International Business Machines' CEO Presents at Sanford C. Bernstein's 29th Annual Strategic Decisions Conference (Transcript)

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 |  About: International Business Machines Corporation (IBM)
by: SA Transcripts

Toni Sacconaghi - Sanford C. Bernstein

Good morning, and welcome, everyone. I’m Toni Sacconaghi, Bernstein's U.S. IT hardware analyst. And I’m very excited that IBM’s Chairman, President and Chief Executive Officer, Ginni Rometty is joining us today.

Ginni has been President and CEO of IBM since January 2012, and Chairman since October of last year. Ginni is a life long IBMer. She joined in 1981 and has held a series of leadership positions at the company, most recently as Senior Vice President and Group Executive, IBM Sales Marketing and Strategy, and prior to that as head of IBM Global Business Services where she led the successful integration of PricewaterhouseCoopers consulting.

Ginni is going to provide some brief introductory remarks and then we will have a fireside chat. You are welcome to put questions on the question cards and send those to the center isles for collection.

Ginni, welcome and again, thank you for joining us today.

Ginni Rometty

Thank you, Tony. Although, I see you emphasize the long career in the brief remark, okay. So, let me, I did, Tony, I thought, as I know many of you, but not everyone. I thought it would help if I spend maybe just 10 minutes upfront to cover what our --three big strategies that drive the value for clients and for you as shareholders.

And so, I would like to cover how we are entering the new era of computing, how we are creating new markets for new clients and then last, what I think is pivotal is the business model we drive, which if I have to just kind of put in a nutshell, it is a business model around continuous transformation to high value and I’ll give you some more meat on those bones.

Let me start with this first one about, we really are entering the new era of computing and this, you could describe it many different ways, and in my mind I picked three that I thought would be most useful for you.

One is, what’s the driving growth in this industry, the second would be, what is actually the foundational technology and the third, always my most important would be through the eyes of the client. And so, let me just cover brief remarks on each of those about this new era.

So new era, what’s driving growth, it is the confluence and I underscore, confluence of four things, but I’ll speak of them each individually, but really the unique part is there are four things happening at once and it is around mobile, social, cloud, creating this world of big data. So comment real fast on each.

Mobile, everyone, I don’t needed to tell you or explain it, enterprise clients, which are what we focus on, very focused on taking all their applications, MobileFirst. But they now are entering that stage that they have to connect it to other valuable assets they have that leads you into the world of enterprise integration and for those of you that ever followed this during the web era that created a $100 billion industry and that is what we are entering now. We in fact came out with the first family of offerings, something called MobileFirst, so mobile alone.

Then go ahead, I enter the word cloud, let me just assert to you that in the end what we win is this idea of hybrid cloud. We just finished a survey with clients, nearly 100% believe this is where the ending point is, meaning public, private on/off premise or with the collection working together.

And then around the area of social, my sort of tagline both with clients and how I’m running IBM is that social business inside the enterprise will be the production line of the future and I’ll come back to this. But this is why we announced the category around social business and we are now in 60% of the Fortune 100 as a platform for social business inside, as I say not in a while inside.

And then the reason I say all that mobile, social, cloud, what all that does is create this era of big data and little for a cocktail to bit. Every two days, the world creates as much data as the world created through the year 2003, every two days.

Now, the issue though isn’t going to be just volume, it’s a kind of data. I’ve been quoted to saying, I think data will be the world’s next natural resources and in fact, I think that is not this limited, but will be how it is refined and how it is used that could fuel another age of really innovation that’s out there.

This is why we have over the last since 2005 spent $24 billion acquiring companies around big data analytics and our own organic development in this area, $24 billion. So you’ve got this big data era.

Now, let me switch and go, what’s driving demand from a fundamental technology platform, and I would just leave with three words.

In all of time, all of our lives, computing has gone through three different eras. The first machine were things that tabulated and counted, if I put it simply, tabulating. The next era, everything you have known to date is systems that are programmable, the third era, which we are entering and these will go for decades, is going to be an era of cognitive systems, those are systems that learn, and if you just think for a minute, why this is in type, you have no choice in a world of huge big data, no one will be able to program, how to deal with all that data, the system have to learn itself what the data is saying and our first instantiation of that was something called Watson, which maybe Tony and I’ll get a chance to talk more about where we are in the commercialization of Watson.

So what’s driving growth from as I first said, was from the technology trends, the confluence of the four, you’ve got this fundamental technology platform, tabulating programming to cognitive, and then through the eyes of the client.

And as I was, Tony and I was just chatting, I spent a large amount of my time with our clients and the CEO’s of all our clients. And we would all be in great agreement, if again I had to put in quote, that information will be the basis of competitive advantage for every company out there. Mine, theirs, all of us, information will be the basis of competitive advantage.

And the reason I say that it will distinctly change three things about a company, and I can talk to you about how I change IBM. It will, one, change how you make decisions, they will be predictive analytics. It will change how you create value that will be the idea of a social business being in the production line. It is going to be more important what you share versus what you know. And then third, how you deliver value will change, it will go to the individual, as I said, it will be depth of the average, that will completely change in all that underpin with data. So kind of a very fast view of the industry which takes me to my second big strategy for us is around creating therefore new clients and new markets.

Now this idea when you take all this technology, I’ve been quoted to saying, it’s going to take technology and change the core of what the company does. And that in fact, if I just loosely put it, it’s going to pull technology even more into the front office, I’m using that very loosely, that means reimagining the role of the Chief Financial Officer, an HR leader, a supply chain leader, a mayor, a police man, that what’s I mean by the front office.

And in this area, I think people don’t realize how much IBM has changed and how much we’ve extended beyond the IT buyer themselves. So just a little bit of kind of bell weather of it. IBM research and we are the only big commercial research company left. But if you look at what IBM research looks like today versus what they did little over a decade ago, research over a decade ago, 70% of what it did was material science. Today, 60% of IBM research is all around what we call growth initiative and things I just covered about cloud, around big data, around smarter planet and if you look at this guys and gals, 50% mathematicians, 50% industry experts, equal amounts of people that are there.

So this idea is how you create market, I want to leave you with three thoughts on how we create markets to address all these trends. First one, by geography, we have, IBM has a vast global footprint already in 170 countries. But over the last year, we have opened up 500 new offices, in those, some of those developing countries. And in fact, I am very focused on taking us even broader into Africa, which we should also talk about particularly Sub-Sahara in Africa. Already in 24 countries in Africa, but I want to focus on that as I steward for the long-term.

Secondly, you make markets, is by new categories, new categories of offering, some of ours most recent would be around social business, smarter commerce is an example.

And then the third is by these new buyers. So we -- we just last week, it was our conference CFO, CIO, of some of the best companies in the world together. We did this a year ago with Chief Marketing Officers, kind of marching our way through all of the C- suite.

And their jobs are changing entirely, I mean, the CFO’s would say three things about their new job, predictive analytics to make better decisions, they would say their job is to drive business model integrations and they would say as an example now they have to drive cross enterprise integration. So we make solutions for all that. So that would be how you make markets and new clients.

Now, I think, these new markets, new clients, this front office kind of wave will end up being bigger to our industry than ERP has been over the past two decades. Those of you that have watched the ways of growth ERP has created, which brings me to my last point, before Tony and I sit down, I thought it would be helpful to go over what I said about our business model, just to give everybody a bit of foundation.

So our business model continuous transformation, so let me make a first point on continues transformation, what does that mean? I would take away kind of three big sets of activities and I’ll go into little more detail later.

One, is all around moving yourselves into higher value offering all the time, the second, is about reinvention and then the third is around making markets, kind of key words there.

Then second big point about our business model, it’s just view of continuous transformation that gives us confidence to take a long-term view. So Patricia just puts up a chart for me, about our long-term view. We use something called the roadmap, I mean, I asked the, how many people can I ask are familiar with IBM’s roadmap. Okay, so sort of half, okay, so tell the guy next to you, no, I will tell you.

So this idea of roadmap, we started back in 2007 and it was in a way to explain be transparent, people say the IBM is complex, don’t understand you. We said, let’s be very transparent about our objective and then there will be flexible ways to get there. So the first roadmap was in 2007, timed out in 2010, we had overachieved that objective. This roadmap started in 2011 to 2015 and it is an objective of at least $20 earnings per share, you see the progress that we have made overtime.

So my second point is this roadmap, it gives us the confidence to give you a long-term sort of perspective. Now, there are elements of it. What we are clear about is where we are investing, our growth initiative, you kind of heard me mention it a few times, the big investments we are making are around cloud, big data analytics, smarter planet and our growth markets, and in fact, collectively over the first two years, those have created $9 billion of growth.

The second thing we are hear is productivity and I hope Tony and I do talk about this, I underscore the word productivity, that is different than cost takeout, and productivity $8 billion over this five year horizon, we take 40% to the bottom line, 60% we reinvest in the rest of the company.

And then we are very clear about our priority to the shareholder and how we use our cash, disciplined in acquisitions, $20 billion in acquisitions will be over this timeframe, as well $70 billion return to the shareholder through dividend and share repurchase.

So all that I sort of wrap up with to underscore for all of you with the commitment to you and that it is, we just finished last year 2012 with our 10th consecutive year of double-digit earnings per share growth and underneath that tripled our free cash flow in that period over $18 billion and I’ll just end with the comment that look this is continuous transformation is how we have evolved the first 100 years and how we will evolve the second 100 years, so hopefully that’s all of IBM in 10 minutes.

So, let me sit down and your questions and Tony’s.

Question-and-Answer Session

Toni Sacconaghi - Sanford C. Bernstein

Thanks very much for those opening remarks Ginni, I’ve got a same thrill to be able to ask multi-part questions and follow-ups over here.

Ginni Rometty

I didn’t say I answer them.

Toni Sacconaghi - Sanford C. Bernstein

So maybe we can start just with some context, you’ve been CEO for one and half years now. Maybe you can talk about what you’ve learned about IBM as a CEO, you were, you’ve been a life long IBMer, but as CEO that surprised you.

Ginni Rometty

Yes.

Toni Sacconaghi - Sanford C. Bernstein

And has your view of IBM’s strengths and weaknesses changed at all in the last year and half?

Ginni Rometty

Well, I would, you would probably be surprised if I said anything surprised me, I mean, having been there 30 years and having run many of the businesses, I can’t say I’m surprised about much. I do have I think a very clear view and maybe even clear what strengths and things to work on. Because if you would ask me, in a nutshell, you walk into me in a hallway, what are IBM strengths and what you got to work on.

Strengthwise, you would not be surprised I would reiterate what I just said about continuous transformation. But because I think it’s a capability, not just the thing that you do. And I think that’s different than most -- many clients that I talk with. If you ingrain that in leadership to be a capability, that would be a strength.

I think the second is our portfolio, meaning the portfolio from an -- I want to underscore enterprise viewpoint for these new trends, social big data et cetera. Okay, now that said to Toni’s point what did you see at some of the things to work on.

I think we’ve got parts of our portfolio. I have to -- and I’m accelerating their transformation to some parts of our business around our power business, which we’re taking into the Linux area, our ex-platform business as well our storage. We should be doing far better in storage than we are doing as an example.

So strength in the enterprise portfolio in the new emerging trends, I got some work to do in some businesses that we need to improve. Couple of other -- I think very much strengths of IBM, I would like you to sort of think about in the call is this idea, that where we do grow, we grow in high value areas.

So when I mentioned things like Cloud, 70% growth in this first quarter, Smarter Planet 25%. Analytics Big Data we exactly took up our goal during this timeframe that Analytics and Big Data would go from $6 billion of growth to $10 billion. We just finished another quarter of 7% growth in that area and some very big numbers.

And the reason, when I say we grow in high value being an important strength, those things I just mentioned, 50% of the mix is software. So as you would care about as the margin in investor, 50% is software versus IBM in it’s total is 25%. So that takes you into high value and then I would also say the other thing that is different than I think most companies that are global.

What global means to IBM. Most people think global is where you sell but global to us is how you operate. So if you pick up the covers and look at IBM, you will see centers of excellence around the world and work is shared internal to IBM. That’s how the companies run and that is great for productivity. And then how you innovate which is done on a global basis, the most recent research lab, I just opened within Kenya and then I end with our strengths. I hope, I think you and I talked about this, the strengths being what you want to call it reverence, respect, commitment to the shareholder and that is on how we use our cash.

The discipline, the shareholder return, $150 billion since the year 2000 and the commitment around and discipline around, things like acquisitions. About strengths, some things to improve.

Toni Sacconaghi - Sanford C. Bernstein

If you think about your leadership as CEO, how is that different than under Sam Palmisano and how are your styles similar or different?

Ginni Rometty

And I hear some people laughing on this. This is a -- it's an interesting question that many people have asked me and I must say I have gone to great extremes not to answer it. And let me tell you why though. I feel very strongly that IBM is not a personality run company, right. It’s not an iconically run company. It is about a lot of great strengths and a lot of great leaders.

So I personally turned down hundreds of these interviews that are these personality kind of profiles that this is about IBM, not about me. But to Toni’s question, what this is about though is whoever is the leader as am I, is a firm commitment to continue to evolve this company to what its next level is. And so to you -- so Toni how I would, I think my better way of answering that is, since I have taken over the position, what have we done, maybe more bluntly kind of a way.

And everything I put in that framework of that continuous transformation, so when I think about moving to high value, I find it interesting. You’ll see companies acquire one or two companies here and there. In the last 15 months, oh no, its 16 months, I guess, 17 months, we have acquired 14 companies, all in those new areas and continue the commitment to divest when businesses are ready to be divested. They are no longer strategic to us, strategic to some one else.

In last spring, we divested our point of sale business around commerce to Toshiba. They are now partner in smarter commerce with us. So we’ve continued our commitment and I have all in those new areas. So when I say 14 acquisitions, it’s things like Texas Memory System that is Flash, it’s things like (inaudible),less than Analytics and Big Data as I described to you before, connects for the HR leader that’s out there.

So I will continue to move us into high value. The markets that we’ve made, I just mentioned about Africa and some of these new social businesses and smarter commerce, I then think about the -- if you take a look at the skills that we have and first reinvention of the business. I mentioned to you reinvention is another part of continuous transformation.

So three big reinventions underway, power for the Linux market, WebSphere which led in internet era is being now we still think it is Middleware for mobile, MobileFirst and then what we’re doing with Watson for this new era. And then I would look at the skill. Toni, often you write about services, right.

And if you would have pick up the cover again and look inside of our global business services unit, you would not find it traditionally aligned any longer around what I would consider old school services businesses which would be CRM, finance, that kind of thing. You now see it reinvented for the globally integrated enterprise in all these new front office professions.

And then I would end with, kind of, where I’m taking how IBM looks itself. And this might be the closest to say what the difference each leader, how does the company look per leader. And if I go back in time, having had the pleasure to have worked under Sam and Louis both, If I would think about some of the great achievements as you look backwards.

Under Louis’ leadership, he really had IBM work on sharing, creating shared functions globally around the world. Under Sam, you would say the hallmark was he globalized the company and what I see for us, what’s underway right now for us. And I believe it would be for many companies is it should be a smarter, I may call it a smarter enterprise, and it’ll have two pillars to it, all around analytics and all around being a social business. It will make your company faster, flatter and that will drive productivity with the analytics. So that’s kind of -- as I see how we move the dial already.

Toni Sacconaghi - Sanford C. Bernstein

Thanks. I want to dig in a little bit into the financial model. And it is enviable in terms of track record that IBM has had. I think prior to Q3 of ‘12. IBM had beaten consensus EPS for 19 straight quarters. And I didn’t compute how many other companies have done that but I presume that they are very smallest.

In the last three quarters, the performance have not been as consistent on the EPS side, IBM missed once, met once and beat once. And so one of the questions that I have gotten a lot from investors is, is there anything that’s changed or have been, you have that remarkable string of consistency in the last three quarters have not followed in the same manner. Can you comment on that?

Ginni Rometty

Okay. So I may consider met as beat bad things, okay, so at least now where I come from and -- but I think the more important point in this, backup and then come forward again is something I meant to mentioned in my, kind of, opening comments on our financial models. If I said part of it, around continuous transformation, the roadmap is a long-term view. The part of it what the roadmap does, it is a commitment. The commitment is in the at least earnings per share and then the roadmap under it is flexible.

And the reason we do it in the long term is that there is no straight road there. Ups and downs that you cannot predict, yet await and navigate through them. So in the 2010 roadmap, we didn’t predict 2008 and 2009 recession, yet skill in the end, exceeded the roadmap with at least number.

And certainly last year in 2012, 13% earnings per share growth with 0% revenue in constant currency. So to me, the most important thing is that outcome and then underneath is that flexibility on how you get there. And it’s meant to be different ways between productivity, between mix, between margins and revenue growth. So I more -- more fixated on that as you know, at least in the long term and stewarding our way through to that.

Toni Sacconaghi - Sanford C. Bernstein

Are you confident that execution over that timeframe has been where you’d like it to be i.e. that this is really more macro in terms of and again I appreciate the long term and your track record is impeccable. But as the CEO relatively early in your tenure and looking at that performance particularly last quarter but even over the body of the last three which has not been quite the eclipsing. Do you think that some of this has been execution or do you think most of it’s been more difficult macro environment than IBM had anticipated?

Ginni Rometty

We’re pretty -- those of you that had followed and even on our first quarter, we’re pretty clear when we think of our own execution issues. And we call them out right. And always first and we did have some execution issues right. We weren’t pleased with the way some of things had as you know, had closed. So we’ve called that out. And when it’s time as we go work on those and as I said some of those platforms that we’re working on.

So I would put that in that category. We’ve got enough to do to work on for ourselves and again the growth comment, I keep going back. When you are 100 years old, you learn, you steward for the long-term and there is not just one chapter, there is going to be another and another and another. And the most important thing that I can do for this company is keep moving it into high value. And so that where we do grow, we’re growing with high value areas are because when you’re 100 years old and going on 200, you’re always keep -- you have to keep reinventing yourself.

You won’t define yourself by a product. You cannot define yourself by a product, right. You have to be an innovation company to keep moving in those areas. So that’s why if I think about growth, it’s part of underlying your questions. I think about it there is most important that I grow in the high value area. So I can meet the objective of at least on my earnings-per-share number over the long-term with no straight road there, but directionally on that way.

Toni Sacconaghi - Sanford C. Bernstein

And that takes me to another financial question, I wanted to ask you about, does revenue growth ultimately then matter because I think if we look back at your last roadmap, the aspiration was to grow at least 5%. You didn’t predict the financial crisis but I think IBM over the period grew about 2%. And to date relative to your expectations for this roadmap, IBM top line is also growing less than its expectations. I guess the question is why have so growth been more modest.

Ginni Rometty

Yes.

Toni Sacconaghi - Sanford C. Bernstein

And ultimately does it matter if this roadmap has 0% revenue growth through 2015, but you deliver over $20. How do you feel about that as CEO and does it matter?

Ginni Rometty

Yes. What I think matters is that I grow in the high value areas because that’s what ensures my viability for the long term and that -- and in doing so both producing for the shareholder and then being sure I steward IBM in the right way for the long-term. Over the last decade, the growth rate was about 2.5% right. So, now when I say what matters is the high growth area, like I just said a minute ago, Cloud over 70%, Smarter Planet 25%. These are big numbers and what you care I think what you should care about is that I grow in the area that are good quality revenue dollars and that is producing higher margin.

I mean that is the model and by the way it’s not just the financial model, if what is relevant to client. I always go back, it is what is relevant to client. And so I keep moving myself into the areas, more of value to them and more relevant to them. So does the revenue matter, sure it matters. It’s one of the components of this roadmap but the roadmap is really meant to be flexible, which we’ve demonstrated as you say.

And so when you say does it matters, yes, it matters that I grow in the high value areas that are there and things like software, right. And that we continue our growth at our historical rates and software mid-single digit that could be an important element of that roadmap.

Toni Sacconaghi - Sanford C. Bernstein

If you look back relative to your expectations, so again may be it’s all macro, but through your lens, relative to your expectations. You thought you would grow more and you’ve always have this high value focus. And so in hindsight, was the short fall relative to your revenue target in the roadmap, something conscious where you said look, we’re actually going to divest more than we thought, where we’re going to migrate more quickly to high value.

Did something change over the course of the roadmap because it has felt over the last five or six years, you've been more optimistic in your financial targets about revenue than you’ve been able to deliver. And I’m curious about whether that’s because you’ve changed mid course or the macro environment’s been tougher or you’ve been over zealous about some of the growth opportunities?

Ginni Rometty

Not changed mid course, we always had high objective on all of these always. So I mean, I think that’s one of the great things about IBM, always set the bar high on everything. So I don't view it so much as oh my gosh, I disappointed myself in this. The point is to give flexibility and then when the market changes, you’ve got multiple paths to the outcome.

And some of this -- the sometimes, our base business erode faster than you think, that can happen, right. And so that’s more of the issues that times that you deal with and that’s why you have flexibility in the roadmap to get there. So, this is why again, do you have confidence and I think we are one of the few that gives any kind of long-term indication, right.

And in 2013, certainly having done it at the beginning back in 2010 is a pretty long-term indication. And therefore this idea, keep your mind focused on the multiple path, it’s not just revenue growth. It is mix, it is margin and then it is obviously share repurchase and acquisition and the like that are all part of that. And when you talk about revenue, it’s partly getting into these new businesses like the ones that I just described.

Toni Sacconaghi - Sanford C. Bernstein

If we think about your financial model beyond 2015, as you alluded to, I think if we look over the last 10 or 15 years, revenue growth has been 2%, 2.5%, 3% depending on the end points and the EPS has been 10% or 11%, 12% compounded depending on the end points that you select over that period. So a tremendous ability to move to that high value in the capital allocation program of reducing the share basis has created that significant differential between revenue growth and EPS growth.

If we think about longer term, that difference cover 8, 9, 10 points between revenue growth and EPS growth, a lot the two biggest drivers that are margin improvement and share repurchases. And on average, I think they’ve each contribute three or four points per year to EPS leverage relative to revenue growth. Maybe we could talk about each of those in turn about their sustainability. I think one of the questions I get a lot from investors is how far can IBM go in terms of margin expansion. And the margin expansion has been so extraordinary…

Ginni Rometty

That’s a good question.

Toni Sacconaghi - Sanford C. Bernstein

…the workhorse rebalancing activity has been a significant contributor, the move to higher productivity, higher value segments. At some point, don’t you reach a diminishing returns prospective where that become too difficult to do?

Ginni Rometty

Yes. That is a very good question because people do ask that and while we have done a great job, we are not yet in the top quartile of the S&P 500. We are not yet in the top quartile of the tech universe. So we have plenty of room to go here. And when I think about this, so there is two ways to look at Toni’s questions on what are the different things to do, right to have sustainable.

So one is you’re not yet there in the top quartile. And that’s when you look at IBM overall. But I must tell you the way we manage the company, we always look in multiple dimensions because clients we buy end to client side and then clients buy individually by different product areas. So you need to be fit and competitive both ways. So we also look as you know we talked about this by the different business segments.

So as an example, on software, right, we are not yet at what Oracle’s margins are. As an example, you look at the Indian based services firms collectively build delta to go. So I used all these benchmarks constantly. And I am going to tell all my clients this is a hallmark of a great company. It’s constantly looking for something to benchmark yourself against that is either like you or different than you because it takes you. It makes you think differently about how you do things, and this is where I think the point about our productivity is underestimated.

And that too many people associate productivity with cost cutting. I kind of made that comment when I started, and as I look forward and I’ll give you two examples. In my mind, they are so vivid, but it’s not cost cutting .So if it’s just cost cutting, Toni, things like you watch another big IT company with big services, they did pure cost-cutting and it crumbled.

As we’ve worked on productivity, the rest of margins improved, right. You have a perfect example of two different views. One to cost, one to productivity and if I look at this two things that you would tell me typically people do by their gut, not analytically driven because I think that’s the secret about productivity and future is this idea of predictive analytics.

And so it’s not just what I felt, but I believe. So as an example salary increases, typically the way most companies do salary increases maybe yours, there is some sort of budget for salary increase to beat up, given to different units, managers and make their decisions, who gets what kind of thing based on their market competitiveness.

We have research work on predictive algorithms to predict people who might predict. They didn’t say they were going to leave and did say anything. They were top performers, predict who would be what it would take to make them not even think that way. We did it in one big country. We probably avoided $50 million of what would have maybe been a salary program we have to do there.

That to me is pure productivity. That’s not cost cutting. I flip the other side, we are working on predictive analytics around sales right, something very much not typically analytically entirely driven about how you do [ph]quote us. And making some great strides on that. So to me, we’re just scratching the surface on this idea of productivity and predictive analytics. And what it will mean. It is the number one topic I talked to almost every client CEO is how that is going to be the difference of competitive differentiation is been all beyond the edges for everyone on how they use these analytics to do it.

Toni Sacconaghi - Sanford C. Bernstein

So you talk about some of the benchmarks that you aspire to. And I think if we look at software, you are about 38% operating margin now. But if I look at your road map target in fiscal ’15, you’re actually 45% to 48% which is Oracle’s margins., And I look at your services margins which are about 17% now and I impude what I think your target is for fiscal ‘15 now and $20 and that’s actually in line with some of the Indian firms.

And so I see the track for 2015 but beyond that do you really think there is case for better than current best margins either across the industry or uniquely for IBM because I think beyond 2015 that’s probably what we’ll be looking at and those two key business?

Ginni Rometty

Give one of the few companies in the world, that even talks about to 2015. I maybe the only company in the world. I’m not going to talk about beyond right. But the commitment around this continuous transformation and I think the other element people continued to forget about this when we think about this for the long term is, what businesses are you in. All right. And what do those businesses look like.

If you take just a static snapshot of the business and then say well, look at its margin eventually be that’s one thing. But I mean our hallmark has been continuing to change the businesses we’re in today are not the businesses we were in a decade ago, right.

And so it isn’t just a mixed statement, it’s what you view in those businesses. So I mean you give me a, if you give me, if you might just one quick moment to just talk a little bit about Watson.

Now, this is -- again my job is to steward for the short and the long term. And what we have done with Watson in a real quick little nutshell. May I just ask how many people two years ago, saw Watson or caught it, read it, sought, played jeopardy on television.

So sort of, half the group and it is a machine. This is not just a Q&A machine on steroids or something like that. This is a machine that both understands English-language, but what it is really doing is inside. It is thousands of algorithms running in parallel that it’s able to take the question, go look in research all the possible answers, rate and rank them on probability, present to you what they could be and then tell you why it believes that.

So that’s an entirely different business. So the work we’re doing with Memorial Sloan-Kettering. The work we’re doing with MD Anderson. Well Point this is all around as an example, those any of you who do anything in medicine, if you can hold the doctors attention for this amount of time. We’ve been training Watson. We pick the hardest thing to do. We’ve been working on how to diagnose and suggest treatments for the non-blood cancers.

And so we have made huge progress on that. That is a service. That is a different business. The one doc says, this is not medical technology. This is medical revolution, alright?

That’s one element of Watson. Another element of it though is what you would call high volume that we are working on. We just announced the first clients working on this which would be things like next best action if you’re financial services firm, call center answer, that’s why I say high volume. This is not like solving cancer, okay? So the other end of the spectrum. And then there will be a whole ecosystem around Watson, where people can write ask to it, use it as a service. So that is a different business. So I think that’s also part of this idea of this continual transformation as you look out into our future.

Toni Sacconaghi - Sanford C. Bernstein

Well, another…

Ginni Rometty

You’ve got a lots of card there.

Toni Sacconaghi - Sanford C. Bernstein

I do and I am going to go a little lighting around in about a minute.

Ginni Rometty

You’re like assorting them, I know, I would guessing, I can’t guess thing, so.

Toni Sacconaghi - Sanford C. Bernstein

And the other part of the -- important part of the roadmap has been the capital allocation program.

Ginni Rometty

Yes.

Toni Sacconaghi - Sanford C. Bernstein

… on return capital, IBM has been fairly unique among most large companies particularly tech and being able to use all of its globally generated cash to buyback shares or do domestic acquisitions, is that something that ultimately sustainable?

Ginni Rometty

Well, whether where the cash is located or how…

Toni Sacconaghi - Sanford C. Bernstein

Well, the fact that you can use all your globally generated cash to repurchase and not have any of it trapped offshore, many other companies talked about.

Ginni Rometty

Yeah. No. This gets back to why again the fact that we are the globally integrated enterprise and it isn’t just that we sell other places, the other set of challenge is how you do sell other places, right? So we sell other places, we innovate other places, we operate other places. So we’ve got a lot of usage for our global cash wherever it might be and I must tell you there are acquisitions around the world that are also, as you know very good, we’ve done a number of them all over the world, whether it’d be Canada, France, Israel, you name it and those of you that again that have kind of watch us, it’s been 140 -- over 140 acquisitions now over the last decade, and as I said, I have done 14 just the last -- since I became the CEO.

Toni Sacconaghi - Sanford C. Bernstein

Okay. I wish we had a bell, let’s go into the lighting round if we can which means…

Ginni Rometty

Is the bell for me or you?

Toni Sacconaghi - Sanford C. Bernstein

I think for me, so rapid-fire questions if I can try and limit you to two sentence responses that would be great, we’ll try and get through as many of these as we can.

Ginni Rometty

He’s got multi-part and I have got like two sentences, okay, go ahead.

Toni Sacconaghi - Sanford C. Bernstein

Senate has proposed visa limitations if this does pass why this is not meaningfully positive for IBM.

Ginni Rometty

Listen, it’s bigger question to whole immigration reform bill that is out there of which this is one component of it. We are strongly in favor of. I mean this country needs more talent in it, and again back to building flexible models, we have a very flexible labor model that has many different components that is only one component of it.

So we did not rest on any one component of the flexible labor model for what we do. So the real answer to that problem by the way underneath that is fixing education in United States we can talk to, but I won’t do it in my two sentences.

Toni Sacconaghi - Sanford C. Bernstein

Okay. Acquisitions, would you consider a larger deal, I presume that means over the $4 billion, $5 billion which has been your max size historically and under what circumstances.

Ginni Rometty

Okay. Acquisitions, the size is not our major determinant. We ask a couple strategic questions for every acquisition, is it IT-based, would it benefit by going into our distribution system that’s out there, are the financials very much shareholder friendly what it is that we go and do and is it strategic. So the size is not.

Toni Sacconaghi - Sanford C. Bernstein

So size is not a consideration if it met those criteria you would do with $10 million…

Ginni Rometty

If it met those criteria and made sense to us, but again in some of the financial criteria we like to see it be accretive, operating margin year one, growth 20%, 30% year one and two, you are going fast.

Toni Sacconaghi - Sanford C. Bernstein

That’s great.

Ginni Rometty

Okay.

Toni Sacconaghi - Sanford C. Bernstein

Lenovo has obliquely confirmed they are in discussions to purchase the x86 server business, how do we think about account control if you sell that business relative to maintenance revenues or pull for other IBM products if it’s ultimately sold?

Ginni Rometty

I never comment on any rumors, but any of the divestures that we ever go through we’d always look at the entire picture of those divestures both in value or the impact on those divestures.

Toni Sacconaghi - Sanford C. Bernstein

But I guess if I could take over that question, does the x86 server business have a meaningful maintenance stream to it and does the x86 server business, is it important for account control or pulling other products whether it’d be software or services?

Ginni Rometty

Yes. Certainly all of our hardware businesses have a meaningful maintenance stream. I mean that is true about everything, you wouldn’t, a client would never allow us to be in a business like any of those businesses without having maintenance with them. So they all have a maintenance stream associated with them. And clearly, the platforms the clients are obviously that are right in the heart of their business are the mainframe and the power platform.

Toni Sacconaghi - Sanford C. Bernstein

How has IBM managed to let Amazon AWS dominate the first phase of public clouds? How do you get back in the game and what do you think of AWS?

Ginni Rometty

Yes. How do we manage two, I mean that was quite conscious, I mean we say, I don’t even know what, when we say manage, because remember the biggest point I would answer that is we’re enterprise oriented, right? So when I think about what we do, it is always through the lens of what is going to be most important for the enterprise client. So our focus has been on this hybrid idea and the first thing enterprise clients did by the way was private cloud.

So first focus with hybrid cloud, can I go one more second on this on your two minute around here, because it’s a good point. In that four cloud for us we said $7 billion gross revenue, $3 billion net, we also said it’s part of that. So this is years ago we saw that happening. First move would be private that would be what you’d consider I consider shift. If you want to say that a revenue shift, then lift if software to service which our software division under our Software Solutions group it is a huge amount of software as a service that’s out there and that all lift for us and therefore through the eyes of the enterprise client. It is around not only having private public on/off premise and the work we’re doing is to connect them.

I would predict that one of the ways hybrid will come out is similar to way, if you look over time, the way telco networks have worked out. So when you talk about a public cloud or private cloud, do they ever meet, do they intersect.

And if you look -- go over time, there is no one telco provider owning one network in this whole world. There are hundreds of them and what evolved over time were peering agreements, standards on how these different things came together and I think that will happen in the cloud arena.

Toni Sacconaghi - Sanford C. Bernstein

How is the competitive environment different in this new era of computing and I’ll add more broadly who do you view as IBM’s biggest competitor?

Ginni Rometty

Okay. So new era around data in my view, in data in cognitive systems, no one else there has a cognitive system yet and data as a base as you’re going to have a very fragmented landscape that is out there. But when it comes to competition, just to share with you how we think, you are never to be defined by a competitor. Your clients define who you are. You do what clients need to help them be successful to move you into higher value where that intersects.

So I feel we are defined by competitors. I mean not defined by competitors, defined by clients. Now that said, it is healthy to look at competitors at every point right, always be pushing yourself where are you versus they, what can you learn my point about benchmarking. And so I don’t see a competitor that tend to end with us this way. There are absolutely competitors that go by the individual segment.

You would look at Oracle in software. You would look at Accenture in the Indian based firms and services et cetera, as you would go on. And so we would look at those and always do push that way, but then this way is around high value end for clients.

Toni Sacconaghi - Sanford C. Bernstein

Okay. We’ve two more. How do you protect against Christensen Innovators cross the dilemma with this focus on higher value?

Ginni Rometty

Is that your question?

Toni Sacconaghi - Sanford C. Bernstein

No.

Ginni Rometty

Okay. I’m going to answer with some more background more for you. So when we say protect against, here’s my view around innovation in this industry, right. And I think many of you would agree that many of you’ve been around this industry. This industry innovates and commoditizes, innovates and commoditizes and this is why I think it is really important that you got to have a continuous transformation model and not define yourself by any single product.

I would like to think of us as an innovation company in the enterprise space. That’s really what we are. And the other way you project yourself, it was an article I saw written, it was the most admired companies in the world about two, three months ago. And it was remarking, we’re on that list, obviously in the top 10 and it was remarking about, we’ve been on it for, I can’t remember, since beginning it was done.

And it said who will be on that survey in the next 100 years, whenever the survey is done and there were a couple of us that predicted would be still on it. And I thought they made an interesting comment that would answer this question about how do you protect yourself. And it said maybe at the end of the day, what IBM is at the end of day when all is said and done, it is really just a talent company.

And I think that’s an interesting way to think about what we are. And I think it’s been evidenced by how we’ve done transitions, how we have leadership. We have a stable board, who they are, how things operate and at the end of the day, it is your depth of talent that takes you through all of these different transitions.

Toni Sacconaghi - Sanford C. Bernstein

Final question, Ginni, what keeps you up at night? What could ultimately happen where either this roadmap doesn’t work out or the next roadmap doesn’t work out, what are the one, two or three biggest risks or things that you worry about?

Ginni Rometty

You’re not going to be surprised. I mean, the biggest thing that keeps me up is to stay on that continuous transformation framework, that all levers, you’re constantly evolving all of those that move to high value, that you make new markets, you try to get there first, that you reinvent the core franchises. As time goes on that you must re-skill and that you must reinvent how the companies run. And that is cast every night, I mean, are you moving that at pace that you have to deliver on what you say your objective is here.

Toni Sacconaghi - Sanford C. Bernstein

Ginni, thanks very much for your time. Thank you for question.

Ginni Rometty

Good. Thank you, Toni.

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