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, IBM's Vice President, Investor Relations. Ma'am, you may begin.

Thank you. I'd like to welcome you to IBM's third quarter 2023 earnings presentation. As the operator just mentioned, I'm Patricia Murphy, and I'm here today with Arvind Krishna, IBM's Chairman and Chief Executive Officer, and Jim Cavanaugh, 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. To provide additional information to our investors, our presentation includes certain on-gap measures. For example, all of our references to revenue and signings growth are at constant currency. We've provided reconciliation charts for these and other non-GAAP financial measures at the end of the presentation, which is posted to our investor website. Finally, 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. So with that, I'll turn the call over to Arvind.

Thank you for joining us. Before we start, let me address the outbreak of war in Israel. We condemn all acts of terrorism. We are also saddened over the loss of innocent lives and join the global community in the hope that peace and safety can be restored. Let me now turn to our business performance. In the third quarter, we had solid growth across revenue, profit, and free cash flow, while delivering innovations and positioning our business to capture future opportunities. On the broader trends we are seeing in the market, technology continues to serve as a fundamental source of competitive advantage. Businesses and governments around the world are looking for opportunities to address demographic shifts make the supply chains more resilient and improve sustainability. More recently, geopolitical events and the reality of higher for longer add to the growing uncertainty. Technology helps organizations better deal with the many challenges they face. We see both tailwinds and headwinds to overall spending. Nearly every business we talk to wants to leverage technology to offer better services scale more quickly, and fuel growth without increasing their footprint. This has been driving demand for technologies that boost productivity and competitiveness like hybrid cloud and artificial intelligence. Overall, we believe the tailwinds outweigh the headwinds and technology spend will continue to outpace GDP. In this past quarter, we saw good revenue growth in software and consulting. In infrastructure, more than a year into the product cycle, we continue to see good adoption of Z16. Our overall growth reflects our ability to help clients to leverage data and AI for competitive advantage, automate IT environments, and seamlessly integrate hybrid cloud solutions. We also continue to position our business for the future, launching new products and offerings, forging and expanding key partnerships, investing in talent and skills, and focusing our portfolio. We have been taking concrete actions to deliver productivity in our own business. All of this results in an IBM that is aligned to our clients' most pressing needs and has a stronger financial profile. Our third quarter results are another proof point. Typically at this point, I talk about hybrid cloud and the progress we have made. Hybrid cloud remains vitally important to our clients and to our business. Given the inflection in AI, and more specifically generative AI, I want to spend more time today on AI and how we are approaching this opportunity. We believe that generative AI will be multi-model, with clients using a combination of IBM's models, other companies' models, their own proprietary models, and open source models. This hybrid approach to AI is similar to the hybrid approach to cloud. Let me give you an overview of the capabilities we have been building. Our generative AI software stack starts with Red Hat OpenShift, which serves as the foundation that allows clients to operate in a hybrid environment. Data services help make the data ready for AI. WatsonX is the core platform that enables clients to train, tune, validate, and deploy AI models. We are providing models that address specific domains, such as code, language, and cybersecurity, among others. Our AI assistants include the WatsonX Code Assistant to augment developers, WatsonX Assistant to augment customer service agents, and WatsonX orchestrate to augment employees. This quarter, we introduced new AI capabilities for our clients and partners. We unveiled Granit, a multi-billion parameter foundation model on WatsonX.ai, which excels in both language and code. We also introduced the WatsonX Code Assistant. This includes the WatsonX Code Assistant for Z, to help clients accelerate the modernization of mainframe code and apps. It's fueled by a 20 billion parameter model and can, as an example, swiftly translate COBOL to Java. There are hundreds of billions of lines of code written in COBOL, so the opportunity is significant. Looking forward, we plan to launch WatsonX.Governance before the end of the year that provides governance tools businesses need to mitigate risks and ensure compliance through the AI lifecycle. This is a key consideration for clients as they go beyond early proof of concepts into real deployments. To bring our AI capabilities to life, we have more than 20,000 data and AI consultants, including a center of excellence for generative AI. Our teams help clients navigate the AI landscape from crafting a strategy understanding how AI can be used, and deploying AI responsibly. These consultants also provide valuable real-time feedback to our product teams. As in hybrid cloud, our ecosystem across GSIs, ISVs, and hyperscalers plays a critical role in bringing generative AI to our clients. In the work we are doing, clear patterns are emerging in terms of the AI enterprise use cases. Based on extensive feedback and trials to date, three have risen to the top. Code modernization, customer service, and digital labor all have broad relevance and deliver tangible business benefits. We have also seen this internally as we apply our AI capabilities to areas such as client support, HR, IT optimization, and source to pay to automate a significant portion of tasks and improve the productivity of our people. Our book of business in the third quarter specifically related to generative AI was in the low hundreds of millions of dollars. The interest is larger with thousands of hands-on interactions with our clients. These are across our largest clients and smaller clients, which lays the groundwork for future WatsonX opportunities. Let me close the discussion on AI by talking about a couple of client examples. Dun & Bradstreet is leveraging our consulting and software capabilities fueled by WatsonX to help their clients create proprietary generative AI solutions. IBM and EY also just announced a new solution powered by WatsonX Orchestrate to enhance EY's people advisory services. We continue to bring innovations to the market in areas other than AI. This includes new innovations to our industry-leading hybrid cloud platform, Red Hat OpenShift, which was recognized recently by both Gartner and Forrester as the leader in container management. We completed the acquisition of AppTO, which complements our IT automation capabilities. In quantum, we're making good progress in building practical quantum computers that can solve hard problems in areas such as risk, finance, and materials. In closing, we accomplished a lot this quarter. We launched our generative AI platform and have good momentum in helping our clients use this important technology. We continue to take portfolio actions to increase our focus on hybrid cloud and AI. And we are applying AI within our own business, improving execution speed and unlocking real value. All of this reinforces my confidence in our future. We're executing a strategy that closely resonates with our clients' needs, and this is propelling our business forward. Three quarters into the year, we are well positioned to deliver on 2023 expectations for both revenue growth and free cash flow. Now, to offer you a more detailed view of our results and the rest of 2023, I'll hand it over to Jim.