International Business Machines Corporation (IBM) Presents at 2018 Wells Fargo Tech Summit (Transcript)

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

International Business Machines Corporation (NYSE:IBM) 2018 Wells Fargo Tech Summit Conference Call December 5, 2018 11:40 AM ET

Executives

Mark Foster - Senior Vice President

Eric Smith - Investor Relations

Analysts

Ed Caso - Wells Fargo Securities

Ed Caso

Good morning, everyone. My name is Ed Caso. If we haven't met yet, I do IT Services, and included that I have the honor of covering IBM. With us today, we have Mark Foster, who runs the Global Business Services or GBS part of the firm, about 25% of the total revenue, but has his fingers involved with so much more than that right, just being a key sort of front end. We got Eric Smith here in the front row, Eric, put your hand up, on the IR front to help us out as well.

Question-and-Answer Session

Q - Ed Caso

Mark, I met you when you were one of the big dogs at another firm, another major firm starts with letter A, went into retirement after a great run. What brought you back to IBM and then what challenge did you see?

Mark Foster

Well, as you say I was -- did have 27 years at the place Accenture that starts with A. And I retired in 2011. I have 5.5 years of frankly blissful retirement. I can absolutely recommend. It’s a fantastic thing. During that process, I did make a mistake of being on the board of Heidrick and struggles, which unfortunately met with their search people to find me a bit too easily. And one day I was approached with all opportunity to take on this role. And the thing that really intrigued me and made me give up my, frankly, lot of pleasant life was the fact that I see another inflection point taking place. I could see this proliferation of technologies around AI, IOT, automation, cloud, digital all kind coming together to create another entire wave of change for clients and organizations. I just seem like too much fun to miss out. And also, I could see from my conversation with Ginni that the IBM had lot in terms of capability around all the three digital, AI and cognitive and cloud. And could be -- could I be part of bringing that to bear. And also Ginni is pretty persuasive too.

Ed Caso

So the financial information we get breaks your group into applications management consulting and process. How do you view your business? What’s going up? What’s going down?

Mark Foster

Yes. So as you say, it's around about 25% of IBM. It's 130,000 people. And in fact IBM is maybe one of the best kept secrets in the world of professional services, but IBM has a 130,000 person consulting and process and an IT capability under the covers here alongside the sister organization which is GTS, which is another 40% of IBM. Under the covers of GBS, where there were three main things that I think that we do. The first is digital strategy and interactive, IX. And that’s our ability to bring our industry skills, our view about where the markets going around digital together with the fact that we have one of the world's largest creative agency networks, some 38 studios around the world, and a huge amount of skills in UX and customer journeys, and how to align that, frankly, in a much more emergent way with our clients around strategy, that’s really the front end of it. So digital strategy is the front end. The second piece then is around the fact that assuming you got to a digital strategy. The next thing to work on is what does it mean for my workflows and my processes?

And so cognitive process transformation is the next middle part of our model, and that’s where we bring to bear all the AI skills, automation, IoT, blockchain et cetera to help transform processes and workflows for our clients and run them. So that's where our BPO business sits. It's also where all of our massive analytic and skill sets to this as well our analytic capabilities. So we're bringing those together really in that area there. And it’s the piece of business that I'd say that connects into the Watson capabilities of IBM, it connects into our blockchain and industry platforms areas.

And then the biggest part of the business is the third piece which is the cloud application piece of the business. And that's everything to do with our implementation of S/4HANA, of Salesforce, of Workday, all the next generation enterprise applications. It's where we do our massive sort of cloud migration microservices work is increasing in that space. It's also where all of our AMS, ADMI work sits as well. So really digital strategy, cognitive processes and cloud applications that's how it's described the three main ways we run our business. But of course in many cases, our clients seek us to actually leverage skills across those groups. So that's how we organize ourselves, but under the covers we work across those.

Ed Caso

On the cloud apps, can you give us a sense where you rank you 1, 2, 3, 4, not in the top 5 with Salesforce and Workday and so forth?

Mark Foster

Oh, no, we’re certainly in the Top 1 or 2 across all of those actually. I mean, we are we go back in fourth to the old place on the scale of our -- being meeting the Salesforce implementation and the certified group. We are very, very high up in terms of the SAP's partner group as well. And we have been building since we made an acquisition, a couple of years ago, our Workday capabilities are up. And again we put ourselves in the first top group of that as well. I mean, we really have a very broad base sort of skill sets of around what I would call next-generation SI and bring those things together. And of course, we are finding that that's actually, frankly, a wave of change that's only really beginning again to grow because for long time these solutions have mainly been finding their homes in what I'd call mid-tier organizations, but now most major global enterprises who are majorly -- who are really our target marketplace of the global, the global 2000. They really begin to think about now how to go on that next wave of the journey. And we see that as being a massive opportunity for us.

Ed Caso

So I mean, we here as we talk to people that digital has taken off -- digital being the umbrella term. And it seems that the restraint to revenue growth has been on the supply or people side. And you talked about 130,000 people, what are you doing to attract, retain, re-skill. And -- the re-skill and then lose them, I mean, how do you -- how does that -- how has that changed?

Mark Foster

Well, I think first of all, we are in the same space that the whole world is in now around is how important talent is. And in fact, just last week, we launched a new preposition around IBM talent and transformation, which I'll be maybe talk about later, which is really around helping our clients deal to the talent transformation agenda they are facing, because in the world of digital and cognitive transformation, we believe the single thing the most want to get it right is the people you wrap around the technology, not simply the technology itself. In my own space, yes, I have 130,000 people, and it's a continually moving picture in terms of the skills they need, what need to be relevant. Obviously, when I came onboard, my first task 2.5 years ago was to find out what we had to actually organize the people into those three groups that I've talked about in terms of the people who can help with Digital Strategy, the people who can help with the processes, the people who can help with the applications, and then to go through that and continually work on where can I reskill someone who maybe was a great old start SAP implementation person to being able to help with S4HANA. Can people with success factor skills work on the Workday space? Can -- how many of the people who are maybe using leveraging old style or more historic tools in the analytic space? Can they move into using the new AI tools, the data scientist capabilities? So actually we are in a -- we have a very deliberate plan, which is around how we are continually training groups of people as you look back in sort of the 130,000 people in this last year, actually 140,000 have gained new skills, i.e., some have gained more than one new skill as part of their formal reskilling and certification inside the business. And I think that's going to be just an ongoing journey for us. Of course, also we’re looking to hire new people from the marketplace. We’re bringing in a lot more people as fairly professional hires. People are starting their career with us. And again we’re very pleased to say that we’re actually a very attractive place for young people to come and join. And so that's been something I've been reinforcing as well.

Ed Caso

Now your former job is pretty aggressive on the acquisition front, constantly bringing in talent through niche acquisitions. It doesn't seem like IBM does that as much their deals seem to be bigger. Has the reduced level of acquisitions hurt your ability to execute?

Mark Foster

No. Clearly, I do what's interesting be able to place, we bring up various other organizations. I think that what we have taken our view is that first of all, we will do acquisitions. And in fact, we've got a number that had been pretty important to us, the Blue Wolf acquisition that we did, completely launched our positioning around Salesforce and was a massive platform for the meteoric, what as I say was a massive step into the world of Workday for us. And the Resource Ammirati, one we did, and other agencies that we bought helped to build-out to be this one of the world's largest creative agency spaces. So we do, do it. We are up for people based acquisitions. We've not been doing so much of late, partially because we've been really on this journey of working out what skills do we have? How much do -- can we actually reskill within our own organization, because a lot of it actually is around having an integrated way of working. So a big part of my focus has been about creating something called the IBM way, which is a consistent way of methodology and tools and thinking and approach that straddles all those pieces of our business, and training in our people to have a common way of talking about problems and issues so they can team together more effectively. And that’s been really probably more of the focus to me than necessary bringing lots of niche capabilities around the world.

Ed Caso

So the conversation I have with investors is that's really how fast is the new stuff -- digital stuff coming on versus the old stuff coming off. And it parallel, I presume, for IBM as it does for IBM's clients that they are facing the same transition. So where are we -- have we gotten past the point where growth should be -- the legacy will not be a drag anymore? Are we getting close to that point?

Mark Foster

Well, you can see that within our business, I think some 65% of GBS in the last quarter was in the strategic imperative space, which is all of the new areas. I mean various -- we and Accenture, others, all describe the new in various different ways, but fundamentally it's all of the digital, the cloud, the analytics, the AI, all those spaces. And for us now, that represents top some two thirds of our business are now in those spaces, and growing and continue to grow into that area. And I think that's going to continue to be a journey will go on, and particularly actually, as the piece is probably been least effected so far, which has been our ADMI AMS space as that becomes more and more cloudified than cloud-centric. That would bleed into that area as well. And that indeed, we’re helping our clients now very much to deal with this dual journey. And in fact we've got two ideas that really underpin this. The first is that what we call a garage capability we’re bringing, which is the ability that we have to bring together these new technologies, apply them to solving the critical pain points our clients are facing. They want to win in their supply chain. They want to be the best claims processer. They want to be the best sales and marketing organization. Our garage methodology allows us to inject these new technologies in a way that allow them to build the building blocks of the future in a very, very structured, but also fast and agile ways. It's all about agile design thinking, but also with a sense of purpose. We align that with our factory model, which is a factory model that allows us to work through the legacy application world our clients are in, start to expose those legacy applications and microservices and APIs, which can be leveraged by the new as well, and start to bring the old to the new together, obviously in a future state. And all the time, we're leveraging for the multicloud environments as we could like the middleware that allows us to transmit things across that space. So I think, I will say again in terms where the most companies on that journey. They're still probably in the 20% space with the other 80% still to go. And that's, I think, for me genuinely, I believe that all organization, particularly big enterprises, are on the cusp of their next wave of transformation, and the next five and 10 years are going to be just massive.

Ed Caso

So AWS, lot of chatter about it yesterday, a big event they had last week. How is IBM's hybrid cloud approach resonating with the clients? Are you -- how much battle you're doing against the ADF -- AWS approach or Azure approach? Is it sort of -- is it resonating?

Mark Foster

Well, first of all, in terms of GBS and GTS, they are the large services parts of IBM, we work across a multicloud environment all the time. We already are one of AWS's main partners. We are a big partner for Azure as well. I mean, we implement across all cloud environments. Obviously, we also have leveraged the fact that we know best the IBM private cloud and public cloud environments. I will say that for our enterprise clients, the IBM public cloud positioning has been particularly resonant powerful because that IBM private cloud ability to actually in many ways protect core data or get people comfortably process that needs to be kept inside the connection of the business type in a private cloud, we found that to be very resonant. And also the fact that that's leveraging very strongly these open Kubernetes container technologies has also been resonating massively, because on this journey of migration, everyone is going to make sure they can migrate safely, but also not just migrating once, but think about where things might go overtime. And of course that also leads into the rational that sits behind the Red Hat acquisition that we've done, which is really an amplification of our position around the fact that we see ourselves as helping clients with this overall journey they're going to go on through the clouds. The fact that they are going to -- as they underpin their broader business transformation with new agile applications and systems that are going to be fundamentally cloud-enabled in a multicloud world, then our access to the tools, the technology, the know-how and the credibility of the open model that the Red Hat brings, just allows us particularly in the services side. And by the way, we believe that that will be $1 trillion marketplace in cloud over the next three years, by half is going to be in services. This gives us just massive further credibility to our ability to say we can help you go on that journey regardless of the clouds you're going to have different parts of your application suite end up on.

Ed Caso

I'm glad you mentioned Red Hat because I'm sure nobody in the room is interested in the topic. But what I get -- we'll pass over how much you paid for, but the question is, did you have to own it -- could you have gotten the benefit from Red Hat in a partnership format as oppose -- I mean, why do you need to own Red Hat?

Mark Foster

Well, first of all, we obviously or did have a -- do have a partnership with them already. And in fact our GTS business, in particular has a very great large footprint of working very closely with them. I think that from our perspective, the fact was that by owning them, first of all clearly we gain significantly more even greater access to their tools, to their development, to where their business is going over the long term. We are able to embed that skills methodology into our teams and our people in a way that, frankly, goes far beyond a normal partnership model. And also, as we recognize this world of hybrid multicloud is going to be the future. This is a very strong clear statement from us that we are in that game and we’re in that game to win. And very much that was fundamentally the heart of the thinking here. So there is a number of ways this works out. And obviously, very importantly, it does massively empower our services businesses, but of course it will also act as on-ramp and a way that our own clouds and other clouds will be also brought into these multicloud architectures. So we see both the horizontal opportunity and the vertical opportunity in our business to leverage this acquisition.

Ed Caso

I’m going to ask another question, but if anybody needs, Stacy is walking around with the mic. So if you thinking of a question, so get ready. Lot of people I talk to think that GBS the sort of a swing factor in the story, and you're sort of bottoming out here fundamentally, awards have been a little uneven, how do we translate awards to revenue? How do we think about margins? Are there more margin to come? Are you still in a heavy investment mode resetting workforce mode?

Mark Foster

Well, if you've seen over the past period, we've returned to growth in GBS, and we've posted a couple of good quarters in terms of significant margin expansion, certainly above what I was thinking is sort of regular levels of margin expansion at this last couple of quarters. That’s been a combination really of the shift in the mix of our work, the fact that we are doing more high-value work. You've have seen the growth in our consulting, we got 7% in the last quarter. And that means this digital front-end more higher-value services are becoming a bigger part of our mix. We’re obviously also have been doing a lot to make sure that we reshape the teams that we're able to deliver our teams and impairments that are always we make money. And a professional services organization makes money by bringing the right mix of levels of people to bear around the different things we try to do. And we have very much more strongly aligned that. And we believe the combination of that continuing to moving to higher value areas. There is still much more that we can do there. The fact that we can still continue to drive more out of our pyramids and our efficiencies leveraging automation, leveraging AI itself as a capability to help us get the right people in the right place. Now we still see ongoing opportunity for margin expansion, looking forward in the GBS business.

The other thing I would say, obviously, is that we do see ourselves playing a clear and clearer role as the front-end of the overall IBM story. The fact that we are the carriers of the industry narrative, the transformational stories that clients are going on, that we can help our clients put together the full journey of the plan under which the other parts of IBM are able to then flourish. So that is very much -- for me, I have two jobs, one was to get GBS to be healthier in its own right, and secondly to make sure it's clearly playing its role of front-end in the overall business.

Ed Caso

Questions? There we go.

Unidentified Analyst

Just first question is you’re in a great position talking to CEOs, CIOs. 2018 has been a great year from an overall spending perspective lots of tailwinds, lot of companies are in their budgeting process right now for 2019. Can you just share given some of the crosswinds that are obvious in the marketplace? What's spending intentions where investment intentions look like for next year given the above?

Mark Foster

Yes, it's a really interesting time. And so far, it's clearly there appear to be a number of potential crosswinds out there that could be causing people to have concerns. I will say that all the conversations that I'm having are still very much in this cost of transformation. We're going to get all and do something meaningful space right now, that in fact either that's because people believe they are going to move to try and win and get ahead of things before anything might happen down the track. But I would say at the moment a very strong sense the people are thinking. No. I mean, I've probably been in five conversations in the last 10 days with major leaders and major companies. Every single one of them is thinking big. And if you think about the fact they want to build these platforms that are going to be the base of their competitive advantage in the future. Those platforms they want to build for the future do need to be having their costs restructure and meet them to make them more resilient to maybe issues in the future. But they're also trying to combine this idea of being more better experienced, more digitally connected, more leveraged and expertise of their business, while also taking advantage technology to take out costs. And I think you're going to see people embarking on -- continually to embark on these major transformation programs. At the same time, trying to deal with this legacy new problem what they got. And find as fast as possible to take advantage of new cloud-based technologies to deal with TCO, but more importantly just create the agility to move and what maybe a more volatile picture in the future.

Unidentified Analyst

I mean, just a follow-up, if at some point in the next few years don't become much more difficult for more difficult environment, which technologies and strategies have the TCO ROI preposition that when the CFO now has to sing off more frequently or list more aggressively if there? And which of the buzz words, perhaps it's not quite there yet that will be more variability in discussion?

Mark Foster

Yes, I think, it is really interesting. And I think that what we are seeing there with all of these technologies are moving to a place where they are significantly more able to play in prime time, they have before. We are moving from the world of thousand proof of concepts around the edges of our processes, around the edges of our company. And people say, no, I want to apply these technologies. Also they are being applied, frankly, together. So you don’t see AI attacking a process in the same supply chain for a client without them looking at automation, generally it's going to be, but RPA is going to play into the mix there as well. You start then, I'm doing the AI and the automation around my, say, insurance claims process. I actually want to think about, can I use IoT smartly at the front-end of it more completely. And by the way, when I want to actually get into a transaction with the players can blockchain now start to be the transmission mechanism of that contract. When I say we're going to start to see these things coming -- we are seeing these things coming together, frankly, more with each other in combination to make meaningful -- by meaningful, I mean, 50% to 60% plus differences to either the cost base or indeed the value add that could be added on top of that by people being able to work more smartly. So I think we are in the, again, on the ready for prime time around all this stuff. Clearly, there were some areas which will take a little bit longer to bear, even some industries with prime things more resonant earlier. But that's our overall point of view. And it really plays through super powerfully at this workflow transformation level. As you start with any work flow at any company, it's got tens of thousands of people in it, huge amounts of costs tied up in it. How that’s going to move, how you can move it, how you can enable those people to be more effective and or take out costs? Just a huge opportunity.

Ed Caso

So we have about a minute left. I’m going to walk throw out some current themes. And -- I can’t do it in crickets, so I’m going to ask you to do it in baseball terms. The big one that was been talked about a lot recently is blockchain. Where are we inning wise in blockchain? And I know, IBM makes a lot of noise around that topic.

Mark Foster

Yes, I've been in the U.S. now for 2.5 half years. I’m just about understanding baseball now. I’m not sound enjoying it yet, but I'm just about understanding it. I would say with some much with the start of the second inning actually is my personal view on blockchain. I mean, there's actually a lot of more substantive stuff going on around this, around the world. I mean we’re now involved with some 400 networks. Some of them are now major scale networks like the we trade network, which has 12 banks in Europe that we’re at the centre all that's acting across trade finance. The network we've created long side Maersk could be other carriers around allowing for global trades to start to move across in a seamless way. The network we've created with Walmart to connect into food safety and security, which today even before this latest remain issue. They had asked for all their suppliers in the green leaf variety to come on their blockchain for safe providence around the world. So we're starting to see that the blockchain, I think, move again for being a bit of a buzzword. And I was at Davos last year, and it was the second, there were two words -- buzzwords at Davos of which one was Trump and one was blockchain last year. I was interested to see what it will be is coming time around. I suspect that the blockchain is now moving into people. We will understand what they can do with the technology and peeling it away from the cryptocurrency conversation into now the distributed ledger or transactions that matter commissioned away. And I think we've only begun to see how things like identity, starts to be leveraged through the use of blockchain technology as the next wave, and maybe that once prefers closure to the first inning.

Ed Caso

We’re out of time, but I hope the people to do one-on-one to ask you about Watson AI, RPA, IoT, all great interesting topics that I know you're very involved with. So thank you very much.

Mark Foster

Thank you very much, Ed. Thank you.