International Business Machines Corporation

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Ms. Patricia Murphy with IBM. Ma'am, you may begin.

Thank you. This is Patricia Murphy and I want to welcome you to IBM's second quarter 2020 earnings presentation. I'm here with Arvind Krishna, IBM's Chief Executive Officer, and Jim Cavanaugh, IBM 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've provided reconciliation charts for these and other non-GAAP measures at the end of the presentation and in the 8K submitted to the SEC. Finally, consistent with our last few quarters, IBM's revenue, profit, and earnings per share reflect the impact of purchase accounting and other transaction-related adjustments associated with the acquisition of Red Hat. These adjustments and charges are primarily non-cash. With that, I'll turn the call over to Arvind.

Hello, everyone. I'm pleased to be speaking with you again. In April's call, I talked about the impact of the global public health crisis, and I told you about the important work we are carrying out to help the shifting needs of our clients. I also told you about the confidence I have in our strategy and our portfolio, which is focused on hybrid cloud as well as data and AI. All of this continues. Today, there are two topics I'd like to cover. First, I want to tell you about what we're seeing in the market, and then I want to discuss our priorities and actions we have taken to move them forward. From a market perspective, while the current environment poses certain short-term challenges, it also presents long-term opportunities that IBM will seize as our clients accelerate their shift to hybrid cloud and AI. The essential work that we do in terms of running our clients' mission-critical processes continues. More profoundly, we see that the digital transformation of businesses is accelerating. Our second quarter results demonstrate this with an increase of over 10 points in our cloud revenue growth over last quarter. The trend we see in the market is clear. Clients want to modernize apps, move more workloads to the cloud, and automate IT tasks. They want to infuse AI into their workflows and secure their IT infrastructure to fend off growing cybersecurity threats. As a result, we are seeing an increased opportunity for large, transformational projects. These are projects where IBM has a unique value proposition, but they are also projects that take time to shape and therefore to close. At the same time, We are feeling the impact of austerity measures that businesses have put in place to preserve cash and capital. Our software and services results reflect this reality. Jim will take you through this in more detail. Taken all together, this is the backdrop of our results for this quarter. They reflect the immediate challenges and long-term opportunities of this environment. Now, let me move on and discuss my priorities moving forward. As I touched upon in our last call, IBM is focused on helping our clients in the two major transformational journeys they're on, hybrid cloud as well as data and AI. Hybrid cloud is the dominant force driving change in our industry, but it's far from universal adoption. Only 20% of the workloads have moved to the cloud. The other 80% are mission-critical workloads that are far more difficult to move. there's a massive opportunity in front of us to capture these workloads. When I say hybrid cloud, I am talking about an interoperable IT environment across on-premise, private, and publicly operated cloud environments, in most cases from multiple vendors. Why do we believe this is the future rather than a pit stop along the way? Clients find that choosing a hybrid cloud approach is two and a half times more valuable than relying on public cloud alone. This considers factors such as innovation, development time, and portfolio optimization. Let me spend a minute to describe our hybrid cloud platform. It starts with Linux, which is the de facto operating system standard. We have a tremendous advantage with Red Hat Linux, which is a market share leader. Linux, along with containers and Kubernetes, provides the architectural foundation of our platform, and OpenShift is our core product that captures all this and more. IBM has a vast software and middleware portfolio which has now been containerized and runs on OpenShift and Red Hat Linux. The family of cloud packs we introduced in the second half of last year allows our middleware to run in a cloud-native environment and bridge our clients from the past to the future. This means clients can now deploy our software anywhere OpenShift runs. It is infrastructure agnostic across not just public and private clouds, but also our mainframes and power system platforms. OpenShift is also what makes it possible to develop and consume software in a new way. It's what enables DevSecOps and all the subsequent boosts in productivity, security, and speed of deployment. Our hybrid cloud platform also includes a set of advanced technologies, such as Watson, analytics, encryption, IoT, and many others. What gives our hybrid cloud platform the fuel it needs to accelerate adoption and become pervasive is the large ecosystem of partners we are building. We have gone to great lengths to forge a global coalition of best-of-breed ISVs. This includes recent additions like Adobe, Salesforce, SAP, Box, and Slack. All are using our hybrid cloud platform to help clients modernize mission-critical workloads. We have done the same with major system integrators, Ernst & Young, Infosys, Wipro, Tata Consultancy Services, Tech Mahindra, Persistent Systems. All are examples that are helping expand the reach of IBM's hybrid cloud platform. Finally, you'll recall that nearly half the hybrid cloud opportunity lies in services. An important part of our platform's value lies in the expertise we provide to help clients on their journey, whether that's modernizing apps, building cloud-native apps, migrating to the cloud, or managing these applications on the public and private cloud infrastructures. We are currently helping hundreds of major clients on these journeys. I believe that our strategic vision is taking hold in the marketplace. I mentioned the acceleration in our cloud growth this quarter to over 30%. This hybrid cloud platform generated over $23 billion of revenue over the last 12 months. I just described the importance of Red Hat Linux and OpenShift to our platform, and Red Hat continued its momentum in the quarter. The combination of IBM and Red Hat driving strong revenue and bookings growth. Across the board, we are seeing greater demand for Red Hat products. Clients are eager to tap into open source innovation. They want the freedom to securely deploy, run, and manage their data and applications on the cloud of their choice, and retaining that choice is critical. Clients such as Bharti Airtel, American Express, Vodafone, Broadridge Financial Solutions, Banco Sabadell, and CaixaBank all see the value in a hybrid cloud architecture built by IBM and Red Hat. As part of our hybrid cloud strategy, a key focus is to help clients tackle complex and highly regulated workloads. Last year, we launched the Financial Services Ready public cloud with Bank of America, and we recently created a new program for ISVs and SaaS, Software as a Service, providers. I'm happy to share that we now have 30 ISVs signed up. This happened with great speed, and I am confident that more will join soon. So let me pause for a moment and remind you of the three priorities I shared with IBMers on my first day as CEO. One, help our clients on their journey to cloud and AI. Two, win the architectural battle in cloud with Red Hat. Three, continually delight our clients These priorities remain the same, and you can see how we have made progress in all of them. At the same time, we have continued to deliver a series of new innovations in the last quarter. We launched our new Edge and Telco network cloud solutions built on Red Hat OpenStack and Red Hat OpenShift that enables clients to run workloads anywhere from a data center to multiple clouds to the edge. We also launched our AI for IT offering to give every CIO the ability to automate their IT infrastructure that immediately reduces cost and becomes more resilient. AI for IT runs across any cloud and works in collaboration with an ecosystem of partners that includes Slack and Box. On quantum computing, we added an additional four systems, which expands our fleet to 22 quantum computing systems. That includes eight systems that have demonstrated a quantum volume of 32, a yardstick IBM has proposed to measure the relative power and usefulness of quantum computers. I've talked previously about the importance of both organic and inorganic investment to drive innovation. We recently announced two acquisitions that will enhance our hybrid cloud and AI capabilities. In June, we acquired Spanugo to boost our compliance and cybersecurity capabilities for the hybrid cloud. And in early July, we agreed to acquire WDG Automation that advances AI-infused automation capabilities into our cloud packs. Needless to say, this is a unique and challenging time for our clients. To continue To be their most trusted partner, we are spending a lot of time and energy to drastically simplify how our teams go to market. We're doing a lot of work on the back end to bring our portfolio together in a more cohesive fashion so our teams can come with simpler and more relevant proposals. We are also focused on changing our culture and operating model so we can make decisions more quickly and make our interaction with clients a lot more experiential. Jim will take you through a few of our more recent actions. Moving forward, we will continue to take actions that improve our operating model and accelerate our strategic priorities so that we can emerge stronger. Before turning to Jim, let me end by saying a few words on our commitment to corporate social responsibility. This has always been important to IBM, but as you know with the current events in the United States, there has been a renewed focus to do more. As IBM CEO, I'm fully committed to ensuring that IBM will continue to lead in this area. But this is also about skills and creating opportunity. Since 2011, IBM has helped to develop and expand a new public education model called P-TECH. P-TECH provides high school students from underserved backgrounds with the skills and credentials they need for competitive jobs in STEM. To that end, we recently made a commitment to hire 1,000 interns who come from P-TECH. To put this in context, we have between 5,000 and 10,000 interns at IBM each year. So this represents more than 10% of our intern base. I'm always happy to expand later on this and other topics relating to our ESG efforts. Now, back to the quarter and the business. Jim is going to take you through our results. Jim, over to you.