International Business Machines Corp at UBS Global Technology and AI Conference Summary

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

Question: David Vogt - UBS - Analyst : <_ALACRA_META_ABSTRACT>And so we thought it would be great to have Dinesh here given the theme for most of the meetings this week has been around data center, AI, software, giving you uniquely, I think, qualified to speak to it, we wanted to start with your perspective of IBM's software portfolio, how we got to where we are today, either through organic growth, inorganic growth? We could, I guess, maybe go back five, six, seven years start with Red Hat. And maybe let's kind of level set where we are today from a portfolio perspective that falls under your purview. Dinesh Nirmal - International Business Machines Corp - Senior Vice President, Products, IBM Software Yeah. So if you go about five or so years back, we said our strategy is hybrid cloud and AI. And if you look at five years back, right, it was all about going to a public cloud. Every customer was raising to a public cloud. But now you fast forward five years, every customer is looking at to say, how do I stay on multiple clouds? How do I keep some of my data behind the firewall? So the hybrid cloud strategy that we put forward about five years is coming real, partly because of regulations, right? If you look at what EMEA is doing with DORA, it's all about resiliency and risk. Resiliency is about is your data on a single hyperscaler or is your data can be recovered in multiple places, right? 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 04, 2024 / 4:35PM, IBM.N - International Business Machines Corp at UBS Global Technology and AI Conference So that, along with cost and -- no customer want to be boxed in. You don't want to go stay in a single cloud, right? So all those things are really driving the hybrid cloud strategy. So you talked about five, six years ago, we acquired Red Hat. So if you are on multiple clouds or hybrid cloud, you want to develop an application once and deploy it anywhere. So how do I do deployment -- I mean, development once and deployment in any place I want? OpenShift can enable it. So the growth that you're seeing in Red Hat, for example, is partly because customers are really taking their applications and deploying in multiple places. So that's one. Two, we have really brought every service that we have, whether it's Apptio, whether it's Concert, whether it's Data Band, every service that we have on every single hyperscalers, including IBM Cloud and behind the firewall. I think we're the only vendor who really have six or seven form factors that really delivers, right? So that's the second on the hybrid cloud. So the hybrid cloud strategy for us has really panned well. And even if you look at the Hashi acquisitions we are doing, right, it enables you to do infrastructure as code. That's all Terraform is about. It enables you to do secrets management using Vault. So all those things that we have done, all the acquisitions we have done, the organic development we have done has always been focused on hybrid cloud, how do we bring on the multiple clouds. The second piece of our strategy has been around AI. Even before generative AI took off, right, there was the predictive AI, deep learning, all those things. So in the generative AI side, there's three core pillars. One is data, mainly unstructured data, how can we really take advantage of unstructured data. And we are playing with watsonx to say, can you really bring your unstructured data, govern that data, really make that available for fine-tuning or prompt engineering or prompt tuning, that's one. The two is models. We have our set-on models, smaller models called granite models. Initially, it was all about the bigger the model, the better, whether it's 30 billion parameter model, 100 billion parameter model. We think smaller the model that's domain-specific is where the future will go because cost also becomes an angle for customers to say, do I need a 100 billion parameter model, right? So that's the second one. The third one is applications, which is how do I generate more code or how do I build more applications using the same resources I have. That's what generative AI will enable. And these applications have to do some inferencing, use the models, all those things. So if you look at generative AI, those are the core things. The outcome is automation. And we are playing heavily on the automation side, whether it's IT automation or line of business automation. So our strategy that we put forward five years ago, focused on hybrid cloud and AI has really enabled us to be here and really be at the forefront, partly because we are consistent in the strategy. We haven't changed it. We have always said it's all about hybrid cloud. We will bring every service on every single hyperscalers, also behind the firewall and the customer can choose where they want to deploy. On the AI side, we are playing with models on structured data and applications, how can we enable our customers to really drive more application development. One more thing, and then I'll pause. And we are not just delivering, we are becoming client zero. So if you take my own example, right, I run about 15,000 developers worldwide. About 6% to 7% of all new code generated today is through generative AI. We would like to get to a 25%, 30%. So it's really helping enable us to deliver more for our customers through generative AI. So it's really enabling us to be more productive, us to be more optimized. So it's not that we are just going and selling our products. We are saying we are a client zero. We are using it. 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 04, 2024 / 4:35PM, IBM.N - International Business Machines Corp at UBS Global Technology and AI Conference Another example, watsonx Orchestrate that we are selling, which is all about digital labor, automating your line of business, we are using internally. Our HR team is using watsonx Orchestrate to really automate HR processes. So that is also very powerful where you as a vendor can say, not only we are delivering a service or a product to you, but we are internally using to optimize ourselves.

Question: David Vogt - UBS - Analyst : You mentioned resiliency. Can you expand upon that? So today, as the portfolio is currently configured, what does IBM bring to bear to a corporate customer to help them along their resiliency journey given all these complexities and risks and challenges that you just sort of articulated? 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 04, 2024 / 4:35PM, IBM.N - International Business Machines Corp at UBS Global Technology and AI Conference

Question: David Vogt - UBS - Analyst : So can you take all of those offerings and that view that IBM has and talk about sort of specifically within AI from the software portfolio? To date, really, it seems like the consulting business has been sort of leading sort of the initiative, right? If I just look at the metrics that the company has reported, 80% of your sort of AI-focused orders to date have been really on the consulting side. So maybe can you expand upon how that sort of helps lead the software business? And what are the initial feedback or learnings that you're getting from large corporate enterprises on AI, particularly around your software portfolio? And how do you think that sort of evolves over the next couple of years with consulting obviously taking the lead?

Question: David Vogt - UBS - Analyst : I just want to make sure I understand. So the way I thought about Watson and what you've announced over the last couple of years, it's more of a platform of technologies and tools and applications that can help enterprises move down their journey, but also help automate and improve your existing functional software technologies. Is that the right way to think about how Watson will get developed over the next couple of years? So Watson, all this capability you're building helps the security side of your business. It helps the data, the automation side. Is that the right way to frame it? And so it's not necessarily a stand-alone offering. It's integrated in everything under your purview that you're thinking about developing over the next couple of years?

Question: David Vogt - UBS - Analyst : Got it. And does -- watsonx does -- you mentioned COBOL to Java. So that would help assist on the mainframe transaction processing side as well, I would imagine.

Question: David Vogt - UBS - Analyst : So it permeates other sort of sectors within IBM.

Question: David Vogt - UBS - Analyst : Got it. I wanted to maybe take a step back and talk about the common thread for a second. So Red Hat, and you talked about all these other companies that you've acquired, Apptio, Hashi is part of it. We get a lot of questions on Red Hat in terms of hybrid cloud, multi-cloud versus public cloud. And Red Hat has had fairly recently good acceleration in growth. Can you maybe talk to what the markets look like that are driving that underlying demand for Red Hat, primarily, I think you talked about OpenShift bookings being incredibly strong in teens, and recently, Ansible, strong. Is that stand-alone pre-GenAI demand? Or is there some sort of element to customers looking for multi-cloud/hybrid cloud solutions because they're going to embark on a GenAI journey effectively?

Question: David Vogt - UBS - Analyst : Did you see that VMware impact in the business over the last couple of quarters? Or is that more of a recent phenomenon given sort of the pricing dynamic?

Question: David Vogt - UBS - Analyst : Got it. In the interest of time, we get a lot of questions on your transaction processing business. I think the business over the last 5 to 10 years has been somewhat misunderstood, right, in the sense that it's been tied inextricably to the mainframe business for all intents and purposes and had been sort of a source of headwind from a growth perspective. It appears to have changed over the last couple of years, obviously, during COVID, now post-COVID. Can you kind of walk through and kind of articulate what the growth trajectory of that business looks like? What are some of the underpinnings to support that growth? And why that business now going forward is actually on much steadier footing than it was two, three, four, five years ago?

Question: David Vogt - UBS - Analyst : Got it. Is the business at all tied to the somewhat cyclicality around the launches of new iterations of the mainframe? Or is it just strictly transactional intensity effectively has improved dramatically? So we do have a new mainframe cycle later next year. At some point, I would imagine, I don't think it's been announced, but it's been in your 10-Q. Do we see an acceleration in transaction processing with a new generation of mainframe? Or is it really the installed base of transactional capacity is what really drives that business?

Question: David Vogt - UBS - Analyst : Perfect. Maybe just in the interest of time, I know you've been incredibly generous with your time. I want to bring it back to your perspective of where IBM sits today with the portfolio under your purview. What do you think is maybe misunderstood from a market or investor perception that really hasn't resonated yet that you think IBM is not getting credit for? And how you think about the portfolio as we move forward over the next couple of years that really gets you the most excited about IBM today versus IBM five years ago?

Question: David Vogt - UBS - Analyst : Got it. All right. I think we're out of time. Dinesh, thank you for your time. Thank you, everyone, for joining, and we'll speak soon. And again, Olympia is in the audience, if you want to hit her with the hard-hitting questions. So thank you again, everyone.