International Business Machines : Prepared Remarks (94 KB) pdf

Introduction

Thank you. This is Patricia Murphy, and I'd like to welcome you to IBM's first quarter 2021 earnings presentation. I'm here with Arvind Krishna, IBM's Chairman and Chief Executive Officer, and Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. We'll post today's prepared remarks on the IBM investor website within a couple of hours, and a replay will be available by this time tomorrow. Some comments made in this presentation may be considered forward looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filings. Our presentation also includes non-GAAP measures, to provide additional information to investors. For example, we present revenue and signings growth at constant currency throughout the presentation. In addition, to provide a view consistent with our go- forward business, we'll focus on constant currency growth adjusting for the divested businesses for the impacted lines of total revenue, cloud and our geographic performance. We have provided reconciliation charts for these and other non-GAAP measures at the end of the presentation, and in the 8-K submitted to the SEC.

So, with that, I'll turn the call over to Arvind.

CEO Perspective

Hello everyone. Thank you for joining us today. I'm pleased to be speaking with all of you again. In our last call, we shared our financial expectations for the year: revenue growth and 11 to 12 billion dollars of adjusted free cash flow. While it's still early in the year and a lot remains to be done, we are confident enough to say that we are on track.

Last quarter, I also talked about how the events of the last year have increased the needs for our clients to accelerate their digital transformations. This is continuing, and the overall spend environment is improving, while there are some clear differences by geography and industry. With that as a backdrop, in the first quarter, we posted revenue growth at actual rates and grew free cash flow. We can see signs of progress in a number of areas. Our results in Cloud & Cognitive Software and Global Business Services revenue show that they are on an improved trajectory, including a return to growth in consulting. IBM Z again demonstrated its value as an enduring platform. Meanwhile, we improved margins in our Global Technology Services led by managed infrastructure services. As Jim will explain to you, all of this helped to deliver free cash flow improvement, which is a key focus area.

As we move through the year, we will continue to execute on the important changes we are making to the company - from the acquisitions we are making - to the investments to expand our partner ecosystem - to the significant overhaul of our go-to-market model that we announced back in January - to the changes we're bringing to our culture to instill more of a growth mindset. As you know, we are also executing the separation of our managed infrastructure services business, now branded Kyndryl, which is on track to be completed by the end of the year. These

changes are all well underway, though as you would expect it will take some time to see the full benefit.

IBM's Hybrid Cloud & AI Strategy

I have immense confidence in our strategy around the transformative power of hybrid cloud and AI, and the decisive moves we are making provide a solid foundation for us to unlock future growth. As I've told you before, we see the hybrid cloud opportunity at a trillion dollars, with less than 25 percent of workloads having moved to the cloud so far.

We are reshaping our future as a hybrid cloud platform and AI company. For us, the case for hybrid cloud is clear. Businesses have made massive investments in their IT infrastructure, and are dealing with specific constraints such as compliance, data sovereignty and latency needs in their operations. They need an environment that is not only hybrid but a hybrid platform that is flexible, secure and built from open source innovation. This gives them a credible path to modernizing legacy systems with advanced cloud services and building cloud-native apps. This is what we have built our platform for and why we have such confidence in our strategy.

IBM's approach is platform centric. Linux, Containers and Kubernetes are the foundation of our hybrid cloud platform which is based on Red Hat OpenShift. We have a vast software portfolio, Cloud Paks, modernized to run cloud-native anywhere. Our GBS expertise is a key factor in driving consumption and in helping our clients accelerate their digital transformation journeys. And our systems and industry-specific public cloud provide differentiated infrastructure. The economics of our platform are designed to drive growth across all of IBM. The platform itself contributes. But then for every dollar of platform spend, clients spend $3 to $5 in software, and $6 to $8 in services. IBM, together with our growing ecosystem partners, are positioned to capture that value.

Let me now turn my attention to some of the progress and proof points we have seen in the past quarter as we execute on our hybrid cloud platform and AI strategy. In the last quarter, more companies chose IBM to help them realize the potential of hybrid cloud. That includes PNC Bank, Banorte and Egypt Air. We are also helping Siemens re-platform MindSphere, their IoT software, on top of Red Hat OpenShift. That makes it possible for them to deploy on both public and private clouds. We now have 3,000 clients using our hybrid cloud platform.

We are also focused on helping companies use our rich AI capabilities to drive business outcomes. In the past quarter, we have forged important partnerships with companies like Palantir to simplify how businesses build and deploy AI applications across public clouds, private clouds and on- premise. As part of this collaboration, IBM and Palantir are creating a new offering called Palantir for IBM Cloud Pak for Data, allowing clients to scale AI with confidence. In addition to Palantir, we continue to expand our AI ecosystem by building on partnerships with companies like Box, Cloudera and MongoDB.

In March, the global research firm Gartner positioned IBM as a leader in three Gartner Magic Quadrant AI reports, now making IBM a leader in 12 AI magic quadrants. This recognition highlights the important work we have been doing to bring new innovations from our research teams in core areas such as natural language processing, trust and automation.

To facilitate our clients' adoption of our focused hybrid cloud and AI solutions, as I said in January, we announced significant changes in our go-to-market model. We drastically simplified our sales model by adopting a single consistent segmentation. We are providing clients with a more technical and experiential approach and are investing in and elevating the role of our ecosystem partners to deliver more value to