The Six Five team discusses IBM Q2FY24 earnings.
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Transcript:
Daniel Newman: So let’s move on to IBM. Pat, you and I had the chance to talk to CFO Jim Kavanaugh on Earnings Day. A couple of quick comments on his comments was, Jim is really been steadfast with us. We talk pretty much every quarter with him about the company’s incredible operational excellence, and the stock really did run on the news, and Pat 2% growth.
So it’s like it’s not the growth. This isn’t like some huge growth number, but when you’re talking about really excellent management of a business, again, another company that has been very cautious about hiring, has been consistent with expense management, is pumping out cash flow. I think it was record cash flow, free cash flow, and doing it all the while building some interesting pivots, hybrid Cloud AI, hybrid Cloud AI. We’ve been saying this so much for so long. I know I feel like a broken record, but it is what it is. And then you look at the business overall beyond, software revenue, 7%, consulting revenue down infrastructure revenue, up 1% with a surprising outperform by Z. But the margin, the operating margin, the cash flow, all really, really solid. Pat, the highlight for me is the $2 billion Generative AI business.
Now it’s about 3/4 of it running through consulting, 25% of it running through software. I gave some feedback. I’ll continue to give the feedback to the market that I think it’s a little hard to discern their AI impact in the numbers. You’ve got all these different categories that are showing single digit growth, and up and down. It’s consulting is making up most of the Gen AI, but the revenue is down, and then software revenue’s up, but only 7%. And you’ve got this, but they’ve doubled, doubled, doubled, doubled. They’ve done the Futurum thing with Generative AI every quarter. They’re pushing forward. Now they’ve got a $2 billion a year run rate on Generative. They had the first enterprise platform in Watsonx, very powerful. And I think that’s the big story for me is they’re hitting it. They’re one of the companies that’s actually delivering through consulting and software meaningful implementations into industry of AI.
And I give them a lot of credit for that. I’ll keep beating the drum. I would like to see it grow faster. I can’t look at the situation, and be like, “God. You’ve added $2 billion around this, but yet you’re only growing 2%.” But having said that, this is a company that has a complicated distributed business, with everything from transaction processing, to mainframes, to consulting, to IoT, and automation software. And this AI stuff’s peppered and sprinkled throughout it. But Pat, you have a business that pays a dividend, puts off a ton of cash, is growing albeit slowly, it’s a good, especially in an area when you’re seeing more rotation to value. It’s a good combination, and the market’s rewarding it.
Patrick Moorhead: Confidence is growing in the company, and people aren’t looking at IBM for revenue growth. Right? That’s not, and therefore, if you’re not trying to be in 25% growth every quarter, it’s all about profitability. And my gosh. The ultimate arbiter of profitability and financial management is cash. And the cash, the cash they are generating is absolutely bonkers. I think it’s the highest FCF they’ve had in a decade. It’s hard with some of the spinoffs to get that number exact, but it’s super impressive. The other thing, it’s funny. While some people don’t like to talk about infrastructure, infrastructure is sexy. For Z to be up, with a platform that’s been out there for that many years, and is absolutely astonishing. And one thing by the way that we saw the OpenShift numbers Dan that were super impressive, what the company doesn’t talk about is OpenShift and Z. And I have this hunch that that is a very impressive number. And what I really like about that is it probably includes Services. It includes Z, which is super high margin, and OpenShift, which is a super high margin, and it’s Cloud, Cloud on the mainframe baby, and containers.
Daniel Newman: By the way, we need to do a whole nother time to explain how that can work, and all the technology from a security standpoint, that enables a mainframe in the Cloud to have a relationship. With everything, with CrowdStrike and Microsoft, there was a lot of proud mainframers going last week. Because there’d be a lot of applications, and a lot of transactions that could have happened that, sorry. I didn’t mean to butt in on you, Pat, but I just mean you make a really good point.
Patrick Moorhead: No. I was actually done. So you didn’t interrupt me at all.
Daniel Newman: Great.
Patrick Moorhead: Anyways, by the way, looking at IBM stock over the past year is up 30, 35%. And isn’t it interesting how there were those wave one pops from Generative AI, and the Mag Seven, and then now we have a lot of companies, a lot of history, like IBM and SAP moving up there. I think that’s pretty cool.
Daniel Newman: Well, look, we do need to see some rotation into small caps, into value. You can’t build an entire market on 7 stocks. You just can’t, or 10. It doesn’t work.
Patrick Moorhead: We’re trying hard.
Daniel Newman: The house of cards, well, it’s safe. It’s been safe. It’s been safe bet. And I don’t think you and I, we don’t give financial advice. If we did, I don’t think we could ever say, “Don’t invest in NVIDIA.” There’s a lot of reasons to. Having said that, there are some important considerations for people that need to look more broadly at where AI and value is going to be created. We’ll keep talking about that Pat.
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.
