International Business Machines Corporation (NYSE:IBM) Credit Suisse 26th Annual Technology Conference Call November 29, 2022 12:15 PM ET
Company Participants
Rob Thomas – Senior Vice President, Global Sales
Conference Call Participants
Shannon Cross – Credit Suisse
Shannon Cross
Okay. Great. Hi, everyone and thank you for joining us. My name is Shannon Cross and I’m the IT hardware analyst at Credit Suisse. I’m now joined by Rob Thomas. He’s the SVP of Global Markets for IBM.
And with that, Rob, would you like to introduce yourself and tell us a little bit about your role and we’ll get to Q&A?
Rob Thomas
Sure. Thank you, Shannon. Rob Thomas, I’ve been at IBM since 1999. So, number of different roles. Started in consulting, was in Micro Electronics for a few years and then spent a decade plus in software and took on go-to-market about 18 months ago. And go-to-market for us is all of our countries around the world, technology and consulting as well as our ecosystem partnerships. So that’s what I’ve been spending a lot of time on.
Question-and-Answer Session
Q – Shannon Cross
Great. So, IBM is a significantly different company than it was just a few years ago. So, maybe from your vantage point, can you talk about where you see the biggest changes culturally in the company, but also how you deal with partners and where your focus is from a revenue perspective?
Rob Thomas
So, let’s talk about what’s different because I agree with your point. I think it’s a very different company from even just two years ago. Why is that? One is focus, I think from his first day, Arvind has been clear the — it’s going to be about growth and everything we’re going to do is going to be about growth and driving cash flow. And that starts with a focus strategy. He said on day one, hybrid cloud and AI. And what you’ve seen over the last couple years is us getting more explicit about what that means. And it’s investing in areas like data, automation, security, all of which run on our hybrid cloud strategy with Red Hat. It’s about building a vibrant consulting business, and we can get into that a little bit.
So, number one is really just focus and getting alignment to the whole company behind a — on one hand, I think the best strategies are simple. They’re never simple to execute, but it’s simple in, these are the things that we want to be good at, which we think are relevant in technology for the next decade plus.
Second has been about transforming the go-to-market, and that’s really been about revenue focus, getting a more technical go-to-market. So, we can talk a little bit about that and changing perception with clients. And then third has been ecosystem. We can’t be the leader in hybrid cloud unless we have a vibrant ecosystem that’s viewing that as a platform that will drive growth for them. So, we’ve done a lot of ecosystems.
So, I think it’s really those three things that are fundamentally different from where we were a couple years ago. And I think it’s encouraging that you can see it in the results more to do, but you can see highlights of it.
Shannon Cross
So, when you talk about hybrid cloud, I mean, I went back say, oh, I don’t know with the pandemic, I lose track of time. But seven years ago, 10 years ago, there was this focus that everything was going to go to the public cloud. And that customers were just that, that’s where we’re going, that’s where we’re going to be and all these data centers and everything else is just — it’s over. So, I guess, when you talk to customers, how are they sort of balancing their infrastructure and plays into your consulting business significantly, I think, as well and trying in terms of trying to help customers optimize their data center infrastructure. So, what are you hearing from them and what sort of trajectory do you think, or how long do you think hybrid cloud will remain sort of a focus?
Rob Thomas
Well, there has been a complete 180 in, I’ll call it, the last five years, because I do think there was a view that every company is going to choose a singular public cloud and move everything to that place. We’ve had the view on hybrid cloud for a while now. And I would say I think the world has now seen the hit the way that we do, which is public cloud is a critical part of the future of technology, but it’s not the only piece. It’s about how do you integrate that with your private cloud strategy? How do you run in a multi-cloud environment? And while five years ago every client was saying, I’m going to choose one public cloud, I don’t talk to any client that says that today. Their only question to us is how can you help us go faster on hybrid cloud, which is a dramatic shift, which is why I say it’s a bit of a 180 and I feel we’re really well positioned for that. So, I think that’s good.
Then you add to the, I would say the tailwind we did not expect was what’s happened geopolitically in the world in the last year, which has led a lot of companies and governments to say, I can’t be dependent on a single provider, which is why you see now more discussion of I need a sovereign cloud strategy. I need a local cloud strategy. And I think all of that plays to the investments that we’ve made in Red Hat and Open Source, because Open Source is about technologies should be available, you should have the flexibility to use it how you want. And so, I don’t think that this is a phase.
To some extent, the world where computing can happen in a bunch of different places is the world we’ve always been in. The anomaly was when we said everything’s going to be in this one place. So, I think this is the new normal. And then it extends to things like edge cloud, which I think will become more predominant. This is why we’re making investments in areas like software defined networking, which we think be fundamental to multi-cloud computing. So, I think this has a long runway.
Shannon Cross
Great. And how should we think about IBM’s go-to-market given this evolving environment that we’re in, how — a couple years past Red Hat, how are you thinking about having the two different sales teams and go-to-market approaches? Where do you integrate them and how do you leverage each other’s capabilities?
Rob Thomas
The — let’s maybe go back to just some basics on what we’ve done in the go-to-market and then I’ll answer Red Hat specifically. Number one is we put a lot of focus on building expertise in the sales team. We’ve asked people to become an expert in technology or an expert in consulting. So, we have very few that are actually overlaying all of IBM, if you will. That’s all about expertise, because that’s what clients demand.
Two is we have built a much more technical go-to-market. Two teams in particular. We built a pre-sales team that’s called client engineering. And this is a team of engineers that goes to the client and says, how can I be helpful? You’re trying to solve a problem on, improving your server utilization, reducing your storage footprint, modernizing applications, doing data science, whatever it may be. And this team will engage and do the work. And this is something we used to charge for. And I think we had to catch up to a modern go-to-market where engineering skill is expected and it’s part of the sales process.
We also built a post-sales team called customer success. So, once a client’s bought a product, how do we actually get them up and running quickly using the product to get results for their business and then ultimately consuming more? So, this is a big change and it’s a material amount of our sales capacity now that used to be zero, that’s now double-digits in terms of percentage. So, it’s material in terms of how we’re engaging with clients, and I think that makes a big difference in perception. And then obviously results over time.
And then to the Red Hat piece, by design from day one we’ve said Red Hat will be independent because we don’t want to compromise what they provide as an open partner to all partners. So — but we IBM, we will prefer Red Hat and a sales cycle will walk in and say if you’re interested in cloud packs or solving a problem with data, the best way to run that is on Red Hat. So, we will prefer Red Hat. The Red Hat team by design we keep independent, because we’re happy if the client uses Accenture to implement Red Hat or wants to run a managed service of Red Hat on AWS or Azure. So, we want to maintain that independence there.
There was an announce — we did a month ago, I think that speaks though to the value where technology we had developed in IBM. We said the best place to land, this is in Red Hat. So, we announced a project called Project Wisdom, which is basically if you go into Ansible, which is for building automation and scripting, this is a natural language interface. So, instead of having to write a 100 or 200 lines of code, you just say launch an Ansible script and all the code populates. So, it was an AI for code project that we were working on. We said the best places for this to show up is in Red Hat. So that’s the leverage Red Hat gets of being part of IBM is around innovation and new technology. And then we partner as we need to support clients.
Shannon Cross
And maybe we can talk a little bit about the consulting business because I think there’s — I get a lot of questions about, well, if there’s a downturn it’s going to get hit and I think, I mean obviously Kyndryl took a chunk of stuff that would really get hit, but how are you thinking about the ecosystem around the consulting business and go-to-market and positioning in what appears to be somewhat of a slowing macro?
Rob Thomas
Again, I think the best strategy of the simplest, if you go back two years, the simple moves we made in consulting, number one was we want to build big meaningful partnerships. So, we went out and proactively partnered with AWS and with Azure where we now have billion dollar pipelines with both. We’ve built on the work we’ve done with SAP through the years. We built a bigger partnership with Salesforce. We built a big partnership with Adobe, just to name a few. It was about picking a handful of strategic partners where we thought we could drive multiple billion of revenue, that is working.
Second is, we said it’s a labor based business. We have to do hiring, obviously. We’ve done a lot of hiring in consulting and I’ll tell you it’s been encouraging to see the response to people intrigued, interested in what IBM is doing. And it’s been very easy to bring people on board, get them skilled up in the different areas in consulting. So, I think that’s been positive.
Third was we had to restart the M&A engine. We hadn’t done a lot of consulting M&A in previous years. We’ve now done like it’s 14 in consulting in the last two years. So, again, three things. Build strategic partnerships, higher M&A and all of that’s driven really great growth for consulting as you look over the last few quarters.
Now to your point on the macro. Anybody can really predict the macro, but one is technology is deflationary. And everywhere that we see inflationary pressure companies that can put technology to work, that helps solve that problem, which is positive. Secondly is we are confident that technology growth will outperform GDP growth, two to four points somewhere in that range. And so I think you’ll see continued interest in what we’re doing there.
I think one good example to kind of bring it to life. We did this deal with McDonald’s where we’ve taken over their automated ordering. And if you think about it, it’s really hard for McDonald’s to hire people. Wages are going up dramatically. And so, if you can actually do automated ordering that instead of having to hire four people, you can hire two people. That’s a great application of technology. It also includes services work on helping that get set up and implemented. It’s a good example of that is going to help regardless of the macro environment. And so, just one example.
Shannon Cross
Yeah. I was laughing, because I’ve actually used that example when we have a dog — so when we were moving across country, we had to stop and you can’t take dogs into restaurants, so you go through a lot of fast food. And I was amazed by how much automation there is now in fast food. And I’ve used it as an example of where — with all the higher costs and that and productivity needs, there’s a huge opportunity for IT. So, it fits in with my thesis. I appreciate that.
Rob Thomas
That’s great. So did you actually try it? It works incredibly well.
Shannon Cross
Yeah. No, it’s good. You just — and you can leave the dog in the car quickly. So, I guess, AI is a significant topic of discussion. You’ve mentioned it a few times here. Where are the biggest areas that you see AI running through the portfolio and where do you think customers are sort of on their journey of understanding how they can use AI to improve their processes?
Rob Thomas
We decided to focus our AI investment in three big areas, which I think are broadly applicable for enterprise technology. One is natural language, because business is all about language documents understanding. Two is automation, whether it’s automating IT processes or business processes. And third is trusted AI, which I think we’re still early on, but as companies get more AI models into production, how you understand how decisions are being made, bias detection, drift detection, those become very important capabilities. So that’s where we’ve invested in core R&D I would say over the last couple years for AI.
What does that mean for clients? There’s five use cases that I see gaining a lot of momentum for AI. One is customer service. We talked about McDonald’s. That’s one example, but this also applies to any customer service. Regions bank is using Watson assistant to field all their customer service questions as an example. So customer service is one. IT operations, instead of having to hire a bunch of people to manage your systems, can you use software to do part of that work? Understanding potential defects, improving meantime to resolution when you have an issue. So, IT operations is second.
Third is cyber security. And I think the line between AI and cyber is actually blurring and there’s so much happening in cyber. The only way to keep up is through software, not through throwing more humans at it. So that’s happening. Sustainability is a fourth area. Understanding data sets, how does that fit into reducing energy costs, energy consumption as an example.
And last I would say serving employees. I think the best example of that is what we implemented in IBM, which is we’re using AI now. It’s kind of an interface across all of our HR systems. So, employees don’t even know what system they’re using. They just get a simple natural language query box. They can ask questions, they can get answers. And I — you think about those kind of the two bookends, customer service, employee experience, I believe every company will use AI for that at some point. They may not know it yet, but I think it’s inevitable, because it’s just a way more efficient way to deal with Q&A type challenges.
Shannon Cross
You could probably sell some to Credit Suisse based on my onboarding experience I had a few months ago, but …
Rob Thomas
We would love to. I can certainly arrange that.
Shannon Cross
I guess, one of the concerns investors have had is with regard to your ability to grow sort of the core IBM software. So, I think Red Hat is somewhat understood, but I don’t think there’s a great, or maybe that’s not fair, but I’m not sure there’s a enough understanding of sort of what lies within your core software bucket and where you see growth and opportunity. You talked about AI, what specifically are you doing maybe in security? Just any more color you can give would be helpful.
Rob Thomas
Sure. I think growing in software requires three things. We talked a little about go-to-market and ecosystem, so I’ll park that because we covered that. The next two is innovation. Organic and inorganic. You have to get innovation going because that’s going to drive growth. I’ll talk a little bit about that. And then third is around product led growth, which is really a new motion, which is different than a traditional direct Salesforce. So, let me talk about the latter two.
On innovation, I’m actually pretty pleased with the progress we’ve made in the last couple years. In security, we’ve developed Cloud Pak for security, which is the next-generation security event monitoring system. We’ve done acquisitions like Randori for attack surface reactive for end point. So we’ve now built out a portfolio that covers, I would say the vast majority of the components for this term, XDR, extended detection and response. And I think there’s only maybe one or two other companies that have the breadth of a security portfolio that we do. I think this is probably a misunderstood part of IBM today that people haven’t caught onto yet, but we’re a big player in cybersecurity.
Next is data. We’ve been in data forever. Data warehouse, data governance. We’ve now released a product around Data Fabric, which is called Cloud Pak for data. Data Fabric is the idea that you shouldn’t have to move your data to actually analyze it. So, how can we actually do data governance and understand all of your data regardless of where it sits? And I think this is what the next-generation data architectures are going to look like. They’re going to embrace unstructured data and structured data. That’s what the future warehouse or lake house is going to look like. So, we have organic work going on. We acquired a company called Databand, which is about looking at your data pipelines. Where is data moving? Where is it not moving, where are there issues? And kind of your data life cycle.
Automation has been probably the biggest bet in the last two years. We built Cloud Pak for Watson AIOps, which is understanding all your IT systems. We did three acquisitions that complement that Instana for application performance management, Turbonomic for optimizing all of your IT resources around that. And then myInvenio, which is a little bit on the side around process mining, understanding IT processes that flow into your system. So, in each of those areas, it’s a combination of organic and inorganic, and innovation is what will drive growth. So I’m encouraged by the progress there.
In terms of product led growth, the reason I say this is newer for us is our traditional model has been sell to large enterprise clients through a direct Salesforce. Now we evolved that, how I talked about with ecosystem partnerships. But the next step is how do we get to a bunch of clients that have never bought IBM or never considered IBM. And that universe is still enormous. And the most valuable real estate IBM has is IBM dot com. If you look at the traffic that we get there is significant, but we do very little today in terms of converting people to a product page, a product trial, and the nurturing their journey through that product. That is going to unlock a lot of growth for us in software. So it’s really those three things; continue what we’re doing on go-to-market, continue and actually increase the innovation engine, and then product led growth is a new motion, it’s a cheaper go-to-market because you compliment that with digital sales along with IBM dot com. And that’s a new motion for us.
Shannon Cross
Great. And maybe switching to a totally different area, talking a bit about your mainframe business, sort of how do you see that fitting in strategically over a long period of time? Obviously, it’s sort of stabilized. I would — I mean, you’ve got to benefit right now because of the refresh cycle. But where do you see mainframe fitting in, infrastructure as a service? Just I’m curious as to how you position that to customers over a longer period of time.
Rob Thomas
If it’s possible after all these years, I still think mainframe might be a little misunderstood. And what I mean by that is, this is a transactional system. It does that one thing and it does it incredibly well. And if you think of sub millisecond response times to this date, there’s no other system in the world that can do that. And companies that use the mainframe, it’s not like their side project, it is their core business. So, they will not run without the mainframe.
So, we’re really pleased with the innovation and the new system, particularly the Telum processor, which is I think the first on chip influencing delivered for AI. So, you can do real-time fraud analytics as an example, as a credit card swipe happens. And so, clients are seeing that innovation and they’re getting a lot out of that, which is good.
The number one question we get from clients on mainframe is how does this fit into my hybrid strategy? So, we’re helping them build an architecture around where that fits. I think one great example, just at a conference this year, Citibank was talking about how they’ve taken their MongoDB workloads and they’ve consolidated that onto the mainframe on Z Linux. Why would they do that? MongoDB is something completely different. True. But they’ve got the mainframe. They know it’s highly energy efficient. And if you can take all of the other hundred servers that would be running MongoDB and you can run it on the system that you already own, makes a lot of sense for them. It’s energy efficient? It’s capital efficient. And I think you’re going to see more clients get, I would say, more aggressive in how they’re utilizing workloads on the mainframe because it’s there. And it’s part of what their business. I think in part this is why you’ve seen stabilization of the transaction processing annuity which we’re encouraged by. Mainframe has a long time to go still. So, I’m optimistic here.
Shannon Cross
And maybe talking about some of the future for IBM and how you think about it. You’re obviously investing significantly in innovation and research in that. I’m interested in what’s going to happen with quantum computing over some period of time. I think IBM is a bit more optimistic in terms of timeframes than maybe some others are. But — and we’ll see if it blows up encryption, but that’s a whole another story. So, how are you thinking about — well, areas that you’re most interested or excited about as you look forward to the next several years?
Rob Thomas
One thing we’ve started working on is a 10-year roadmap for enterprise computing. I think this is something that clients want from IBM is where is technology going to go? And there’s a few — think of it this way, in the short term, it’s more like GPS coordinates. Like, we know what we’re going to do for the next few years. As you get out, it’s more like a compass, it’s a direction. But quantum computing is certainly one of those areas. We announced the 433 qubit system just earlier this month. We continue to build out the quiz kit, which is the developer platform for a quantum, and the adoption of that is going very well.
To your point, don’t know exactly when commercialization will happen, but we’re confident we have great technology that’s a step ahead of others. I think quiz kit is the key step to watch over the next couple years, because that’s where applications will be built that are designed for quantum. So, we’ll see how that continues to progress.
In terms of other areas, it’s what’s the future of hybrid cloud? And we’re thinking about things like multi-cloud computing. When people think about multi-cloud today, it’s really about how do I integrate what’s happening on different clouds? Multi-cloud computing is, can I build an application and then just run that wherever is most suitable location wise, cost wise, I think there’s something to come there, but we’re early days of thinking about things like that.
In AI, we’ve invest — been investing heavily in large language models. We now have what I think is one of the larger systems in the world. It’s an exaflop system for training foundational models on language. Why does that matter? That feeds into all of the use cases I talked about for AI. It’s one reason why we were able to take technology from McDonald’s and make it way better in a short period of time, is because we’ve been investing in these foundational models. But we’re at like billions of parameters today that will continue to increase over the next few years.
Security’s a big part of that roadmap. Like I said, I think AI and cyber, probably the line blurs where it becomes much more about your cyber defense is only going to be as good as your AI. How well do you understand events? What’s happening? Can you predict what could go wrong? So, I’m encouraged. We’re early days on thinking through this roadmap concept, but it’s a good way for us to get alignment with clients on this is where IBM’s investing. It’s all the areas we talked about, data, automation, security, hybrid cloud. How does mainframe fit in with hybrid strategy? And I think this is an important part of making today’s IBM well understood by clients.
Shannon Cross
And as you think about like the roadmap, how do you add in your partner ecosystem and — so you’re not just — if it’s not big blue, we’re not going to sell it. And making sure that your customers are comfortable with your willingness to work with others in that.
Rob Thomas
Well, just this month we announced a new initiative around embedded AI. It’s become clear to us that many companies, particularly other software companies, tried to build their own AI and they realized it’s very expensive, and it’s actually very hard to do. So, the purpose behind embedded AI was making our AI library as our foundational models available to other software companies. Companies like SingleStore have announced they’re using NLP. Accubot is using some. We’ve got some other big announcements to come that I can’t share yet, but I’m actually really encouraged where we’re making partners part of all the roadmap capabilities that I talked about.
We’ve worked with other global systems integrators like the Deloitte, like EY, where they’re setting up cybersecurity centers, managed service capabilities based on IBM technology. So, everything I described in the roadmap is actually available to partners. And the one thing I’ve heard from partners that I think is positive is they have more, I’d say, insight into transparency into what we’re doing in products than they ever have before. We make them — when I enable our sales team to start the year, partners are invited to all that. They can see exactly what our sales team sees. That was not true 18 months ago. And so, in all of these areas, we’re encouraging partners as much as they want to participate with us.
Shannon Cross
And how do you — from a comp perspective, how do you sort of incent your partner ecosystem? I’m just trying to figure out from a competitive landscape. Because again, I think it used to be more sort of IBM first, and I mean, obviously, Red Hat first here, but you seem to be much more willing to work with people. So, maybe from P&L perspective, I don’t even think how you think about it where you do sales comp on your internal employees versus your channel so that everybody feels like they’re sort of adequately respected.
Rob Thomas
I think the fundamental change we made here, which has gotten a lot of positive response from partners was around how we segmented clients. We have a set of top clients, which we work with partners, but we have a big direct sales presence. For everybody else we have declared a partner first model. And so, as I look at my SG&A reallocation, I’ve reallocated a lot of SG&A to basically business partner, sales people on the IBM side that can only hit their quota by working with partners. There’s no other way for them to hit their quota. That was not true before. And so, they’re just like a direct salesperson. They have a number they have to get, but they have to fulfill and work with partners. So that’s a pretty big change. So there’s now a huge part of the world for how we define it, that is partner only. We have sales people that are only paid if they’re working with partners that’s going to have a positive impact.
Shannon Cross
And just it massively expands your distribution network.
Rob Thomas
Exactly. Yes.
Shannon Cross
Yeah.
Rob Thomas
And then back to my point on product led growth, then as we get leads on the web, the digital team is cultivating those. Those leads get passed to either directly to a partner or do one of our partner managers who then has to close that working with a partner. So, the product led growth motion is actually all going to play out in terms of success for partners, which I think will be a positive momentum flywheel for us.
End of Q&A
Shannon Cross
Great. Well, with that, I think we’ve come to the end of our discussion. Thank you so much for joining us and look forward to watching your journey going forward.
Rob Thomas
Thank you, Shannon. Appreciate it.
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