International Business Machines Corp at UBS Global TMT Conference (Virtual) Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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 (inaudible).

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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 REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 07, 2021 / 6:00PM, IBM.N - International Business Machines Corp at UBS Global TMT Conference (Virtual) 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?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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, (inaudible) 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?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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.

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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 REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 07, 2021 / 6:00PM, IBM.N - International Business Machines Corp at UBS Global TMT Conference (Virtual) 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?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 07, 2021 / 6:00PM, IBM.N - International Business Machines Corp at UBS Global TMT Conference (Virtual)

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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.

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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.

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : 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.