IBM reported positive performance for the first quarter of its fiscal year and expects to see strong performance following the recent spin-off of its managed infrastructure business and despite growing concern of an upcoming recession.
In prepared remarks and when answering questions from analysts during the quarterly earnings call Tuesday, IBM Chairman and CEO Arvind Krishna said the tech giant’s consulting, software and other segments will be able to withstand any major economic event in the future.
“What we‘re hearing from clients is clear—technology has become a fundamental source of competitive advantage,” Krishna said on the call. “It is at the very center of how businesses scale and is no longer perceived primarily as a way to cut costs.”
He continued: “We think and we believe—and the past couple of quarters have borne this out—that demand for technology is going to stay four or five points above. Even if GDP falls too flat, or there’s a quick recession or if it’s a very slight recession, we see demand staying strong and continuing. Now, I’ll acknowledge if we have something much more catastrophic, that’s different. But for all the scenarios that we do outline and we do look at, we see that demand is going to continue in a growth phase for the foreseeable future.”
IBM reported US$14.2 billion in revenue, an 11 percent growth year over year.
Mark Wyllie, CEO of Boca Raton, Fla.-based IBM partner Flagship Solutions Group, told CRN that his company is investing in building skills around IBM’s cybersecurity, AI operations (AIOps) and automation offerings.
“Those are areas that are resonating with customers on their hybrid cloud journey,” Wyllie said.
At least two investment banks gave positive views on the tech giant’s future in reports issued Wednesday.
“We continue to view IBM as facilitating adoption of hybrid cloud architectures, leveraging an existing mission-critical customer base and acquired assets,” according to a report by Credit Suisse. “As a hybrid-first world progresses and materializes further for enterprise accounts, we view IBM as one of the key strategic enablers of such an IT architecture transformation.”
In a report by Morgan Stanley, the financial institution said “whereas last quarter‘s revenue outperformance was driven primarily by core Infrastructure (i.e. perceived as a lower quality beat), the upside this quarter came from more broad-based upside across all 3 segments, which we believe the market will interpret more positively.”
Comments from Krishna and IBM Chief Financial Officer James Kavanaugh on “a more constructive consulting outlook, bullish software commentary, contributions from a mainframe cycle starting in 2Q, and ELA renewals expected to increase in 2H22” give Morgan Stanley “a positive setup heading into mid-year.”
The report continued: “And in a market defined by increased volatility and uncertainty, we believe this dynamic coupled with IBM‘s more defensible profile (50%+ recurring revenue) sets IBM up to outperform the rest of our Hardware coverage, which remains more susceptible to potential budget cuts as the macro becomes more challenging.”
Morgan Stanley’s survey of chief information officers “points to overall IT market growth in excess of the 10-year pre-COVID average,” according to the report.
Here’s more of what Krishna had to say on IBM’s earnings call.
Technology ‘a fundamental source of competitive advantage’
Our first-quarter results reflect the changes we have made to position our business for the future. This solid start to the year reinforces our confidence in our strategy. And we now see revenue growth for 2022 at the high end of our mid-single-digit model.
What we’re hearing from clients is clear: Technology has become a fundamental source of competitive advantage. It is at the very center of how businesses scale and is no longer perceived primarily as a way to cut costs.
This is especially true in our current environment. Harnessing the power of technologies such as hybrid cloud and AI remains essential as our clients face a number of strategic challenges and opportunities, whether it is competing for talent, supply chain issues, inflation, cybersecurity or geopolitical instability.
We continue to see a strong demand environment for both technology and consulting as we help our clients respond to these issues.
Over the last two years, we have been optimizing our portfolio, expanding our ecosystem and simplifying our go-to-market to capture this demand. This quarter, we again had double-digit revenue growth in consulting, and software growth reflects solid performance across the portfolio. … Our revenue performance this quarter is a strong indication that our focus, our investments and our actions are paying off.
Hybrid cloud has 4,000-plus clients
Let me now turn to the progress we are making when it comes to our hybrid cloud and AI strategy. Hybrid cloud is all about providing a platform that can straddle multiple public clouds, private clouds and on-premises properties that our clients typically have.
The platform we have built is open, secure and flexible. At its core, it is based on Red Hat, which gives clients powerful software capabilities based on open-source innovation. Our software has been optimized for that platform and helps our clients apply AI, automation and security to make the business work better.
A global team of consultants offers deep business expertise. They do this by co-creating with clients and finding ways to harness the power of technology to accelerate their digital transformation journeys.
Our infrastructure allows clients to take full advantage of an extended hybrid cloud environment. This platform-centric strategy is producing solid results. We have more than 4,000 hybrid cloud platform clients, including 200 added in the first quarter. This gives us two avenues of growth from the incremental number of clients, but more importantly, it allows us to expand our software consulting and infrastructure footprint at these clients.
Clients such as Charles Schwab, Discover Financial and the U.S. Department of Education have all recently chosen IBM hybrid cloud capabilities to digitally transform and build new and differentiated experiences and services.
Clients also turned to IBM AI capabilities to move their employees to higher-value tasks and improve the customer experiences. For instance, IBM is now working with McDonald’s to pilot an automated drive-thru experience with Watson Order. In addition, TD Securities is using IBM’s AI-powered virtual assistants in support of their precious metals digital store. We were recently recognized in this area as a leader in a Gartner Magic Quadrant.
These highlight our ability to drive innovation in natural-language processing and bring these new capabilities to clients.
More partnerships, consulting soaring
An important element of a platform strategy is a partner ecosystem, where we continue to gain momentum. We see this in IBM Consulting, where signings with our ecosystem partners were up more than 50 percent to US$2 billion this quarter.
In the first quarter, we continue to broaden our ecosystem. We announced an expansion of our strategic partnership with SAP, serving as SAP’s Rise premium partner to help clients move workloads to the cloud.
With Adobe, we announced a significant expansion of a partnership around the use of AI-powered weather data on the Adobe Experience Platform.
We are collaborating with Worley and ABB to build a digitally enabled solution that will help energy companies build and operate green hydrogen facilities more efficiently and at scale.
We also signed an agreement to join the UAE [United Arab Emirates] network of industry 4.0 champions, a major public-private partnership designed to accelerate the digital transformation of the country’s industrial sector.
Within IBM, we are making significant changes to the way we work to build a client-centric culture based on technical excellence. Our new client-engagement model–based on experiential selling, client engineering, co-creation—is strongly resonating among clients.
Over the last few quarters, sales productivity is rising, renewal rates are increasing and recurring revenue is growing.
IBM’s z16 launch planned for second quarter
While we are focused on meeting the needs of clients today, we continue to shape the technologies of tomorrow. Most recently, we announced the IBM z16 platform in early April. Z16 is designed for cloud-native development, cybersecurity resilience and includes an on-chip AI accelerator. This allows clients to reduce fraud within real-time transactions.
The z16 exemplifies our ability to drive critical innovations to a platform that remains essential to the world‘s economy.
At the same time, we are bullish on the immense potential that automation represents. We firmly believe that our AIOps [AI and operations] capabilities are poised to seize this significant opportunity.
In the last quarter, we announced a new AIOps solution in collaboration with Flexera that is designed to automate software license compliance.
Quantum and acquisitions
Quantum is another example of our commitment to advance the fundamental science of computing. By deploying the world‘s first 127-qubit [quantum bit] processor, we are the only company to have an actual operational computer that is available on our cloud.
Delivering organic innovation remains an important and constant focus. At the same time, we continue to make acquisitions to strengthen our portfolio and add value to our clients.
In line with this thinking, we completed three acquisitions in the first quarter—Envizi, Neudesic and Sentaca. … Each quarter, we’ve continued to strengthen our portfolio, expand our partner ecosystem and drive productivity and simplification through the business. IBM is now a very different company. We have in effect changed our company‘s trajectory. And while much remains to be done, we are beginning to reap the rewards of our hard-earned efforts. And we are confident in our trajectory for the year.
IBM seeing strong demand
Just to comment on the economy—and I‘ll call it demand—we are seeing very strong demand.
As I said in my prepared remarks, I think technology has shifted from being just one aspect of a business to being the source of competitive advantage.
When that happens … we think and we believe—and the past couple of quarters have borne this out—that demand for technology is going to stay four or five points above GDP.
Even if GDP falls too flat, or there‘s a quick recession or if it’s a very slight recession, we see demand staying strong and continuing.
Now, I‘ll acknowledge if we have something much more catastrophic, that’s different. But for all the scenarios that we do outline and we do look at, we see that demand is going to continue in a growth phase for the foreseeable future.
Growth not just from acquisitions
So if we look at it, we have always said our model for acquisition contribution is typically between 1 point to a point and a half for the year. And so that remains steady in that range. We don‘t really look at that as coming up yet.
I‘ll take it, certainly, if it gets above that, but that is not the case. So what we’re seeing right now is strong demand on what you would call the organic part of the portfolio. And we can see that in the software portfolio. We can see that in the strong Red Hat growth.
Consulting is largely, by the way organic growth is driving it … only a few points of that was acquired growth.
So I would say much more organic than acquired. Acquired is in the range that we have called out before.
IBM forgoes Russia revenue
So when you talk about Europe, [CFO James Kavanaugh] quantified—certainly, Russia, direct— quantified its impact in direct terms. That (US$)300 million we don‘t really expect to see this year at all.
Now when we look at overall growth in Europe … it is likely because we are in much more, I’ll call, mission-critical applications. We have much more in fundamental transformations at our clients and with the focus on financial volumes on critical systems—on telecoms, utilities, health care, government—we tend to see that right now the demand profile in Europe is staying strong.
And so we‘re not seeing, at least at this point, that demand profile coming down. As things go on, that could evolve. As I’ve said before, it‘s our jobs to be concerned about all of these things. And we’ve been watching them very carefully. But with our book-to-bill ratios in consulting, which is kind of a leading edge, we see right now that the demand profile is continuing and has not slowed down at this point.
Kyndryl helped mainframe revenue
Let me first address the Kyndryl piece because that may be behind some of your questions.
The Kyndryl contribution was largely in our mainframe software segment in the TPP [transaction processing platform] segment. So I’ll put it there, and then we pointed it out. I think 28 [percent] of the 31 percent comes from Kyndryl.
By the way, as an absolute amount, we expect that to stay going into next year. But obviously it won‘t contribute to growth going forward after this October.
Now as we look at some of the others, a lot of it comes down to the focus and nimbleness in which we are now operating the company where we have a technology segment and a consulting segment. I believe that that is what contributed.
Certainly there was demand in the market for security … but the nimbleness and the focus of our teams now allows us to go fulfill that demand.
And that is why he saw that growth rate come up by 7 [percent] to 8 percent during the fourth quarter, just looking at quarter-to-quarter dynamics. Then when you look at Red Hat, the execution was very good.
But Red Hat has been in the upper teens, and that is where we expect it to keep performing for the rest of this year.
And that speaks to both the quality of the portfolio and the demand that‘s in the market. Of course, we always have to keep executing against that demand.
So I think no real puts and takes in there in these three.
Now when we come to the data and AI and automation, I do believe that with some of the acquisitions we did last year and being able to fulfill the demand against those that led to the second half of last year having an accelerated growth rate in automation.
And we do expect it to remain within our model—our model calls for mid-single-digit growth in both automation and data and AI.
That said, let me just tell you that my instinct—from listening to our clients, from seeing what they want to do, and from looking at all the shifts happening in demographics, meaning tech skills are very hard to get—I anticipate that for the market at large, there will be more and more demand in both in automation and in AI.
Now the execution is on us to go fulfill against that demand.
IBM should withstand recession
So if you look at the makeup of our consulting portfolio … we have very little of what I would call the infrastructure services. Those all went with Kyndryl.
So what we have left is helping clients and [Kavanaugh] talked about the very high growth rates with some of our ecosystem partners. There is consulting around topics like Salesforce and Adobe and public clouds.
Even in difficult environments, we believe that the adoption of those platforms is going to continue with all of our clients.
Second, as we look at digitization, so digitization is not just taking something and just coloring it and making it digital. But if we look at it as being one of the primary ways to address the labor demographics issue—meaning the shortage of high-skilled labor that is there pretty much globally—then we believe that that actually continues even in a difficult environment because it gives our clients a way to go address that.
If I take, for example, airline scheduling. If you take rebooking passengers, if I take quote-to-cash—where you cut across all of the silos—if I take much more real-time impact of revenue and omni-channel.
These are all examples of consulting projects which we see carrying on even through a difficult environment. So when I look at that, that tells me there‘s sustainability and durability.
I don‘t see the number of trained people and experts coming up suddenly. And so consequently I think that, because of that, because there is a shortage of technical talent in the world, it will continue to go well, even in a constrained economy. … When I say ‘constrained,’ I mean, if we enter what I’ll call a mild recession or a quick recession.
If you get something deep and sustained, I‘ll put my comments a little bit to the side and we’ll have to then go look at that again.
But I think that because of the makeup of our portfolio, I think it will actually fare quite well.
Mainframes still important to IT
If I look at the demand side of mainframe, a lot of our clients are seeing additional volumes because mainframe serves really well as a system of record, as that transactional engine that helps drive our clients’ business.
If there is volatility in the markets—if there is 10 [percent], 20 [percent], 30 percent volume increases, which we are sensing many of our clients see, that is the primary driver of growth.
And the second driver of growth, where we talked about resiliency, is everybody is now wanting to be 24-by-seven and because of all of the issues around—not just resiliency due to physical issues, or software errors, but also because of cyber—people are much more concerned and that drives additional capacity, that people want to make sure that there is a working copy of their application and dataset available at some other place. And that is why you heard us talk about that.
Then, as the volumes go up, we know that there is always an indication of fraud that can go up. And because of the fraud, we embedded AI into the processor so you can now make your fraud decision in line with the transaction decision.
And you can imagine, whether it‘s processing credit cards, whether it’s moving money, all of those capabilities are going to drive that.
So if I pack all of that and then unpack it … I will tell you that we saw over the last three years more growth and better adoption of mainframe than we have seen in prior cycles. We expect from early signals that we‘re going to see that continue for the next couple of years.
That said, we’ve got to go out and execute. We’ve got to make sure that our clients actually are able to quickly deploy these applications that they use. And that will allow us to grow the mainframe over this coming cycle as well.