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 would like to turn the meeting over to Ms. Patricia Murphy with IBM. Ma'am, you may begin.

Thank you. This is Patricia Murphy, and I'd like to welcome you to IBM's fourth quarter 2020 earnings presentation. I'm here with Arvind Krishna, IBM's Chairman and 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 worth of 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 8K submitted to the SEC. So with that, I'll turn the call over to Arvind.

Hello, everyone. Thank you for joining today, and I'm pleased to be speaking with the investment community again. Over the next 15 minutes, I'll talk about where we stand in the execution of our strategy as we begin 2021 and how we are running the company to align with the strategy. I'll provide a perspective on the current environment and our results. In the spirit of being as transparent with you as possible, I will speak to our expectations for the next two years. Jim Cavanaugh will then cover the quarter, give more detail on the separation process for our managed infrastructure services business. I've also asked Martin Schroeder to join us to make a few comments as the recently named CEO of this business. Jim will conclude with additional follow-up on our 2021 expectations, and then Jim and I will take your questions. I'd ask you to please bear with us if we go slightly longer than usual on this call. When I was appointed CEO in April, I laid out my approach to growing the value of the company, which is straightforward. We will significantly increase our focus on our hybrid cloud and AI capabilities, the two most important transformational journeys for our clients. In the nine months since then, we have taken a series of important actions to redefine our future and as a hybrid cloud platform and AI company. This is where we are focusing the bulk of our efforts, time, and investments. In spite of the many challenges in 2020, we have made good progress. In 2021, we believe you will see that progress showing up in our results. With that said, we know it's not necessarily going to be a straight line. The operating environment remains difficult, because of what clients are experiencing at the moment. We can see that in the quarter just passed. Our revenue was slightly behind typical seasonality, but we finished strong in free cash flow, which is important as it's the fuel for investments. Our performance reflects the fact that our clients continue to deal with the effects of the pandemic and broader uncertainty of the macro environment. This put additional pressure on larger software transactions this quarter and project delays in some services engagements. Our revenue growth was also impacted by IBM's specific headwinds of our product cycle and compare challenges. Notwithstanding the short-term market dynamics, we believe we have the plans in place and the focus inside the business to be able to grow in 2021. That said, in the midst of all this, I'm seeing an ever greater need from clients to accelerate their digital transformation, and this bodes very well for us now and over the long term. As I've told you before, the opportunity in hybrid cloud and AI is enormous. In fact, we see the hybrid cloud opportunity at a trillion dollars with less than 25% of workloads having moved to the cloud so far. Our approach is platform-centric. Linux. along with containers and Kubernetes, provides the foundation of a hybrid cloud platform. And Red Hat OpenShift is the core product that captures all this and more. Our hybrid cloud approach is also differentiated by a vast software portfolio, modernized to run cloud native, and our GBS expertise, which plays a key role in driving consumption and is currently helping hundreds of major clients on their own hybrid cloud journeys. With this foundation in place, we are successfully leveraging Red Hat as a unique platform to address what our global, complex, and highly regulated clients need, a hybrid cloud platform that is open, flexible, and secure. Our hybrid cloud approach allows clients to connect their back office to their front office, to modernize mission-critical workloads, to build cloud-dative apps, and to securely deploy and manage data and applications across various clouds. We are confident that we have the right strategy for our clients and for IBM. Let me comment on some of the proof points we have seen over the last few months as we execute on our hybrid cloud platform and AI strategy. First, to drive leadership and focus as a hybrid cloud platform company, a key element of the strategy is to win the architectural battle in cloud. And with our cloud foundation in place, client consumption continues to grow. We now have 2,800 clients using our platform, a number which has grown 40% over the last year. In the fourth quarter, clients such as Barclays, Walmart, Geico, Airbus, Ford, ABB, are all leveraging our hybrid cloud platform to accelerate their own digital transformation journeys. We're also making good headway in our focus on industry clouds, which are designed to tackle the specific needs of mission-critical and highly regulated industries. Following the successful launch of our cloud for financial services last year with more than 75 ISVs and SaaS partners, including Adobe, Infosys Finical, Persistent Systems, and many others, we launched our cloud for telecommunications in November. So far, More than 35 partners have joined our cloud for telecommunications. For example, Samsung is working with IBM and Red Hat to develop new user experiences for business. We're also helping major companies like Verizon, Vodafone Idea, Bharti Airtel, and AT&T to transform their IT and telecom network operations. Second, to be the trusted partner of clients for data and AI. The opportunity in AI is massive, while the current enterprise deployment rate is in the single digits. Clients are now at the point where they are moving from experimenting with AI to deploying it at scale. To seize this opportunity, our AI platform is focused on data, automation, and security, and now includes more than 30,000 clients who have turned to IBM to unlock value from their data. We're helping clients across industries build intelligent workflows by infusing AI into their core business processes, such as hiring, supply chains, and customer service. When it comes to data and AI, CRUST is paramount. IBM is unique in that we make a hard commitment not to monetize or use our clients' data. We also offer the industry's strongest commercially available cryptographic technology, and we give clients the ability to retain control of their own encryption keys. In the fourth quarter, clients such as Air Canada, Print T-Mobile, State Street, and Humana use our rich data and AI capabilities to drive business outcomes. As we look forward, we are also investing to develop and address future market opportunities such as quantum computing. Quantum has the potential to unlock hundreds of billions of dollars of value for our clients by the end of the decade. To seize this opportunity, we have a roadmap to build a thousand-plus qubit quantum computer by 2023, and we have expanded our fleet of quantum computers on which our clients are working today. I want to now spend a couple of minutes on a series of significant changes we are making to the company, most since just the beginning of October. We know that a platform-centric strategy requires a fundamentally different way of doing business. This is why our operating model is to be quietly but substantially reshaped. These decisive moves are all aimed at creating value through greater focus on our portfolio, our operating model, and the needs of our clients. And as they take hold, they will help us to deliver sustainable mid-single-digit revenue growth post-separation. To drive greater focus on our portfolio, we announced the separation of a managed infrastructure services business in October. As I just mentioned, this month we appointed Morten Schroeder as this new company's CEO. Morten has a unique understanding of the business, its global talent base, and 4,600 clients. You'll hear from him shortly. Though much remains to be done, we are on track to complete the spin by the end of the year. We are working closely with clients to ensure a smooth transition, while we are also renewing business and signing new deals. We have a comprehensive project management office to establish the new entity and to optimize the business. I can tell you there's a great deal of excitement among our employees about the opportunities ahead for this new company. To strengthen our hybrid cloud and AI portfolio, we have announced 10 acquisitions since I became CEO, and seven acquisitions just since October. This includes five in global business services, which add skills to help our clients with their journeys to cloud. Red Hat's first acquisition is part of IBM that adds cloud native security capabilities for OpenShift. Our investments in organic and in organic growth and in our people will continue to be sharply focused on both hybrid cloud and AI. To accelerate consumption of our hybrid cloud platform, we are also rapidly expanding our ecosystem by adding hundreds of new partnerships with global system integrators, independent software vendors, and major third-party software partners, and also elevating the role of partners. We are investing a billion dollars in our ecosystem so that our partners can play a much bigger role in fulfilling the many needs of our clients. As an example, We recently teamed up with Salesforce to deliver a new strategic contact tracing platform for the UK National Health Services to help them in their fight against COVID-19. Salesforce and IBM have also joined forces to address key challenges such as vaccine management using IBM's Sterling supply chain solution and our blockchain-based digital health path together with Salesforce's vaccine management and CRM capabilities. To simplify and transform the way we engage clients, earlier this month we announced a new go-to-market model. The first aspect is that we have simplified our sales model by adopting a single consistent segmentation, which will make it easier for clients to work with us and unlock a great deal of productivity. In addition, we are providing clients with a more technical and experiential approach with investment in pre-sales garages, that allow us to co-create with our clients earlier in the sales process. And we're ensuring our sales organization is fully incentivized towards our strategic growth areas. Finally, we're investing in and elevating the role of our ecosystem partners to deliver more value to clients. Let me say a few words about the changes we're bringing to our culture. Since I became CEO, I've talked at great length about the importance of culture and the need to instill a growth and entrepreneurial mindset. As part of that, we are encouraging more business risk-taking and ensuring a higher tolerance for failure across the business. This should allow us to more quickly respond to clients, seize more opportunities, and drive better business outcomes. I'm only scratching the surface of all the actions we've taken to sharpen our focus. As a result, we are running the company differently as we begin 2021. I'm convinced that all these changes will allow us to deepen our client footprint and open up new avenues for growth. Now, let me speak to our expectations for the next two years. All of the actions I've taken are designed to drive growth, and we expect to deliver sustainable mid-single-digit revenue growth post-separation with strong free cash flow performance. How do we achieve this? First, through the continued strong growth of Red Hat, which has grown 18 percent on a normalized basis in 2020 and will be an even larger contributor to revenue growth post-separation. Second, with improvement in the global business services trajectory, we expect GBS to return to its pre-pandemic growth rate by the middle of the year. Third, by leveraging our expanded ecosystem, to further contribute to both GBS and software. And we'll finally start to see the benefit from the investments we're making, both organic and inorganic. These will all contribute to an improving software trajectory as well. In the first half of the year, we expect our results to continue to reflect some of our current challenges as well as our product cycle dynamics. And of course, all year, we'll be working on the separation of managed infrastructure services. But these are not long-term trends in the business, and these headwinds will dissipate. In 2021, the significant changes we have made to focus on hybrid cloud and AI will also begin to take hold. The company will look different at the end of the year, particularly with the execution of the spin-out, but also with the operational changes to sharpen our focus. At a high level, in 2021, We expect to grow revenues at current spot rates with better performance in the second half than the first half. This is the first step towards achieving mid-single-digit revenue growth post-separation. And we expect to generate between $11 to $12 billion of adjusted free cash flow. These are the measures we are focused on. This is where we stand today and how we will operate to achieve our growth goals. Jim will cover all this in more detail.