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'd like to welcome you to IBM's second quarter 2021 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 growth at constant currency. 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. With that, I'll turn the call over to Arvind.

Hello, everyone. Thank you for joining us today. It's my pleasure to be speaking with all of you again. We continue to make progress this quarter. Our revenue growth improved to 3% as reported, led by global business services and our software business. And we grew adjusted free cash flow for the first half. Across every industry, Enterprises are using technology to redesign business processes, whether it's automation in manufacturing, telemedicine in healthcare, or omnichannel in retail. These digital transformations are enabled by a hybrid cloud environment. The technology and services we provide to our clients enable their business growth and productivity increases and improve customer experiences. This is why our strategy is focused on hybrid cloud and AI. At the same time, the overall spend environment continues to improve. With the economy reopening in many parts of the world, many markets and industries are getting back on track. We see this in North America and in select industries. Jim will delve deeper into our performance across the different parts of our business. But I want to be clear up front that with our results over the last two quarters, we remain on track to achieve our financial expectations for the year, revenue growth at actual rates, and $11 to $12 billion of adjusted free cash flow. We continue to take decisive steps and make the investments required to execute on our strategy. This includes making acquisitions that strengthen our portfolio, offering new innovations and digital capabilities to our clients, expanding our portal ecosystem, accelerating changes to our go-to-market model, while also instilling more of a growth mindset among our teams and building a more client-centric culture. We are executing the separation of Kindrel, which is still on track to be completed by the end of the year. The recent announcements within our senior team also support and reinforce our strategic priorities. While there have been a number of changes, our comment on Jim Whitehurst, who has stepped down as president, but remains as a senior advisor to me and the rest of the leadership team. Jim worked on many parts of our strategy, including the integration of Red Hat. Nearly three years since we announced the acquisition, there is no doubt this integration has been successful. Jim remains a strong believer in IBM and our strategy. Given his background, I understand his desire to become an investor. Going back to the execution of our strategy, We are pleased with the early signs of progress from the significant changes we are making. But as you would expect, it will take time before we realize the full benefit of these changes. Our strategy around hybrid cloud and AI is resonating among our clients and bears repeating. Hybrid cloud is more than a strategy. It's the reality for our clients today. They have multiple public clouds, private clouds, on-premise workloads, and are dealing with stringent regulatory and security requirements. Our hybrid cloud platform gives clients the ability to flexibly deploy and manage data and applications across any environment. With hybrid cloud, clients can derive two and a half times more value in comparison to other approaches. Our strategy is platform centric. Linux containers and Kubernetes are at the heart of our hybrid cloud platform. allowing clients to write once, run anywhere. Our software portfolio, including cloud packs built on Red Hat OpenShift, runs cloud native. Our GBS experts work with clients across every industry to accelerate their digital transformation journeys through hybrid cloud and AI. Our systems and industry-specific public clouds provide differentiated infrastructure. This platform approach drives compelling economics to IBM and our ecosystem partners. This quarter, we continue to make progress in the execution of our strategy. More and more clients have chosen our technology and services as a lever for business growth. We now have over 3,200 clients using our hybrid cloud platform. That's almost four times the number of clients just prior to our announcement of the Red Hat acquisition. GBS is helping to drive this platform adoption as we modernize and manage our clients' applications in a hybrid cloud environment. This work is accelerating, and we have now grown to 700 GBS Red Hat-based client engagements since the acquisition. Our hybrid cloud platform is proving to be of immense value across industries. One example is telecommunication companies, which are among the largest technology spenders each year. We recently announced that major Telco clients, including Verizon and Telefonica, have chosen IBM's hybrid cloud platform to transform their core networks and bring to life the era of 5G and edge computing. Moving on to AI, we fundamentally believe that core to the competitiveness of every company going forward will be their ability to use AI to unlock real-time value from their data wherever the data resides. Our efforts are focused on bringing our AI technologies to horizontal processes. GBS helps our clients build intelligent workflows and transform their core business process, whether that be a supply chain, talent management, or customer service. This allows them to boost productivity and improve the customer experience. An example of this is the work we are doing with CVS Health. As COVID vaccines began rolling out in the United States, IBM built, in just a few weeks, an AI-powered assistant to help CVS Health deal with the massive influx of calls. Watson Health handles more than 10 million calls in three months, improving the customer experience and reducing costs. Keep in mind, this is for one vaccine and one use case. As use cases expand, the benefits will grow. This is a compelling value proposition and we've recently deployed Watson Assistant to other clients ranging from York University to DFW Airport to PayPal. These examples and others reflect our ability to build powerful AI capabilities for business for which we are also externally recognized. IBM was again ranked number one in IDC's artificial intelligence market for 2020 market share. And IBM has been named a leader in Gartner's 2021 Magic Quadrant for data science and machine learning platforms. Since we announced our new go-to-market model in January, we have made significant changes to our sales model and are providing clients with a more technical and experiential approach. Every client I have spoken to sees the value of this approach. They are pleased to co-innovate with IBM, leverage our garage methodology, and derive value more quickly from our solutions. Of course, we expect the return on these investments, such as improved renewal rates and client expansion, to take time. But time measured in months, not years. We've also been building and expanding a powerful ecosystem of partners who are playing a larger role in helping our clients move along the transformation journey. We're expanding the scope of our partnership with EY. To help financial institutions accelerate digital transformation, IBM and EY recently created the Financial Services Center of Excellence and launched the IBM Tech Hub at EY to strengthen EY's capabilities in hybrid cloud. We also built EY Diligence Edge, an AI platform hosted on the IBM cloud using Watson to drastically decrease the time it takes to do due diligence during mergers and acquisitions. Another partnership that has grown stronger is with Schlumberger. Building on the partnership we announced last year, we've recently launched a new data management platform that clients can leverage to unlock value from the massive amount of data produced by the energy industry. We're seeing growing momentum in our IBM cloud for financial services. Banks have stringent needs driven by compliance, security, and resiliency. Launched last year, The IBM Cloud for Financial Services includes key control and security features built right into its very core. It makes it easier for banks to collaborate with ecosystem partners and vendors. In the second quarter, we reached a milestone of more than 100 ecosystem partners in support of clients like Bank of America and BNP Paribas. While we invest to expand our ecosystem, we are also investing to enhance our portfolio. In the second quarter, we announced a series of products to further differentiate our hybrid cloud and AI capabilities. This includes AutoSQL that automates the management of data without having to move it, CodeNet that teaches AI systems on how to translate code, Watson Orchestrate that augments the personal productivity of professionals, CloudEngine to simplify how developers build cloud-native apps, and Mono2Micro to help companies decide which apps should move to the cloud and to transform monolithic apps into microservices. Red Hat launched new managed services on OpenShift, including API management, Apache, Kafka, and data science services that make it easier than ever to build next-generation applications on OpenShift. Meanwhile, we continue to complement our organic investments with acquisitions. Durbanomic is an ARM provider that helps optimize the performance of any application or resources. It builds on the recent acquisition of Instana for APM and observability and the launch of IBM Cloud Pak for Watson AIOps to automate IT operations with AI. We are reinforcing our ecosystem play in GBS with the acquisition of WEG, the leading Salesforce consulting partner in Europe. These are near term opportunities. At the same time, we are focused on emerging and longer term opportunities such as quantum computing. Quantum is an area of incredible promise, slated to unlock hundreds of billions of dollars of value for our clients by the end of the decade. To help business and society reap the benefits of quantum computing, we have put a roadmap in place to build a thousand plus qubit computer by 2023. we are forging a series of major partnerships to advance the business and science of quantum computing and post quantum encryption. This quarter we have announced we'll join forces with the University of Tokyo in Japan, the STFC Hartree Center in the United Kingdom and the Fraunhofer Institute in Germany. This builds on the partnership we announced last quarter with the Cleveland Clinic. Before I close, I'd like to quickly comment on some of our initiatives around societal issues. This month, we released our 2020 CSR report. In it, you will see our efforts to apply the power of our technologies to advance societal progress, such as applying supercomputing resources in support of COVID-19 research. We have made the important commitment to reach zero greenhouse gas emissions by 2030 without the use of carbon offsets. We're taking a series of actions to increase our diversity representation, and we are being transparent in our diversity and inclusion scores, as you can see in our report. To close, let me reiterate my confidence in our strategy. Our second quarter results demonstrate the progress we are making towards achieving our two financial objectives, sustainable mid-single-digit revenue growth post-separation and strong cash generation.