Speaker 1: Bloomberg Audio Studios, podcasts, radio.
Speaker 2: News chez VIBM trading near the lowest level since November
Speaker 2: twenty four. September twenty twenty four, the company dialed back
Speaker 2: its full year sales forecast after a pretty steep drop
Speaker 2: in mainframe sales, which weighed on results. Joining us from
Speaker 2: New York is the co host of Bloomberg's The Clothes
Speaker 2: Remain Bustic alongside IBM CEO Avin Krishna remain Arvan.
Speaker 1: You've seen the reaction amongst investors. Here are some concerns
Speaker 1: here about that lowered sales forecast overall, as well as
Speaker 1: softness in software. You've characterized this as basically a shortfall
Speaker 1: for one quarter that is limited to CAPEX sensitive areas
Speaker 1: of the portfolio, but that's still a meaningful area of
Speaker 1: your portfolio. Were sales coming into that quarter? Was that
Speaker 1: pipeline overstated?
Speaker 3: I don't believe so, because when we look at all
Speaker 3: the deals that didn't close, I think we have done
Speaker 3: enough verification include with the clients to know that they
Speaker 3: were very real and it was a reprioritization of the
Speaker 3: CAPEC spend. At the end of the quarter. This was
Speaker 3: pretty confined to I'll call it the fortune one hundred
Speaker 3: the deals that were within a subset of those, now
Speaker 3: one third of what didn't happen has already come back,
Speaker 3: So that tells us that this was a reprioritization and
Speaker 3: those deals are very real as opposed to us being
Speaker 3: optimistic in our projections and Romain I would also add,
Speaker 3: I think that maintaining a free cash flow tells us
Speaker 3: that we have levels around productivity and conviction and confidence
Speaker 3: in the business, and that is also I think going
Speaker 3: to serve our investor as well.
Speaker 4: But the next few months will tell us that.
Speaker 1: Well on that cash flow figure, yes, and that certainly
Speaker 1: pleased a lot of analysts and investors out there, that
Speaker 1: billion dollar number of protective free cash flow growth. You
Speaker 1: maintaining the dividend as well, but you're largely done that
Speaker 1: so far by cutting costs. So that raises the question
Speaker 1: that if we are anticipating slower growth on the revenue side,
Speaker 1: does that mean more cost cuts are in store.
Speaker 3: So the bulk of our cash flow growth over the
Speaker 3: last four years has actually been on a just adbita,
Speaker 3: so that tells you that this is mostly through revenue growth.
Speaker 3: And our model has always been that we are the
Speaker 3: last dollar is more productive and more profitable than the
Speaker 3: first dollar. So we've been growing revenue four five percent
Speaker 3: and we've been growing cash flow up in the seven
Speaker 3: eight nine percent. So that's kind of our model and
Speaker 3: we intend to keep maintaining that now. Right now, if
Speaker 3: we drop revenue by one point because we said four
Speaker 3: to five instead of five plus, we can absolutely make
Speaker 3: it through productivity. Cost cuts is an interesting question. Costcuts
Speaker 3: doesn't always come down to people reduction in headcount. Our
Speaker 3: headcount has been more or less flat over the last
Speaker 3: many years. I think there's a lot of third party
Speaker 3: spend where we are going to get a lot more
Speaker 3: efficient that third party spend than we have been always.
Speaker 2: Bloomberg Tech is live on Bloomberg Television and Bloomberg Radio
Speaker 2: and we're speaking with the IBM CEO of in Krishna
Speaker 2: IV in good morning. You want to focus on accelerating
Speaker 2: revenue growth and accelerating profitability and just really simply, I'd
Speaker 2: love to hear what you're asking the team to do
Speaker 2: differently now in response to all of the factors that
Speaker 2: you outlined.
Speaker 3: So ed really, so if I look at our software business,
Speaker 3: eighty percent of it is already an annuity consumption opics
Speaker 3: BUSS business. Twenty percent of it is a CAPEX business.
Speaker 3: If we think that the CAPEX headwinds are going to continue,
Speaker 3: but eighty percent is already growing at about eight percent,
Speaker 3: we want to put a lot more focus. So we
Speaker 3: are going to direct a lot of the team with
Speaker 3: forward deployment engineers, with people who are focused on deploying
Speaker 3: the software at clients, much more technical help and make
Speaker 3: that eighty percent grow even faster. Product red Hat, Confluent,
Speaker 3: Harshi all fit that model. On the capech side, we
Speaker 3: have to make sure that while we can continue to
Speaker 3: do it, don't depend upon outsized growth on that side
Speaker 3: to go there. Then on the supply chain, can we
Speaker 3: leverage all of our capability and supply chain to make
Speaker 3: sure we have enough distributed infrastructure in storage in Unix
Speaker 3: systems that people can fulfill all of the demand. Because
Speaker 3: we came out of the second quarter with half a
Speaker 3: billion dollars of backlog in that part of the portfolio.
Speaker 3: So those give you an idea of the kind of
Speaker 3: changes that we're making already, not just for the rest
Speaker 3: of the half.
Speaker 2: You summarize the state of the world beautifully you said
Speaker 2: that customers shifted spending towards servers, storage and memory in
Speaker 2: late June, and when I posted on social media You're
Speaker 2: coming on the show that The question from the audience
Speaker 2: really simple. Did that trend continue from June into July?
Speaker 2: And for how long do you expect it to last?
Speaker 3: We have not seen it in July, but I would
Speaker 3: tell you, Look, the semiconductor pricing memory is up what
Speaker 3: three to four times over the last eighteen months. Networking
Speaker 3: infrastructure is up sixty to eighty percent, Fiber is up,
Speaker 3: connectors are up. I do think that some of these
Speaker 3: trends on the underlying components are going to carry on
Speaker 3: for some more time that works its way up into
Speaker 3: those things. So people are going to have those prices. Now,
Speaker 3: the question is is that going to maintain a reprioritization
Speaker 3: of the capex spent? If I take the signal that
Speaker 3: a third of our deals closed, then that says no,
Speaker 3: people are going to get more careful about how to
Speaker 3: spend their capex. If that goes into September, because a
Speaker 3: lot of capex does get committed at the end of
Speaker 3: a quarter, not always through, then it means that that
Speaker 3: carries on for some more time, and that is why
Speaker 3: we gave a guide of four to five percent. Depending
Speaker 3: upon if that carries on, we'll be at the low
Speaker 3: end of the ring, but some of it comes back,
Speaker 3: then we'll be at the high end of the range.
Speaker 1: So Aravin, I know there's a big focus right now
Speaker 1: on sort of the clients that sort of did not
Speaker 1: necessarily materialize in the quarter. With regards to the existing
Speaker 1: clients that you have, and I'm primarily referring to your
Speaker 1: mainframe business, I mean, can you share, like sort of
Speaker 1: what percentage of those clients are actually increasing their spending?
Speaker 1: Is that going up still?
Speaker 3: Absolutely so. The current machine is called the Z seventeen.
Speaker 3: The Z seventeen has been from the beginning, which was
Speaker 3: May of twenty twenty five to today at one hundred and
Speaker 3: thirty percent in terms of the capacity growth compared to
Speaker 3: the prior machine. That's one very strong signal, and that's
Speaker 3: an aggregate. Then you can say, hey, is everybody in
Speaker 3: there or only a few eighty five percent of the
Speaker 3: clients are increasing their capacity as opposed to the fifteen
Speaker 3: who are not. That optimization goes on all the time,
Speaker 3: and I would tell you this is probably the best
Speaker 3: that we have seen in a long time of what
Speaker 3: is going on there. Software to lag?
Speaker 1: Yeah, software is going to I mean, look, we know
Speaker 1: the hardware capacity is there. Software is lag and I
Speaker 1: understand why it's lagging in the moment. And I'm gonna
Speaker 1: ask you a question, and I forgive me if it's
Speaker 1: a bit unfair, but I look back to the nineteen
Speaker 1: nineties and whether there are some parallels to some of
Speaker 1: the mainframe issues that IBM went through back then under
Speaker 1: a predecessor two or three times removed from you, John Acres,
Speaker 1: and this idea that at that time we were going
Speaker 1: through this paradigm shift in computing and how companies spent
Speaker 1: and allocated their money. And there was a lot of
Speaker 1: talk by the CEO then that the issues were temporary,
Speaker 1: that they were economic, and that they were right them sales.
Speaker 1: We know in hindsight that it was much more structural.
Speaker 1: Why should we now look at this major shift going
Speaker 1: on with AI and the computation involved in that and
Speaker 1: think that this time is different.
Speaker 3: Well, we have to look at what the clients are doing.
Speaker 3: I always thought there our opinion is an opinion, what
Speaker 3: clients do is what matters. So when I check with
Speaker 3: my clients, those who do a credit card authorizations, are
Speaker 3: you going to maintain the mainframe and they go to
Speaker 3: all the resilience, the amount of capacity, the unit cost
Speaker 3: of it being five to fifteen times cheaper is important.
Speaker 3: The big difference from that time early nineteen nineties to
Speaker 3: today Romain is the cost issue. You could not argue
Speaker 3: that the mainframe was cheaper on a unit cost basis
Speaker 3: for the workloads that.
Speaker 4: Are moving off.
Speaker 3: Then at that time, the mid range computers I'll call
Speaker 3: it the whole Unix, it wasn't really client server, it
Speaker 3: was Unix taking the workloads off in the early nineteen nineties.
Speaker 3: That issue you have to look at if there is
Speaker 3: a cheaper alternate for that workload. I'll sort of look
Speaker 3: at you and say that means in five to fifteen
Speaker 3: years it will move off.
Speaker 4: But that's not the case right now. For the workloads
Speaker 4: that are on.
Speaker 3: We can show the clients that it's five to fifteen
Speaker 3: times cheaper to keep it on the mainframe, they're not.
Speaker 3: But that's not all workloads. That is workloads that need protection,
Speaker 3: that need resilience, that need the bus capacity that comes.
Speaker 3: And so for those kinds of workloads, the main frame
Speaker 3: is the architecturally superior platform that was not the case
Speaker 3: thirty years ago. For the workloads that did go off.
Speaker 2: Live on Bloomberg Television and on Bloomberg Radio. This is
Speaker 2: Bloomberg Tech speaking with IBMCO r Vin Krishna. I've been
Speaker 2: listening to you a lot recently on long form podcasts,
Speaker 2: some clips on the social media about your view of
Speaker 2: the world, what it's like to be a CEO in
Speaker 2: the domains that IBM operates in. And it's interesting how
Speaker 2: quickly it comes back to the macroeconomic backdrop. A lot
Speaker 2: of people looked at the guidance for the balance of
Speaker 2: this year and would say, and they do say, are
Speaker 2: in on this show memory prices are not changing, they
Speaker 2: continue to push higher. They look at the outlook for growth.
Speaker 2: Could you just explain the data points you rely on
Speaker 2: that give you the confidence on the new guidance that
Speaker 2: you've given and whether it is actually achievable or it
Speaker 2: will be difficult to meet.
Speaker 3: Yeah, so, Ed, I'll come back to For ourselves, we
Speaker 3: have to look at our demand pipelines and our yields
Speaker 3: and how we get things going. But I think for
Speaker 3: your audience, let's look at it this way. Number one
Speaker 3: most important is what is GDP growth going to be.
Speaker 3: We think that that's between two and three percent for
Speaker 3: the year. If I look at the globe and it
Speaker 3: is going to be consistent, even in the Middle East,
Speaker 3: even in Asia where there is a lot more energy
Speaker 3: and disruption.
Speaker 4: We actually see a lot of growth.
Speaker 3: Tech is going to be I think two to three
Speaker 3: to four points above that. So that puts tech in
Speaker 3: terms of what the market is somewhere in the five
Speaker 3: six seven percent. Then that comes back to what parts
Speaker 3: of our portfolio can play against that demand and what
Speaker 3: parts cannot. And so I look at the parts of
Speaker 3: the software portfolio. That's what I talked about, the eight
Speaker 3: percent growth in the eighty percent of it that can
Speaker 3: play right into that. Then I look at our distributed
Speaker 3: infrastructure that can play right into that. I think consulting
Speaker 3: will be that one two three percent. It is not
Speaker 3: going to be in the double digit growers. But we
Speaker 3: see the demand and we see the signings, and we
Speaker 3: see the clients leaning in to say they want transformational
Speaker 3: work done. That's how we kind of know beginning with
Speaker 3: the macro and then coming down I'll make a prediction
Speaker 3: for you. I think technology spend is going to become
Speaker 3: a larger and larger part of every enterprise's budget.
Speaker 4: Used to be three percent.
Speaker 3: Since remain raised the thirty years ago, is probably up
Speaker 3: at five six percent on average. I will not be
Speaker 3: surprised if by twenty thirty five it's ten percent of
Speaker 3: everyone's budget. Give you a quick micro case study. Bloomberg
Speaker 3: reported that Starbucks is replacing some IBM tools on the
Speaker 3: software side with in house.
Speaker 4: Let's talk to that.
Speaker 3: So Starbucks is about a little over two million dollars
Speaker 3: a year client for IBM. The portion they're replacing is
Speaker 3: a product called tri Regard that it does real estate
Speaker 3: Lee's management. The version of it that Starbucks has is
Speaker 3: almost ten years old. I'm not surprised at a replacing
Speaker 3: it because I've actually been describing publicly software which is
Speaker 3: largely interaction based and is based on ease of use
Speaker 3: as opposed to anything else, can be easily replaced by
Speaker 3: AI and AI agents, and that is what is going
Speaker 3: on there. However, if I see other parts of Starbucks
Speaker 3: and maybe the ability for our harshy portfolio or security portfolio,
Speaker 3: I'm a loutf afraid it this way, I would not
Speaker 3: be surprised if Starbucks is a larger client next year
Speaker 3: than it was last year.
Speaker 1: With regards to how this world is evolving, Arvin, I
Speaker 1: am curious that just internally about your plans to hire,
Speaker 1: particularly when it comes to the technological side. Have you
Speaker 1: been able to keep pace with some of the other
Speaker 1: companies out there also trying to do what you do
Speaker 1: and pay some of the salaries that you have to pay.
Speaker 3: Well, we hired three times as many college hires this
Speaker 3: year than we did last year, and I think that
Speaker 3: given others seem to be backing off college hiring, it
Speaker 3: gives us an incredible ability to bring in great talent
Speaker 3: and to then grow them inside our company and to
Speaker 3: offer them great careers. I think if I looked at
Speaker 3: it last we had I think twenty million resumes in
Speaker 3: our applicant database, so that gives us a huge field
Speaker 3: to go look at. So I mean I don't worry
Speaker 3: about bringing in talent. I actually worry much more about
Speaker 3: can we give them a great career and a great
Speaker 3: pathway because not everybody is cut out to do work
Speaker 3: that is going to be demanded. Because I don't think
Speaker 3: there's a lack of employment, but the nature of the work.
Speaker 3: If you can't use AI tools, if you can't use
Speaker 3: the productivity tools, then it's going to be really hard
Speaker 3: for you to be competitive with your peers.
Speaker 1: We always we already know sort of the potential impact
Speaker 1: what AI means for the economy and for your business.
Speaker 1: There are a lot of people looking around the corner,
Speaker 1: including yourself, to quantum. Is that a viable business on
Speaker 1: the horizon or is that just a moonshot that you're
Speaker 1: hoping actually.
Speaker 3: Sticks well when things are two years away. I wouldn't
Speaker 3: call them a moonshot. I think quantum is now in
Speaker 3: the engineering realm, as opposed to the science realm for
Speaker 3: the next five years, and I believe that by twenty
Speaker 3: twenty nine we will deliver a machine that does one
Speaker 3: hundred million competitions of large scale, fault tolerant quantum computer
Speaker 3: in the next two years. I think that's an incredible opportunity.
Speaker 3: I'll quantify it. And this is not just our work,
Speaker 3: a lot of third parties. By the end of twenty thirties,
Speaker 3: we think it's about a trillion dollar total market opportunity
Speaker 3: in terms of value that quantum will create. That is
Speaker 3: why we also double down this morning and announced that
Speaker 3: we bought HRL from GM and Boeing and that is
Speaker 3: going to help us bring people with a lot of
Speaker 3: talent around materials, spintronics, quantum sensing and other sense that
Speaker 3: technology is to add to our own effort, so we
Speaker 3: are even more well positioned to go win in this market.
Speaker 2: Avin Krishna IBM CEO, of course, alongside Bloomberg's remain bustic.
Speaker 2: Thank you both very much,