Here are a few of my thoughts and opinions as I listen to the 4Q2020 IBM earnings call.
There is a strategy shift from the IBM leadership:
IBM Management deep dives:
1) IBM Z (release 15) is having a strong cycle. IBM Z revenue is down 24% in Q4, some clients delayed Z15 adoption, but still IBM Z delivered growth in the year. IBM Z is seen as a high value, secure and scalable platform that supports cloud-native applications running on zLinux. The installed based of MIPS is 3.5 x higher than a decade ago.
2) The NewCo(Managed Infrastructure Services) (NewCoMIS) spinoff facts:
$62B in backlog
90,000 employees in over 100 countries.
Reduced service offerings.
$2B charge - largest portion was in GTS cost reduction efforts.
Revenue down 8%, but 70 bps higher margin.
Some Q4 deals were delayed / extended out of Q4 due to the announcement.
Leaner and more efficient operating model.
This is an integrated business.
When the new CEO of NewCo(MIS) was asked about his focus for 2021, he replied with a financial focus:
- Margin, profit and cash are the fundamentals of this business that we will focus on.
- This business will be attractive to a value-based investor. It should approach double digit net margins.
- We are on track to complete the spin by the end of 2021.
- There is excitement within their employees about the change.
3) Confidence in 2021 and 2022 revenue growth:
- Confident in the hybrid cloud business, at ~ $25B and growing 20%. This drives downstream business revenue ($1 platform = $3-5 software => $6-8 services)
- Strong ELA cycle, with shorter deal duration meaning more negotiations.
- Better software renewal rate (top of the range), even excluding RedHat, which helps economics.
- GBS: will return to pre-pandemic levels, then accelerate into 2022
- Systems: Product dynamics are a tailwind into 2022, but the numbers are not that big
- Ecosystem investments should benefit across the segments (systems, services and software).
A few opinions as I listen:
1) I did not hear much about technical things the company is doing to improve their offerings, whether hardware, software or services. I heard about reducing costs and driving operational leverage, but had to strain to hear about investing in people, skills or quality of employee experience. I heard a restatement of segment value propositions, but not of the actual product or capabilities.
2) I am concerned that IBM is committed to its own IBM Cloud as a platform, powered by RedHat, with 2,800 clients. There were 260 engagements that included IBM hybrid cloud (so around 9%). I was surprised that the RedHat growth was only 18% and that 80% of new implementations came through GBS (I might have heard that incorrectly, could have been 80% of GBS engagements included RedHat usage). I wonder how this compares to Amazon Web Services, Microsoft Azure, Google Cloud, and the other public cloud and SaaS infrastructure providers?
3a) Quantum computing and Artificial Intelligence have great potential, but limited current penetration. Quotes about AI from Arvind Krishna (CEO): "Opportunity for AI is massive, but deployment is in single digits" (I assume percentage of clients). "We are helping clients develop intelligent workflows" and "Trust is paramount." Clients use our "rich capabilities."
3b) The CEO's comments on quantum were more specific, saying "Quantum [computing] has the ability to unlock 100s of billions of dollars of value for our clients." IBM committed to a roadmap to delivering larger quantum computers and IBM has been deploying more quantum computers for clients to use.
4) IBM delivered strong cash flow and operating profit performance, but at what cost? During COVID 19, IBM has been able to grow operating gross profit margins (70bps for the quarter, 140bps for the year). There is a charge of $2B for structural changes (which lowered those costs). This is a tricky situation w.r.t. revenue growth, capability growth, employee engagement and morale. Cash flow was exceptionally strong in 2020, $6B in free cash flow (FCF) in Q4, and over $10B FCF for the year.
5) IBM will maintain a financial focus in 2021 (but these may be chilling words for clients and employees):
-- IBM will continue to de-lever, and maintain a single A credit rating with an improving financial profile.
-- "We know how to drive operating leverage"
-- "We will have operating margin expansion in 2021"
Strategic IT Management Consultant with a strong interest in Quantum Computing. Consulting for 29 years and this looks as interesting as cloud computing was in 2010.