The Six Five team discusses IBM’s Q2 2023 earnings release.
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Transcript:
Pat Moorhead: So what are some of the basics? Revenue, $15.5 billion down 0.4%. They missed slightly on the revenue expectation. They beat handily on EPS, almost a 10% beat on profits. Revenue growth primarily driven by software and consulting, which it’s kind of crazy. And by the way, IBM will throw this number out when Z is not in the up cycle. It’s 75% of overall revenue.
And the other good thing about software and consulting is it helps ARR, which is at about 50% of the mix. Now, Z did well too, Z was up double digits to 11% compared to where it was at 30%, but it’s totally expected because Z has up cycle, down cycle, up cycle, down cycle, and the stock was up based on it. I also want to call out the double-digit revenue growth here because I think that’s exciting. Application operations consulting up 13%, Red Hat, 11%, I already talked about Z, and data and AI up 10%. On the call, IBM did a double-click on two AI clients, which included Citibank and J.B. Hunt. Two very impressive companies. And oh, by the way, two very regulated companies as well. So overall good performance, did almost as much as the Street expected on revenue, blew away those profit numbers.
Daniel Newman: Yeah. We had a chance, you and I, to speak to CFO Jim Kavanaugh. And it’s always helpful to get the context, Pat, when a company doesn’t hit the top line, people often start to, just like I mentioned with SAP, it’s like, “Oh, what’s wrong?” Well, as much as we’ve had this boom of AI spending, you also have to remember there is a lag between buying GPUs, which is Nvidia, and buying the software, and implementing the applications and tools into your business and starting to monetize that, especially when the monetization is in things like software and consulting.
So right now there’s an arms race, and a lot of it’s at the hyperscale level, but then beneath that is at the large enterprise level to invest in the infrastructure that’s going to be required to deploy AI at scale. So IBM making its big bets on AI are likely to benefit in a substantial way from this, but it may not come in the same kind of tidal wave effect that we’re seeing GPU purchasing. So that’s the first thing that I’m thinking about here.
The second thing as I see it is you really have to look at how well the company has done to just get out of things that aren’t going to make it money in the long run. So there was a cleanup requirement, and we saw it over years, the shedding of PCs, workstations, the shedding of servers, the shedding of Kyndryl, there was a lot of cleanup to do. And when you have a company the size of IBM, it’s not an overnight transition. So as I see it, I actually believe that the company directionally is going the right way.
Now, the biggest thing is that when you and I did a GA thing last week and it was IBM-related, was the fact that IBM has its IBM Watson X AI and Watson X data in market today to sell is a pretty big advantage for the company. The other thing is with probes into the OpenAIs, question marks around data and the way data is being exploited, utilized, Pat, IBM is in a unique position to get with enterprise customers right now and say, “Look, while we’re sorting out some of this inconsistency or uncertainty with how AI and data is being utilized, potentially exploited in some of these LLMs and some of these consumer products that have come to market, we’ve built a governance-enabled solution.”
“We’ve built a tool that’s driven by protecting personal data, governing the models, making sure that the models are very specific to business use cases that data’s not being exploited or leaked into a situation where that data is being collected in a way that’s nefarious, or even accidentally just negligent on behalf of the company.” And there’s a lot to be said for that. This is something that I don’t think will be a forever advantage. I think it will get caught, but I think in the early innings with a large global Salesforce, GA services and products, it will help.
Now, I’ll continue to say IBM needs to really help the market understand its growth in TAM and the opportunity and how much revenue and the expectations around Watson X so that people could say, “This is a good bet.” I think in the near term those numbers are going to be harder to define, so what I think you mentioned, Pat, use cases, customer studies, and then showing how that ramps up to volume and revenue is what the market’s going to want to hear. Good management of the business, beating on the bottom line, I think that’s really important when revenues are a little slower, it’s how do you manage the business to be profitable, to drive cashflow? That’s something the company’s doing real well.
I think the overall IT spend is still in a bit of a mixed state. I think there’s been a huge surge in the market, very much driven by one factor and driven to a very narrow band of companies. And don’t forget that IBM was one of the darlings of the downturn, one of the best performers when everything else was performing really poorly. So the fact that it’s moved slower in this market kind of makes sense. It’s a safe stock, it’s a safe company. It’s seen as one that, hey, it pays a dividend, it manages its business very well, it’s competitive in innovation, but it’s not taking huge risks. And I think that’ll always mean it’s going to be a little bit more sturdy during downtime, but of course it’s never going to see that same kind of catapult effect in the uptime.
So overall good quarter for IBM, I mean look, you and I both I think would agree we want to see the double-digit growth, that would just make us and everybody else feel good, but what Arvind is committed to is really pretty reflective in what we’re seeing, which is lower single digit, currency matters right now, getting rid of the slow and the bad, bringing in the good and the disruptive, and being on the cutting edge, but doing it IBM’s way, which is not in such a way that it’s going to be massive risk for the company.
Pat Moorhead: Yeah. IBM is doing exactly what they say that they’re going to do and the huge risk they did take was with Red Hat, but when you have a company the size of IBM with the revenue that drives that double-digit improvement from Red Hat is amazing, but it doesn’t convert everything else into double digits.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
