of finish it on 2 points. One is related to what I just covered. The innovation engine is working in IBM, and give a lot of credit to Arvind and the kind of the focus he's brought to this, between research and our product development. So really encouraged by that. Hopefully, you saw the recent announcement on 127 qubit quantum as another example. So a lot happening in terms of organic innovation, which is all about how we drive return on investment for shareholders. And then I'll kind of finish on what I'm responsible for, which is go to market. I'm really optimistic about what we're doing in the go to market. We're changing how we show up with clients. First thing I did, as anybody would do in my role, was go out and spend a bunch of time with clients. It's pretty clear. They want an IBM sales team that is more technical, that is more experiential, that is rolling up sleeves and helping get things done, versus just selling. We've made big investments in the areas I've talked about, like customer success and client engineering to address that. Partnerships in the ecosystem, that is part of our go-to-market motion, something that is very new, not just with other technology companies, but also working with other global system integrators, like Deloitte as an example, launched a data product called DAPPER, which is built on IBM's Cloud Pak for data. So it's a good example of partnering with global systems integrators as well. And then lastly, just competing, bringing really a new spirit of competition in the IBM sales force. People are really charged up about the growth that they're seeing in IBM, people are excited. So it's a great place to be.

Great. And I think we're out of time. So Rob, we'll just end it there. We appreciate you being generous with your time today. And hopefully, when we do this next year, we'd love to have you back, but in person, like we did the last time. And so we'll just cut it there. Thank you everyone for joining. Very great evening. Great afternoon. And if anyone has any questions, please reach out to either me or Eric or anyone else, and have a great day, everyone. Thanks again Rob.

Thanks, David.