IBM CEO Krishna Touts Hybrid Approach To AI, Says Partners Key To Delivering GenAI To Customers
Wade Tyler Millward
‘As in hybrid cloud, our ecosystem across GSIs, ISVs and hyperscalers plays a critical role in bringing generative AI to our clients,’ IBM Chairman and CEO Arvind Krishna said on the company’s third fiscal quarter earnings call.
IBM is already seeing interest from its early products in generative artificial intelligence and consulting engagements around GenAI, bringing in a book of business in “the low hundreds of millions of dollars,” Chairman and CEO Arvind Krishna said Wednesday on the vendor’s latest quarterly earnings call.
Delivering results for the third quarter of its fiscal year, a quarter that ended Sept. 30, executives with the Armonk, N.Y.-based tech described early use cases in GenAI, namely code modernization, customer service and digital labor. Krishna said that about half of the business came from AI consulting and half from software.
“We’re certainly expecting and planning that that will only increase as the quarters go on,” he said.
IBM Q3 2023 Results
He also gave a shout-out to partners as a key component of the company’s go-to-market strategy.
“As in hybrid cloud, our ecosystem across GSIs, ISVs and hyperscalers plays a critical role in bringing generative AI to our clients,” he said.
IBM has had “thousands of hands-on interactions with our clients,” Krishna said. “These are across our largest clients and smaller clients, which lays the groundwork for future Watsonx opportunities. … I expect to see a lot of deployment in 2024, going into full production across the world. Whether you use the words large language models, or foundation models, or generative AI.”
Still, IBM kept its full-year revenue guidance to 3 percent to 5 percent growth, most likely at the lower end, CFO Jim Kavanaugh said on the call.
“That’s just practically speaking, given we have one more quarter to go,” he said. Currency exchange rates is one of the issues IBM continues to tackle, with foreign exchange hitting revenue by about $250 million in the quarter.
IBM’s stock traded at about $139 a share after hours, up about 1 percent.
IBM’s GenAI Approach
Just as IBM has rode a wave of hybrid cloud work, Krishna believes that the vendor can take a hybrid approach to the AI market.
He believes customers will seek a multi-model approach to AI, using a combination of IBM models, other companies’ models, their own models and open-source models.
Customers looking into GenAI for coding don’t want to lay off developers but instead take care of accumulated “tech debt” and make developers more productive,” Krishna said on the call.
“Most enterprises are very quick to realize if you’re more productive, that means you have a competitive advantage to your peers,” he said. “And if they have a competitive advantage to their peers, they’ll take share without spending more on labor. That’s an incredible long-term competitive advantage.”
AI for customer service can result in fewer employees, but smaller customer service teams can address a higher volume of chats and calls. He put the cost takeout at about 20 percent to 30 percent.
Unlike human workers, Krishna pointed out, “AI does not get tired. It doesn’t get angry. It doesn’t get upset.” AI for digital workers can increase productivity up to 10 percent, he said.
For businesses concerned about higher interest rates, a lack of skilled workers and geopolitical uncertainty, AI and hybrid cloud “offers them a way through that without having to decrease their ambitions for next year,” Krishna said.
When asked about customer concerns around AI, Krishna said that customers continue to ask about model accuracy, using models for a long time, how their data is used in AI models and long-term liability.
“They hear and they read that—whether it’s artists, whether it’s authors, whether it’s code writers—are suing some of the producers of large language models,” Krishna said.
IBM provides legal protection for customers using IBM-produced models, similar to legal protection behind its enterprise software. “We are confident in our ability to stand by the data we’ve used to train what is being used to be output,” he said. “As you would expect, that’s hard for us to do for open-source models. But we believe that that takes care.”
Krishna said that IBM governance tools will help customers track lineage of the data used to train a model. And IBM promises that data and model refinements stay with the customer. “This helps to mitigate some of the fears and uncertainty around those issues,” he said.
He described one IBM GenAI engagement with a financial services company where IBM worked with the customer to augment a GenAI model with the company’s proprietary language, data and code snippets. The model was deployed in the client as a service in private cloud infrastructure.
Red Hat Disappoints
Red Hat growth decelerated to 8 percent year over year ignoring foreign exchange, according to the vendor.
Kavanaugh said that growth “came in a couple of points below our expectation.”
“I think that’s an execution discussion overall,” Kavanaugh said. “It came from the consumption-based services and offerings side of the equation, which, by the way, it’s about 20 percent of our portfolio is shorter duration overall. … We have to continue to monitor what happened to us in the third quarter [and] get the team focused on execution.”
The hybrid cloud segment that includes Red Hat still performed well, Kavanaugh said. The segment saw annual bookings up 14 percent in the quarter, with “double-digit growth across” Red Hat Enterprise Linux (RHEL), OpenShift and Ansible, he said.
The core subscription-based businesses of Red Hat, OpenShift and Ansible grew 19 percent overall, he said.
“Overall, 110-plus percent MRR [monthly recurring revenue] on that renewal rate of that business,” he said. “And within that 19 percent, OpenShift and Ansible were north of 40 percent, with RHEL growing double digits.”
And in IBM consulting, the Red Hat practice grew double digits to $1 billion in signings in the quarter.
“We feel very confident in the long-term posture of Red Hat growing double digits,” Kavanaugh said. “We have just got to get through and monitor what’s happening to us on the services side.”
Strength In Consulting
Kavanaugh was asked about an acceleration in consulting bookings growth—32 percent this quarter, 24 percent the prior quarter and 7 percent before that, a different story compared with rivals such as Accenture.
Accenture is No. 1 on CRN’s 2023 Solution Provider 500 compared to No. 7 IBM.
Kavanaugh attributed the growth to customers seeking digital transformation and application modernization. Opening IBM up to more strategic partnerships also helped, he said.
Krishna said that IBM Consulting has even leveraged expertise in rival Microsoft’s Azure OpenAI Service to win deals and expertise in rival Amazon’s Braket quantum computing platform.
“In that case, they’re coming in with a methodology, with knowledge with the thousands of trained consultants who know how to work on those platforms,” Krishna said.
Despite all the work for IBM Consulting, Kavanaugh cautioned that the group faces the same challenges as other services consulting companies. “There are macroeconomic challenges, without a doubt,” he said. “But we have got to go out and compete every single day. … I think we’re taking share.”
During the quarter, consulting revenue grew 5 percent ignoring foreign exchange, bringing in $5 billion. Clients prioritized transformation projects that enable cost savings and productivity but also sought engagements around GenAI.
“We are helping clients understand how AI can be used to automate tasks, make better decisions and speed and improve customer experiences,” Kavanaugh said. “We’re providing clients with the opportunity to accelerate their transformation and deploy generative AI responsibly, whether that be leveraging AI capabilities of IBM, our partners or a combination.”
Within the consulting segment, business transformation consulting grew 5 percent. Technology consulting grew 1 percent. “Growth in cloud-based application development and modernization work was partially offset by declines in on-prem application-focused projects,” he said.
And application operations grew 7 percent. This was “driven by both cloud application management and platform engineering services,” he said.
Strategic partnerships accounted for about 40 percent of consulting revenue and grew double digits across revenue and signings, he said. Hyperscaler partnership revenue was up more than 40 percent. Signings doubled year over year.
Third Quarter In Detail
IBM saw third-quarter revenue of $14.8 billion, an increase of 3.5 percent year over year ignoring foreign exchange, according to the vendor.
Software revenue grew 6 percent year over year, bringing in $6.3 billion during the quarter.
The hybrid platform and services segment—which includes Red Hat, automation, data and AI and security—increased 7 percent year over year. The segment’s annual recurring revenue (ARR) was $14 billion.
Automation revenue grew 13 percent. “We had strength in AIOps and management, driven by good performance in Instana, Turbonomic and now Apptio as clients look to optimize business outcomes and boost productivity,” Kavanaugh said.
Data and AI grew 6 percent. “Growth areas include data fabric and Customer Care as enterprise clients are both preparing for and adopting generative AI solutions, leveraging Watsonx,” Kavanaugh said. “We also grew in asset and supply chain management as we help enterprises run sustainable operations.”
Security fell 3 percent. “We delivered growth in security software driven by data security and identity and access management,” Kavanaugh said. “This was more than offset by declines in managed security services.”
IBM’s transaction processing software grew 5 percent year over year. “The success of the last couple of zSystem cycles is driving demand for this mission-critical software,” Kavanaugh said. “This together with price increases contributed to year-to-date growth in both recurring and transactional software revenue in transaction processing.”
Revenue from IBM infrastructure—which includes IBM zSystems—decreased 3 percent year over year ignoring foreign exchange, according to the vendor. But this segment still brought in $3.3 billion for the quarter.
IBM zSystems grew 9 percent year over year. IBM’s z16 revenue is “well ahead of prior cycles after six quarters of availability,” Kavanaugh said.
He cited growing enterprise workload requirements and the economic value at scale of the platform in traditional processing and Linux consolidation as parts of z16’s strength.
“In fact, install MIPS [millions of instructions per second] capacity for Linux on Z has grown more than fourfold over the last decade. Clients continue to value the security, resiliency and hybrid cloud capabilities of the zSystems platform,” he said.
Distributed infrastructure fell by 6 percent year over year, which Kavanaugh attributed to high growth the prior year. Growth in IBM Power was offset by declines in storage. Infrastructure support fell 7 percent year over year.
IBM reported $9.5 billion in year-to-date net cash from operating activities, an increase of $3 billion year to year.
Free cash flow was $5.1 billion, up $1 billion year to year, according to the vendor.
For the quarter, IBM generated $3.1 billion in net cash from operating activities, up $1.2 billion year to year. The vendor’s free cash flow was $1.7 billion, up about $1 billion year to year. It ended the quarter with $11 billion of cash and securities, up $2.2 billion from the end of 2022.
IBM is “ahead of pace to achieve our target of $2 billion in annual run rate savings by the end of 2024,” Kavanaugh said.