International Business Machines Corporation

Welcome and thank you for standing by. At this time, all participants are on 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 third 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. I'll remind you the separation of Kindrel is expected to be completed at the beginning of November, and as a result, our third quarter performance reflects IBM, including the Managed Infrastructure Services business, and our pre-separation segment structure. 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. So with that, I'll turn the call over to Arvind.

Thank you, Patricia. And thanks to all of you for joining us today to discuss our third quarter performance. At our recent investor briefing, we laid out our hybrid cloud and AI strategy and our approach to delivering strong free cash flow and sustainable mid single digit revenue growth starting in 2022. Over the last year and a half, we've been taking actions and investing to execute our strategy. This quarter, we reported modest revenue growth and delivered solid free cash flow. We generated over $11 billion of adjusted free cash flow over the last year. We also made tangible progress in our key growth areas of software and consulting. With that, I will acknowledge that in other areas of the business, we fell short of our expectations. With systems nearing the end of the Z15 cycle and global technology services clients pausing ahead of the public filing of the Form 10 and separation of Kindrel. We have made further progress in the Kindrel separation in the last two weeks and announced a distribution date on November 3rd, which is ahead of our original schedule. We have done a lot to prepare Kindrel for this moment. We took structural actions to improve the profit profile. The management team is in place. Employee transfers and the vast majority of client contract innovations are complete. We are now even more certain that separating this business creates value through focus. That said, the people of GTS have been a part of IBM for a long time. Hence, it is with mixed emotions that we are reporting on this segment for the last time. And just yesterday, you heard from Morton and his management team on Kindrel's strategy and value proposition. The separation is just one of the many actions we are taking to focus our business on hybrid cloud and AI and improve our financial profile. To give you some color on IBM's performance excluding Kindle, we delivered 2% revenue growth this quarter. That compares to 1% in the second quarter and minus 1% in the first quarter. These results reflect the strong demand for technology products and services that help our clients advance their digital transformations. Our software revenue growth was led by Red Hat, security, automation, and cloud packs across our software. Global business services, soon to be IBM Consulting, accelerated revenue growth to a double-digit rate. Software and consulting are our two main drivers of growth, and this was certainly true this quarter. I will now expand on the progress we made in the third quarter toward our future. As I have described in the past, we have a platform-centric approach designed to meet clients wherever they are in their journey. The platform we have built is open, secure, and flexible, and continues to gain traction in the marketplace. We now have more than 3,500 clients using our hybrid cloud platform. This not only fuels our Red Hat revenue performance, but also provides a solid base for the multiplier effect across software and services. IBM Consulting is helping to drive this platform adoption, and this quarter had over 180 new Red Hat engagements. Our teams work alongside our clients to co-create business products and solutions, and so far we have done more than 4,000 IBM Garage engagements. In the last quarter, more clients are leveraging our platform capabilities and our expertise to unlock business value. We announced DISH is using IBM software and services to help automate their cloud-native 5G network. CloudPack for network automation, which is infused with AI, automation, and orchestration capabilities, will be used by DISH to fine-tune speed levels or coverage areas depending on the needs of specific clients. Building on a partnership spanning half a century, we announced Credit Mutuel is creating an IBM technology and skills hub in France. The new hub will help Credit Mutuel leverage AI, data, cloud, and IBM Z. We also announced a new agreement with Caixa Bank, one of the largest banks in Europe, to boost its digital capabilities with IBM Cloud for Financial Services and the new IBM Cloud Multi-Zone region in Spain. CaixaBank will leverage IBM Consulting's industry expertise to move to a hybrid cloud approach for modernization. This quarter, we continue to leverage our ecosystem to drive what we described at our investor briefing as a flywheel of growth. That is, the more we grow, the more our partners grow, and vice versa. We are partnering with select GSIs to bring joint solutions to market. This quarter, Atos announced the setup of the FS Cloud Center of Excellence to help financial services customers with their digital transformation journeys. We also have continued momentum and revenue growth from our partnership with industry-leading ISVs and hyperscalers. This quarter, we are partnering with Adobe to help the British pharmacy chain Boots transform their e-commerce platform and deliver new digital customer experiences. While we invest in partnerships, we also invest organically and inorganically to deliver innovation. We have made 16 acquisitions since April 2020, including Boxport and BlueTab in the third quarter. These will strengthen our hybrid cloud consulting capabilities. In the same manner, we are organically developing new innovations that matter to our clients. I'll mention a few new introductions, starting with our innovations in software. In the quarter, Red Hat introduced a new, re-architected version of the Red Hat Ansible automation platform. Red Hat also launched a new version of its advanced cluster management for Kubernetes. These two products are now more tightly integrated which helps drive hybrid cloud automation. In addition, the latest version of Red Hat OpenShift became generally available. IBM Cloud Packs run anywhere that OpenShift runs. They use common services such as logging, metering, monitoring, and security, and are infused with innovations and capabilities from IBM research to deliver much more value than containerized code. In this quarter, We launched Cloud Pak for security, SaaS, as well as new versions of Cloud Pak for integration, Cloud Pak for network automation, and the Maximo application suite. We also recently announced our environmental intelligence software suite. This product, based on our Cloud Pak for data and leveraging our weather capabilities, is designed to help companies measure, monitor, and predict environmental outcomes, but also to help simplify ESG reporting. As you know, we made a commitment to be net-zero greenhouse gas emissions by 2030. We will leverage this solution to inform management as we take action to reach this goal. In our systems business, we recently launched Power10. Power10 has unique hardware innovations, including a processor specifically optimized for data-intensive workloads such as SAP S4 HANA. During the quarter, we also announced the Telom processor. This 7-nanometer microprocessor is engineered to help clients gain insights from their data at the speed of the workloads. At the same time, we continue to see quantum computing as a promising area of opportunity that will play out in the longer term. Our teams are hard at work to move this exciting field forward. Investors will have an opportunity to learn more about this within the next month. Let me quickly highlight one ESG announcement we made recently. To help protect the rights and privacy of cloud clients, we have joined other major companies in the tech industry, Amazon, Google, Microsoft, Salesforce, and SAP, to establish the Trusted Cloud Principles. This initiative is consistent with our longstanding focus on trust and transparency. Before our transition to Jim, Let me reiterate three messages we conveyed during our investor briefing. First, we are optimizing our portfolio to drive mid single digit revenue growth starting in 2022. Second, we are increasing our focus and agility to better serve clients. Third, we are generating strong free cash flow that enables our investments while providing attractive shareholder returns. This quarter, we took another step towards this future. And while much remains to be done, we are confident we can achieve our midterm objectives. Jim, over to you.