International Business Machines Corporation (IBM) Management Presents at Bank of America Merrill Lynch Global Technology Conference (Transcript)

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About: International Business Machines Corporation (IBM)
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International Business Machines Corporation (NYSE:IBM) Bank of America Merrill Lynch Global Technology Conference June 4, 2019 12:30 PM ET

Company Participants

Martin Schroeter - Senior Vice President, Global Markets

Conference Call Participants

Wamsi Mohan - Bank of America Merrill Lynch

Wamsi Mohan

Thank you, and welcome to the Bank of America Technology Conference. We're delighted. I see a lot of familiar faces. Glad you're all back here this year. I'm Wamsi Mohan for those I’ve not met. I am the Tech Hardware and Supply Chain analyst here at Bank of America Merrill Lynch.

We're delighted to have IBM here with us today. Martin Schroeter, second time that he is joining our conference. He is the SVP, Global Markets, which basically means he runs all of IBM sales. And that is tremendous job to say the least. And so we're delighted to have Martin. Martin -- you might all know Martin, actually from his prior role as CFO for four years at IBM. And now he's obviously got a different role, different viewpoint of the organization.

I also want to mention, we have Patricia Murphy and Eric Smith from IR at the back of the room currently, and if you have questions, Eric's up here, and if you got questions, feel free to also follow-up after this. But Martin, thank you so much for…

Martin Schroeter

Thank you, I had a few question for Patricia and Eric. So maybe I'll just sit here.

Question-and-Answer Session

Q - Wamsi Mohan

So to start off, maybe we can kick it off with a macro environment. The macro has been very shaky, in some ways. And there's this constant news every day in terms of trade, in terms of China. So can you just talk about in your role, obviously, from a day-to-day basis, you see a lot of what's going on, would love your perspective on it.

Martin Schroeter

Yeah, we -- thank you, and thank, and thanks everyone for joining and thanks for the opportunity to be here as well. Look, I do spend a lot of time with our clients. And when you think about our clients we run part of the biggest banking infrastructures and the airline reservations systems and the supply chains of the world. And so when I look at let's say, if you go back to first quarter, we'll start there on macro. So I think there are a few points to be made on macro. If you go back to the first quarter, the nature of our discussions with our clients has not changed dramatically.

So we are -- if I oversimplify our business, we're in two businesses. We deliver productivity to our client base, and then they reinvest that in order to drive new capabilities and new ways of reaching their clients. And that mix, maybe it's 50-50, maybe it's 51-49, 49-51 that doesn't change a lot. In fact, when you look at our first quarter, one indicator of sort of how they're thinking long term, we saw really good growth in our cloud and our cognitive businesses, right. And those are -- that's a primarily a software business focused on helping our clients generate new ways of reaching clients, of their clients of, new insights about new ways of working for them. So we saw really good performance there.

And I think, part of my interpretation is that they've been -- they're thinking about the future, forward looking, continuing to invest in order to position their businesses. We saw really good growth in our GBS business, particularly in consulting. Again to me that says they are -- and we know because we were talking with them, they're looking at how do I -- how do they change the way they work? How do they digitize their processes as an example? How do they take where they are today with our cloud and cognitive software put something together that allows them to become a cognitive enterprise all very much part of a longer term journey.

So we saw, again, good reinvestment, good growth in those two parts of the business. On the global technology services side of the business, which is very much about delivering productivity to our clients, right? They have these big infrastructures, we run them as a service for them. And that business is always about delivering productivity, which as I mentioned earlier, they go and reinvest. That business continued to deliver productivity. Now we've shifted our focus in that business. We've come out of some of the lower margin offerings and elements of that.

So that business didn't grow, but it's a stable kind of a business and there's opportunity out there. But we want to make sure it's good high value opportunity. So I would say and again, the nature -- and the macro side, and the nature of the discussions, we're having, that mix between, help me drive productivity and then I can reinvest is about what we've seen over the past 18 months.

Now I read the same papers as you do. And so we do read about, there's a fair bit of uncertainty, there's a fair bit of what's next and but again from an investment and a mix perspective, our clients seem to be continuing to invest. Because they know that the opportunity they have to become cognitive businesses, the opportunity they have to serve their clients in new ways with new tools, new technologies, is not going to last forever, right? They do have to continue to invest if they want to be competitive. And that's again, part of the reason they come to us. We know where they are, and we know where they're going.

So investment cycle stays. What else on macro? We will see, the -- since we announced our earnings, our first quarter earnings back in April, we've seen the dollar strengthen a little bit more, right. It was a 2.5 point impact that we announced. Now we're up to a 3 point impact based on where the dollar is. So that I think says something more about investment flows around the world than it does about where our clients are necessarily behaving, those kinds of moves. I don't expect they're going to change dramatically. Our clients investment patterns but we'll have to watch, we'll have to watch and see what happens.

And then there's a lot of talk, a lot of news around trade. Right. And that's been primarily around traded goods and how the administrations of our country, other countries are interacting. But again, we'll see how all of that. That creates, obviously, uncertainty and businesses don't tend to love uncertainty, right. They tend to -- so we'll have to see what the reaction is.

Wamsi Mohan

Yeah. I think in your Q1 call, you also spoke about, I mean, company spoke about Asia-Pac being slightly weaker. Is that something that it was macro-driven at that point. And I think that there was some level of confidence and - there was a lot to do with timing of certain things rather than true structural demand changes.

Martin Schroeter

Yeah, and I think I still feel that way. So we did have a few things in Asia that kind of slipped out of it. We because of the role we play in our clients’ environments, not every decision is going to line up well with a 90 day reporting period, right. So the things that have now sort of slipped over, they are closed.

I wouldn't read it through as a different macro-environment but we do have to recognize that the role we play, the things we need to deliver to our clients, they just take time. And I can tell you as the person who run sales, that I was in those deals and I know that they've now closed.

So I would not read through differently from that experience, but it does say a lot about the two businesses we're in, which is we need to deliver productivity and we also need to give them new function new capabilities to go reinvent their businesses and that was, that conversation is global, that’s no different in Asia then it is in U.S.

Wamsi Mohan

So Ginnie talks a lot about Chapter 2 and when you look at IBM’s role in driving digital transformation, how do you approach clients and help them understand the value that IBM brings in changing their environment, how they should think about investing for the future?

Martin Schroeter

It is sort of top of mind for our client base and I think based on my discussions what our clients value very highly from us are a few things. One, we bring them technology, right, so we're still builders of things, a big part of our credibility is the research we do. We build things. We understand the technologies because we are building them. So we're bringing them a whole new series of technologies that can help transform their business and they appreciate that. Blockchain is a good example. We're going to fundamentally redefine how safe the food supply is by building the food trust with our clients. We're going to change the way the shipping industry works by building Blockchain for trade.

So they appreciate that we created that Blockchain technology, we put it down to open source. So we have a lot of credibility in technology, I think that’s a big, big part of why how we differentiate ourselves in what they're looking.

Wamsi Mohan

I think you still have the highest patent count?

Martin Schroeter

I think we do, touch wood, I think we do. So we bring technology. Secondly, and importantly and you know this, I think we talked about this in the past, IBM is always sort of we're at the intersection of technology and business. So it's one thing to have technology, it's another actually to put it to work.

And so we show up with experts who understand their business processes and their workflows and we can help them actually take these technologies and embed them in their workflows in a way that makes a lot of sense for them and in a way that sort of represents how their industry can behave, because we do organize ourselves very much on an industry context and we have deep, deep industry insights.

So bringing technology helps a ton and bringing the know-how that allows them to implement it, so they can actually use it is I think sort of the other part that they're looking at us for. Now the other thing I would add is that we can also -- they trust us, there is probably a lot of ways to say that, but they do trust us. They trust us because they trust our technologies, they trust us because we introduce technologies in a very responsible way. They trust us because we understand their industry. And they trust us for another really important reason, which is they understand our business model and we're not competing with them.

So when you look at the long journeys they are on, whether that's moving to a hybrid cloud, to get new AI capabilities or moving to a hybrid cloud to get better agility, they trust that we're not going to compete with them. So we have a whole different discussion around their data, who owns their data because they know they own it with us. They know that they own their insights. So in addition again we bring them technology that both we develop but we bring other technologies into the picture.

We have a set of expertise around their industry and around their particular workflows and then this element of trust is so, so important today. Every one of our clients, every company in the world is thinking about how do I start to head down this journey, and how do I pick, if I have to just pick one or if I am only going to pick a handful, how do I pick a technology provider and an integrator who isn’t going to sort of undermine me, try to intermediate me from my own clients. Those are really important decisions, really important discussions. And I think that’s why we're in a lot of these discussions, we bring technology and we bring the expertise to implement it and they trust us.

Wamsi Mohan

As a firm Bank of America has been writing about migration to the cloud for a long time and the changes that we have observed is that there was a big impetus about everything moving to public cloud. I think that was a theory that was there maybe even 10 years ago, I think you guys have been very steadfast in saying there is going to be hybrid cloud model, I think you guys are pretty early on saying that’s ultimately where things will go in terms of architecture.

When you look at the amount of CapEx that the large public cloud guys are putting in that’s fairly significant, still growing at a decent pace. Your cloud businesses have become fairly significant about $20 billion of cloud revenue for you. But when you think about how the journey of these customers is evolving into this hybrid cloud model and you are seeing some evidence even from the public cloud guys on trying to do things on-prem, now how do you see this playing out in the next few years?

Martin Schroeter

Wow, that’s a lot there. So let's spend a few minutes, I think, first on kind of where we are in the state of play in the cloud world. Everyone, every discussion is about cloud, whether that's going to ultimately wind up in public, whether that is going to stay on-prem, whether that is private cloud, the discussion is about hybrid because that’s the world in which we’re all going to live, that’s the world we live in today and that's the world that’s going to stay and in fact as you said we've been -- we have always said hybrid, right.

So there was some noise talk about this idea that everything is going to move to a cloud but we were 20 years in almost right and fewer than 20% of the things have moved to the cloud. So the cloud is here, it's real, everyone is thinking about it. But even if you look today at the state of play most of our clients already have five or six clouds. So this idea that everything is going to move to a public cloud is just -- we never thought that was viable. By the way we didn’t form that opinion any other way than talking to our clients, all the banks, all the airlines, all the supply chains as I mentioned earlier.

So in that world -- that’s the state of play today. What's one reason that it's sort of sits at that high teens kind of level, well. The things that are going to be the next push are going to be the much more kind of mission-critical things, because just because it's mission-critical doesn't mean you don't want agility, it doesn't mean you don't want flexibility, it doesn't mean you don't want to embed and use your data in better ways to make those processes run better.

So when you start to talk about mission-critical though, now you start to talk about how enterprises really run, you need scale, you need a whole new -- probably a whole new thought about security and your data and what you're -- how you’re dismantling those applications.

So in this phase, the next phase if you will, some things obviously are going to stay on-prem, as you said. A lot, a lot of our clients are building private clouds and they will continue as they have. They build private cloud because you get all the agility and there is no additional economics if you will, from going to public and particularly if you are in a regulated industry, private makes a lot of sense because you can navigate a regulated environment in a private cloud while getting agility. You do have to refactor your applications, you do have to put them to cloudify them -- I don’t think that’s a word.

You do have to get them to work in a private cloud but that’s work that we help our clients do today. So in that world the world is going to have some things continue to move to public. The world is going to have some things sit private, some things sit on-prem and again our view has always been that that's the world in which we have to operate and help our clients. Now in that world how you manage across all these clouds becomes really important.

We can do that for our clients, because we’ve said in this open hybrid cloud world, a provider like IBM needs to be able to manage across. Having these little pools of data and places and having these sort of little one off applications is not going to help the CIO manage the data, it’s not going to help the CIO feel secure about where their data is and how their applications run.

So that’s the world. What we're starting to -- and that’s our view of the world, open, hybrid multi-cloud, help them achieve that. What some are starting to do, are trying to take their proprietary stack and put it into a private cloud environment. But it doesn't really help with what our clients - or the other thing our clients are worried about which is look we can’t be locked in. We can’t be working in a closed environment. I can't build my enterprise. I cannot build my enterprise and all the mission-critical apps in a closed environment where I'm locked into a single vendor. So I can't absorb all of these AI tools necessarily unless they are open.

I can't build the skills I need if I'm going to work in a proprietary closed environment. So that shift which we've observed isn't really solving that big problem that I think our clients have talked to us about, which is, again, I need I, the client, need to operate in an open world. I need to operate multi cloud, I need your help IBM to help me manage all of that. But just putting another proprietary stack into my environment is not going to be the path I need.

I need management of multi clouds. And while today it's five or six, in who knows, five, six years, it could be 10, or 11. It could be 6-7 who knows, but we know it's not one we know it's going to be multi cloud. That's what we're helping our clients do. That's the journey they're all on in terms of cloud, and how do I get agility.

Wamsi Mohan

So maybe that's a good segue to talk about your latest deal, Red Hat? And how, what was the thinking behind Red Hat? Maybe if you could quickly talk about what does it really change for IBM? And then secondarily, like, as basically head of global sales, like, what are you seeing, what are you going to tell your sales folks around, how do you go to market? What can you do to make this very successful choreography?

Martin Schroeter

Yeah, so we'll talk about Red Hat to the extent we can right, obviously, we're going still through regulatory process here. So we're not closed yet. But I'll talk a little bit about I think, sort of the how our clients are -- both what they told us what they're telling us now, right, what they told us before what they're telling us now.

And then to your second question, how do we know how do we take that take, take help Red Hat now and expand them much, probably much more rapidly than they necessarily could have on their own.

So first, and I touched on this earlier. The agility that our clients want from moving to a cloud, the access to tools, the ability to build and get tools and lots of AI tools, machine learning, all that is, is the journey they are on. And it's an important journey. However, what many of them have said is that, look, I can't afford to take this mission critical stuff, and move it into a closed environment, I can't count on tools that aren't open.

And by the way, I, Mr./Ms CIO, I want to, I want to build skills myself, I want to have a team, because I'm in the data business, forget about if you're in banking, or airlines doesn't matter, retail, I'm in the data business, I want to build those skills myself. So I want to build them on open tools that I can now go drive an innovation agenda in my firm, the only way I can do that is if I wind up in an open platform.

So what Red Hat allows us to do now what IBM and Red Hat together allow us to do is ensure that we can give them that open stack that allows them to be confident that in those mission critical now in those mission critical apps as they start to move, that they're not going to get locked in tied in and their enterprise will be safe.

And importantly, they can they can become the not self integrators, but they can they can build skills themselves, right. You've heard some of my peers in IBM talk a lot about the IBM garage methodology, right, where we do come together, we co create, that is very much the model of how the modern CIO wants to work.

In order to do that, they bring their skills, we bring ours, but you need an open environment, Red Hat gives us that open environment. So what we've talked about, right from day one, from the day we announced it, Ginnie has talked about, let's make sure everyone recognizes Red Hat is, my words, the Switzerland of the operating system what we will make sure that that stays right there. The developer ecosystem they built which is really powerful, the commitment to open is really powerful. And we said we're going to we're going to keep that exactly as it is.

Now from a go to market perspective on, my team out with our clients, the feedback we've gotten is almost in some ways, it's like a sigh of relief, because now they can look at the other 80% plus of what they're doing. And actually give it a really good kind of put it through a framework that says now, that it's viable for me to think about where I can move these because now I can go build an open framework. I can get access to the open the tools I need to embed machine learning or AI, whatever you want to call it. Then now it becomes viable for me to think about that.

So our client feedback has been phenomenal. They're excited about that, because that allows that journey to continue whereas before they were kind of holding back for the reason I mentioned that can't find themselves kind of trapped into a into a proprietary environment. So we have, we operate in 172 countries. I think that our teams now are, my team is now.

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Our sales teams are getting all the teams now or my teams now, our sales teams are getting all the education they need to be conversant, to be deep technically with their client base on what does that journey look like, how do you modernize your apps, what is the landings place look like, how do you make sure that, how do you make sure that you wind up in a spot you want. So yes were excited about it. I think our clients are very excited about it based on my discussions with them and it really is this open hybrid multi-cloud environment that they need, that they want that allows that journey to continue.

Wamsi Mohan

Where are we in that regulatory process, what are your thoughts on timing on that?

Martin Schroeter

Well I think we said we still expect the second half kind of closing and I think we're still in that same spot, second half. So we have -- the U.S. went well. So now we're still in that process with those are open, second half I think is still where we see it.

Wamsi Mohan

Right, you mentioned AI, there is been a huge amount of investment that’s being made by all the tech giants around AI. You guys have watched in various forms and has a wall, a various different business models have come to life, within industry verticals that you have tackled. Where are you with respect to your AI initiatives, how do you frame that with your sales force in the broader economy?

Martin Schroeter

It’s a good question because it is very much front of mine for our clients, how do they are all asking I need to start down this journey. I know that I need to embed AI processes into my processes; I need to get there ahead of my competition. I have all this data, please help that’s word of the first call.

The starting point for many of these discussions by the way is all the work we do to help our clients get their data organized in a way that allows them to even take advantage of AI because in our experts or AI experts, our software experts have a phrase is not my phrase, I don't like the phrase, but they would say look, there's no AI without IA, there is no artificial intelligence without an information architecture.

So the initial discussion on a lot of these places is how do I get my data organized in a way that helps me. Once you started that journey and I will come back to IBM in a second we’re obviously big users of it is as well. And you mentioned Watson, when you start that journey and you're using say Watson you are using Watson in its current form and we will continue to evolve Watson but it's a very consumable form. Right so you may call, an API to help you build a call center application, put a few APIs together to help you build the call center application. That is a very common use.

And we’re seeing, our clients are seeing tremendous productivity out of embedding AI into call centers, so that they can respond to their clients more effectively.

So there are a ton of project sort of heading down that path of the sort of the simple, how do I take my first steps. Again you need your data in a way, in a structure that’s going to allow that but we’re seeing in banks that call center application sort of taking off in healthcare were seen it in helping doctors and essentially the leveraging the best knowledge that’s available and the best approaches that are available and getting that into places where just not as readily available as it might be in the U.S.

So we're seeing it in applications for health and financial services as I said in some call-center applications and they were seen it deployed in a lot of IOT environments where all the data is coming in a way that they're trying to make sense of how do you run a rail road, how do you maintain equipment, how do you maintain machinery. So we're seeing a pretty broadly spread it's not one industries, it's across many, many industries and were using it similarly, so we use in our HR processes, we use in our supply chain, we use, we're pretty heavy users of AI yourself.

There is one element and this was not part of your question I do want a little bit of a detour this. There is one element of this that our clients are worried about and we’ve taken a leadership position on. And I spent time in Washington last week on this topic and that's what I call digital trade. So what all of the AI today means and what all of our clients needs, is to make sure, they can move their data around in a way that allows them to make use of it. This is not like our home numbers and our addresses. I am not talking about personal data, but the supply chains of the world work by moving data from place to place.

The shipping industry works by being able to move data. We are seeing pockets of really, really good digital trade laws being included. TPP has pretty good digital trade laws. The U.S. NCA has the best digital trade laws we have seen. The challenge is TPP is only a handful of countries, right, U.S. NCA, us, and Mexico, us and Canada. We're not seeing a broad, acceptance or a broad sort of framework for how digital trade should occur. And that's what I've been spending time on as well as is making sure that we have a framework that allows that journey for AI to continue by having robust protections, if you will, around how data can move.

Japan has -- Japan has the seats now in the G20. They're going to use it to go through a WTO process. We're aligned with the Japanese. I met with the Japanese Trade Minister, and they are almost like 100% aligned on the kinds of principles. Now we just need to get much, much broader agreement on a set of principles.

So I include that in the AI discussion, because it's imperative that if we're going to continue this journey and our clients are going to continue this journey about how to embed AI, we get really good digital trade laws. We get really good digital trade framework so that the data can move. Again, not this is not a privacy issue, it's not about your phone number. It's about how do you move data to run the systems of the world, the banking systems and the reservation systems, the transactional systems of the world. You need good digital trade laws.

What you'll pick up the paper and you'll read about our goods trade, right? They'll talk about soybeans, and they'll talk about electronics, but we need digital trade. That's why we're bringing it kind of front of mind for administrations to make sure we get it in there.

Wamsi Mohan

So that's a great point. So it sounds as though digital trade is one of those maybe gating factors in terms of adoption rates for AI. It feels like the adoption rate maybe has not been as fast as what people might have anticipated a few years ago, at least within certain industries. And I wonder if it has to do with some of the digital trade law. Some of it could be just the data wrangling getting all that data sort of organized in the right way to be able to define it and analyze it and derive inferences. So what do you think has created maybe a slower rate of uptake of AI?

Martin Schroeter

Look, I wouldn't, I wouldn't classify it as a slower rate of uptake at all. I do think there are some things that we as an economy have to get through and as I mentioned earlier. So getting your data in order is really, really important. And that takes a bit of time. Digital trade is a is an issue that we have to deal with, otherwise it will slow progress. But I wouldn't say it's been an issue to-date, but it could become an issue.

What I think is the path we're going through, and I mentioned a little bit the CIO of today wants to co-create, the CIO of today wants to build it -- build their own skills in their own organization. So when I sit in our -- when I sit through a IBM garage session with us, one of our clients and we start co-creating. Boy, it does not take -- Wamsi, it does not take 10 minutes, and you will have 50 themes, 50 ideas on the board, from the teams on what they can go do.

So that happens very quickly. Then in our garage methodology we will have a prototype there. We will have somebody out within two days, and that will start -- they will start to learn. So it's not a shortage of ideas, it's not a shortage of access to technology, but you do have to get your data organized and as I mentioned, the reason I bring up co-creation is because the tools that our co-developers that our clients need, they need familiarity with those as well.

You need to learn how to use them, how to embed them how to. And so I think we've done very, very quickly. I think from our experience, what we're delivering for our clients is very, very powerful. As I mentioned, we're in -- there's not too many industries in which that we haven't touched. We have thousands and thousands of projects going on now.

This is the perspective from IBM, which, consultants, other the third party consultants would say, well, IBM is the leader. So it's not a surprise that you're hearing them say that we're going pretty fast. I don't know that that's everyone else's experience. But again, they're not the leaders in the industry.

So with getting our clients data in, with helping their teams, their ecosystem, their developer, community and everything, getting that familiarity with the tool sets and how to use that think about it, and the ability to rapidly prototype and build continue to evolve it that's happening, I'd say very, very quickly.

So there's a lot more in this space. We're early innings. But I think I think this is, from what our clients tell us, they know it's an imperative. They know they have to head down this path. They are looking for us to help them both with the technology as well as how do I embed it into my process? So it's going I think it's going really, really well.

Wamsi Mohan

When you when you look at just a switch gears a little bit into services, you've delivered some tremendous change in margin improvement in GBS, gross margins have expanded quite significantly. The scale base had been reoriented, there was a lot of hard work I know that went into that. And the fruits of that are sort of showing up now.

When you look at GTS though, in the last call I think there some comments around, hey, we're going to be more selective a little bit around GTS. And so how should we think about what you're doing in GTS? Maybe if we can contrast that with what happened in GBS. GBS was a multiyear journey, is GTS something like that, is GTS something quick? How should we think about what you're trying to accomplish within GTS? And there was margin improvement there, too?

Martin Schroeter

Yeah, there was there was margin improvement. I mean, I think what we talked about on our call with regard to GTS and focus is really, it's, it's completely consistent with what we've talked about is the IBM financial model, the overall financial model, which is focused on high value. So similarly, when we divested of our x86 server business, we said look, that's a commodity place. It's not going to drive the kind of margins we need, it doesn't it's not highly valued by our clients. So we're going to divest.

When we looked across the GTS portfolio, that is a high value business, right, the work we're doing is very high value. But we are going to say no to things like bringing other OEM content into it, because there's no value there. So the revenue line will get a little bit of pressure by choices we make, right? But the business itself is a business that delivers a ton of productivity to our clients. So it's very highly valued by them.

That business will, once we sort of get the lower margin content out that business is a is a business that resonates very, very well the offerings resonate very well with our clients, because those offerings now reflect not dissimilar to what we went through and GBS was offering now reflect the world of hybrid multi cloud. So there our backlog is now, which massive backlog, right? Our backlog now is almost a third cloud now. It doesn't, it doesn't turn over quickly, because as a long duration to it.

But that's a high value business, because now it's it is basically becoming a cloud business. Yes, we'll get some of the low margin stuff out. But it is a high value business. So the process we use when we talk about the IBM Business model is no, it's no different when we look at a segment reporting, and that really is about value.

What GBS has done similarly, is taking the offerings that we’re starting to come out of ties. And we've talked about this already years ago, we said look, some of these big enterprise kind of application implementations are commodity. So we're going to take those skills we're going to retrain them we're going to put them into helping our clients digitize their process helping our clients with the design they need in order to build more compelling apps for their own use. So we've done that in GPS

We've done that in GBS, we've modernized that those offerings, and they now reflect like, as I said, they reflect digital design, they reflect the digital journeys that our clients are on much, much higher value than where they were. GTS is in that similar process. Again, it's very cloud, it's very cloud focused now, highly valued by our clients, but we are going to get the OEM stuff out of the revenue, this just doesn't make sense to have it.

Wamsi Mohan

We're coming up at the end of time here, Martin, but I just wanted to talk about innovation for a couple of minutes because I feel like IBM is a gigantic organization, and we don't talk about it enough. But I mentioned patents and you're the leader in patents.

I think you've also done a great job in commercializing things so that they can be applicable to business. You see a lot of companies talk about AI, but there is really no monetization path, of that AI technology sort of used internally for various purposes. You guys have done a great job commercializing it. So when you look at some of the things down the road, what are the most exciting things that you're seeing down the road for IBM?

A - Martin Schroeter

Yeah, look, we've been, we've been an innovation machine for a long, long time. Right. And I -- when we look out at the world and our researchers look out at the world, there are, I think a few that are already here today that are going to define how businesses operate with one another for a long time to come. And again, it is important, this is enterprise right? This is enterprise tech, it's not consumer.

So in the world of enterprise, and I mentioned this a little bit earlier, but blockchain is -- it is a very real technology that has a lot of value in the enterprise, because of the way it allows parties to trust one another essentially right without an intermediary. So you can add a ton of efficiency and when we look at how many blockchain projects we have going on, in doing real work, we use it ourselves also, it is very exciting technology.

Part of the reason that we gave the fabric to the open source community is because our clients, again, it's not different from the cloud discussion, our clients were never going to buy into a closed proprietary technology. You have to give them sort of that base, that base on which to build. And that's why we're the leaders in blockchains, because we've given them a base, we bring in the expertise that helps them use this innovation. And then obviously, we add more value on top of that stack. So blockchain already today delivering a ton of value is got a long, long runway ahead of it still from a future value.

And then the other one I point out that I think is very exciting as quantum. So we have, -- we're the builders of quantum systems, right? We're the ones who make it available, you can use our quantum system, there are a lot of people writing white papers on quantum. But writing a white paper and having a quantum system are two different things. And so we have made ours available.

We see the power of what quantum will likely be able to solve not only today but as it continues to expand is really encouraging and our clients are excited. That's why so many of them have joined our quantum effort right to help them think through, how do I use this new kind of technology.

But importantly, I think quantum is another example of technology that yes, we will introduce it to the world, but we’ll introduce it in a very responsible way, because with quantum yes, it can be used to it can be used to build much, much better risk models of in financial services, it can be used to model chemical compounds much, much more efficiently say for pharmaceutical company.

It can also break every encryption device that exists today, not yet but we're heading down that path. So, it needs to be ushered into the world in a responsible way, so that it can be used for the purposes that will advance what people are trying to do with advanced society not turn it into a really big mistake.

So I'm excited about blockchain, our clients are excited about blockchain. We're all excited about the AI journey. Again, there's a lot of data work that has to happen, which we're helping our clients with, and we're all excited about quantum when we ushered in a way that's responsible.

All of that however, I think there are two points to be made. The reason we're in these discussions with our clients is because we're still the builders of technology we have that credibility and two, we need to make sure we have a robust digital trade framework so that the data can be moved and its data is going to -- data does underpin all those exciting innovations can do it if you can't move the data.

Wamsi Mohan

Martin, we're unfortunately out of time. Really appreciate you, taking the time today and sharing all these insights.

Martin Schroeter

Thanks Wamsi.

Martin Schroeter

Thank you.