IBM CEO Krishna: With AI, ‘Flexibility Of Deployment Is Key’

‘Simply put, we meet clients where they are and allow clients to deploy AI models across multiple environments,’ IBM CEO Arvind Krishna said on the company’s third-quarter earnings call.

IBM doubled its Watsonx and generative artificial intelligence book of business in the last quarter of 2023, showing continued interest in GenAI with revenue from the emerging technology still a ways away—while the Red Hat and security businesses showed room for improvement.

Arvind Krishna, CEO of the Armonk, N.Y.-based tech giant, previously said that the third quarter GenAI book of business “was in the low hundreds of millions.” On Wednesday’s earnings call—covering the end of IBM’s fourth fiscal quarter, which ended Dec. 31—Krishna didn’t break out exact amounts but he clarified that the AI book of business “is not all revenue in the quarter.”

“At this stage, we wanted to start looking at what is our momentum? What is the sentiment from our clients?” Krishna said during the quarterly earnings call. “We went to a measure that is more reflective of—I’ll use the word ‘signings’—what are the commitments the clients are making to us? … Over the long term, let’s call it a couple of years or more, yes, the book of business should turn into an amount of revenue and a quarter. But that’s going to take a bit of time to catch up. … This gives a better indicator right now of what is our traction and what is our acceleration.”

IBM Q4 2023

Krishna said that “every client” he speaks with asks about boosting productivity with AI and how to manage the technology stack.

IBM saw “thousands of hands-on client interactions, including an acceleration in pilots that were completed during the quarter,” he said.

Two-thirds of the AI book of business was consulting. The rest was software transaction and Software-as-a-Service average contract value. Early use cases included code modernization, customer service and digital labor, with IBM seeing large and small transactions across consulting and hardware, Krishna said.

IBM has about 55,000 worldwide channel partners, 12,000 of them in North America, according to CRN’s 2023 Channel Chiefs.

The AI excitement did not translate into major gains in IBM’s software for automation and data and AI. Automation’s year-over-year growth in the quarter was flat. Data and AI grew 1 percent.

Krishna told listeners that he believes “AI will be multimodal, with our clients leveraging a combination of models—IBM, open source, their own proprietary models and those of other companies.”

“Flexibility of deployment is key,” Krishna said. “Simply put, we meet clients where they are and allow clients to deploy AI models across multiple environments.”

Krishna On Customer Spending

Krishna said on the call that he expects the global economy to behave similarly to 2023 and repeated the optimistic view he has maintained throughout IT spending normalization following the COVID-19 pandemic.

“Technology demand will continue to be strong and serve as a major driving force behind global economic and business growth,” he said. “It allows businesses to scale, offer better services, drive efficiencies and seize new market opportunities.”

IBM has not seen a reduction in software and technology budgets from customers, but customers have been “a bit more discriminating in what they’re spending on,” with more spending on AI and digital transformation and spending less in other areas, Krishna said.

“If you look at some of the pressures our CEO clients face, whether it’s interest rates, whether it’s inflation, whether it’s supply chain, whether it’s demographic shifts in population, whether it’s geopolitical conflicts or uncertainty, one answer that lets them grow without taking on fixed costs of either labor or physical infrastructure is technology,” Krishna said. “We see every one of them leaning into technology as a potential answer and help them against all of those potential headwinds.”

IBM Acquisitions, Sales

On acquisitions and divestitures, Krishna said he expects the about $2.33 billion purchase of two Software AG platforms to close “midyear” and reiterated that the sale of The Weather Co.’s assets to investment firm Francisco Partners will close during the first quarter.

“Acquisitions will probably give us a little bit less than 2 points of that growth in 2024,” IBM CFO Jim Kavanaugh said on the call. “Two points from high-value recurring revenue, a little bit less than 2 points of acquisition.”

When asked on the call about what company IBM may buy next, Kavanaugh said that the vendor is “focused on strategic fit for a hybrid cloud and AI-platform-centric company” over the size of the deal. IBM wants high growth, recurring revenue, highly profitable and quick free cash flow accretion, among other factors.

“As the CFO, as we deploy $1, we're looking for a multiplier of hardware, software, services on top of that,” he said. “You’re going to continue to see us be opportunistic in the marketplace.”

Issues In Red Hat, IBM Security

IBM’s security revenue fell 6 percent year over year, with Kavanaugh calling the decrease “an execution gap.”

“We have got an opportunity to go fix that in 2024,” he said.

IBM subsidiary Red Hat grew 7 percent year over year, similar to the prior quarter. IBM did not break out the actual dollar amount Red Hat contributed to the quarter. “We continue to see dampened growth in consumption-based services,” Kavanaugh said on the call.

Although Red Hat—which has been investing in its partner program, a separate program from IBM’s—met the vendor’s expectations of “high-single-digit” growth, the business “still got impacted by consumption-based services,” Kavanaugh said.

“We’re extremely excited about the acceleration of demand and our single-year bookings in our subscription book of business,” Kavanaugh said. “Fourteen percent growth in third quarter. Seventeen percent growth in fourth quarter. Red Hat will give us about 2.5 points of growth year over year.”

In other positive signs for Red Hat looking ahead, Red Hat Enterprise Linux (RHEL), Red Hat OpenShift and Ansible saw double-digit bookings growth, he said. Net revenue retention (NRR) was more than 100 percent and up 6 points over last year. OpenShift saw annual recurring revenue of $1.2 billion.

Krishna said that RHEL should benefit from overall Linux use and customer concern around Linux patching, security and open-source volatility. “It drives a lot of demand for Red Hat,” he said. “We begin to see not just enterprise customers, but even many ISVs begin to upgrade.”

Red Hat OpenShift should benefit from growth in hybrid cloud environments, he said. And Ansible should benefit from customer inability to hire the thousands of people otherwise needed for manual deployment of thousands of business applications.

“Those three combined roll up into the 17 percent increase in [annual] bookings,” Krishna said. “That’s not a leading indicator. That is actually already done. Now, with 14 [percent] in the previous quarter, that tells us there is acceleration happening on that side. And we feel confident, given the client conversations, that these are all going to lead to Red Hat growth.”

The subsidiary should also benefit from increasing embedded opportunities, its edge platform and other new markets, he said.

IBM Consulting

IBM’s consulting wing—No. 7 on CRN’s 2023 Solution Provider 500—grew 5 percent year over year to $5 billion.

IBM Consulting will be an early beneficiary of AI, Krishna told listeners. “We are the only provider today that offers both a technology stack with our Watsonx platform and consulting services for deploying and managing generative AI,” he said. “The early work for clients around data architecture security and governance is critical and hard. And we think consulting expertise is going to be crucial here.”

Krishna said the segment “delivered durable revenue growth through the year despite an uneven macro environment.”

“Our expanding ecosystem, skills and technical expertise, global reach and co-creation approach not only set us apart, but also contributed to our consulting performance outpacing that of our competitors,” he said.

The overall consulting market grows in the 4 percent to 6 percent range, Krishna said. “We are going to be absolutely focused on taking share, which is why we are guiding to a higher 6 [percent] to 8 percent number,” he said.

Compared with other consulting giants, IBM is “very focused on our strategic partners and we are very focused on digital transformation and data and AI as opposed to a much broader swath of offerings that other people have,” Krishna said.

Kavanaugh said IBM is “the only technology company with a consulting business at scale.” Strategic partnerships make up more than 40 percent of IBM Consulting revenue and delivered double-digit growth in signings and revenue for the full year.

IBM’s Amazon Web Services and Microsoft Azure practices each grew revenue more than 50 percent for the year, he said.

Within the consulting segment, business transformation grew 5 percent year over year for the third consecutive quarter. Technology consulting revenue grew 4 percent. Application operations grew 6 percent.

Kavanaugh said the segment saw signings growth of 17 percent, trailing 12-month book-to-bill over 1.15 and absolute backlog up 8 percent, “the strongest we've had in quite some time.”

“There’s real synergistic value of consulting in a hybrid cloud, AI-platform-centric company,” Kavanaugh said. “I think you’ve seen that play out.”

About two-thirds of the consulting work entering 2024 is backlog-driven, he said. “Based on those backlog realization trends, we see an acceleration growth path throughout 2024,” Kavanaugh said. “And that tail end into 2025, we’re well in front of our skis now.”

IBM Fourth Quarter In Detail

IBM’s book of business for Watsonx and GenAI roughly doubled from the third to the fourth quarter, according to the vendor.

Revenue for the quarter was $17.4 billion, up 3 percent ignoring foreign exchange. Net cash from operating activities was $4.5 billion, up $500 million year to year. Free cash flow was $6.1 billion, up about $1 billion year to year.

Software revenue grew 2 percent year over year to $7.5 billion. Within this segment, hybrid platform and solutions grew 1 percent year over year ignoring foreign exchange.

Transaction processing grew 4 percent. “Clients continue to value this portfolio and mission- critical software supporting growing workloads on our hardware platforms like zSystems,” Kavanaugh said. “This together with price increases contributed to growth in both recurring and transactional software revenue in transaction processing for the year.”

IBM’s infrastructure segment grew 2 percent year over year to $4.6 billion. “This performance is particularly notable given it’s the seventh quarter of the z16 cycle,” Kavanaugh said. “z16 revenue performance has significantly outperformed prior cycles, including the successful z15 cycle.”

Within this segment, hybrid infrastructure grew 7 percent year over year ignoring foreign exchange rates. IBM zSystems grew 8 percent. Distributed infrastructure, which includes Power and storage, grew 7 percent. And infrastructure support fell 9 percent.

Install million instructions per second (MIPS) have doubled over the last two cycles, Kavanaugh said. IBM saw annual recurring revenue of $14.4 billion, up 7 percent year over year.

IBM Full-Year 2023, 2024 Guidance

For the full 2023 fiscal year, IBM brought in $61.9 billion in revenue, up 3 percent ignoring foreign exchange.

Software revenue grew 5 percent year over year. Consulting grew 6 percent. Infrastructure fell 4 percent, “reflecting product cycle dynamics,” Kavanaugh said.

Net cash from operating activities was $13.9 billion, up $3.5 billion year to year. IBM’s free cash flow of $11.2 billion was up $1.9 billion and “our strongest level of cash generation since 2019,” Kavanaugh said. IBM ended the quarter with $13.5 billion of cash.

For IBM’s 2024 forecast, the vendor told listeners on the call that it predicts 2024 revenue around mid-single-digit growth and about $12 billion in free cash flow.

IBM software should grow “slightly above the high end of our mid-single-digit model,” Kavanaugh said.

Infrastructure revenue should decline and cost overall IBM revenue growth a point. Kavanaugh said that productivity increases in the business should “lead to workforce rebalancing fairly consistent with 2023 levels.”

The first quarter of 2024 revenue growth rate should “be similar to the full year,” he said. IBM’s stock traded at about $188 a share after hours Wednesday, an increase of about 8 percent.

IBM should hit $3 billion in annual run rate savings by the end of 2024 as it adds more automation and AI-driven efficiencies to its own business, streamlines its supply chain and reduces its real estate footprint, Kavanaugh said.

Less real estate could prove a negative for the employees who will work more in the office given IBM’s actions discouraging complete work from home.