The Six Five team discusses IBM Q4 2023 earnings.
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Transcript:
Patrick Moorhead: Net, net, beat, beat. Beat on top line, beat on the bottom for the quarter. It was also a wrap to 2023, but there were a few highlights that I was impressed with. First of all, the generative AI and Watsonx, we’ve seen a literal doubled quarter on quarter. A third of that business is through software and two thirds, as you might expect, is consulting as these enterprises are trying to figure out what is going on, what should they be doing. From a revenue comparison, they said Q3 was low hundreds of millions for Watsonx and, if you double that, I guess that’s low 200s of millions. I mean honestly don’t know how to do that. Maybe low hundreds of millions … it was 200, which should mean 400 million, but we’re going to see. They talked a lot about the demand of the areas that they’re targeting for: code modernization, customer service, digital labor … Cited two banks, Citi and NatWest, plus Lockheed Martin, which I thought was really interesting.
Overall, that 3.3% that isn’t swinging around the room super-duper growth. I like to focus on the businesses that are really bringing double digits. Generative AI and Watsonx, You had some pretty good highlights. We’re on the tail end of IBM Z, and I’ve got to give Ross Maury and crew a shout-out here: 8% growth on … I think it’s the seventh quarter of z16 and usually, that’s like a desert and we’re going to be waiting for a z16. Consulting … AWS and Azure up 50% year-on-year. 40% of consulting business gets back to strategic partnerships. IBM doesn’t talk a lot about the competition but on the call, they went after it and made their case about how they’re differentiated. They’re the largest consulting group that’s a tech company and I think that’s fair. Accenture is not viewed, as an example, as a tech company, they’re viewed as a consulting firm. Software, the highlights for me: Red Hat, 17% bookings increase across RHEL, OpenShift, and Ansible.
They gave a 2024 forecast. Revenue was in line. Cloak words like $3 billion productivity target … that’s likely going to be AI related and people optimization but man, that cash $12 billion target and final comment: highest stock price I believe in 10 years, strongest cash generation since 2019, the Arvind Krishna team and the new team is working.
Daniel Newman: It was a really good report, probably one of the best the company’s had in many, many years. This is a continuation of the Hybrid Cloud and AI focus and, when you’re focused as much as Arvind Krishna is and his team, you get the results. You and I both had a chance to talk to CFO Jim Kavanaugh. Jim also reiterated just the strong operational management, the company’s ability to generate cash flow. There were some really great indications about the meaningful impact that AI is having on the business, specifically watsonx. The watsonx business was quoted in the low hundreds of millions. Let’s just put the number two around that and then say they doubled it between Q3 and Q4. It went from 200 to 400, roughly. Again, that’s me adding an assertation, but low hundred, one, two … if it was three, it’s six, but the point is that ramp means IBM’s on its way to generating a billion dollars in revenue from its generative AI technology, watsonx, which was one of the early GA’d enterprise generative tools. That was really one of the things that stood out to me.
You caught onto what’s going on with Z. That was very, very good. The Hybrid Cloud business … look, it’s interesting, but their ’22 to ’24 guide was all about this low, mid single digits and that’s what they’re delivering. It’s interesting that that’s caught fire, but there’s something about stability, consistency, growth and focus that I think makes investors happy, which is part of the reason it’s driving to new highs. Also, that margin expansion, that cash flow creation, those are things that people love to see. It sits really well. It shows that things like the Kyndryl spin-off really did make a lot of sense. I’d like to see more acceleration in the Red Hat growth. I think that’s a really important part of the business. It’s growing a little slower than I would think, in the high single digits. I think it should be double digits, if not higher. Well, not higher than double, but higher double digits.
Then, of course, I’d like to see, and I’ve been saying this for several quarters in a row, I’d love to see cybersecurity pick up a bit. I think that’s a great opportunity for the company across its consulting as well as its technology. Then, I do think it’s made big, big bets on observability. That’s another area, the Instana, Turbonomic investment … with all this AI, we’re going to need to monitor all these systems. You see Cisco making the bet on Splunk. You see companies coming up in this space. Observability’s going to be a big one in the future. It’s not the cool AI, but it’s the important AI, so that is definitely going to be in focus as well. Really, like I said, you’ve got to look for things not to in this report and there wasn’t much to not like. Congrats Arvind, Jim, team. Thanks for the time this past week and good job to IBM.
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.
