The Six Five team discusses IBM’s most recent earnings.

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Transcript:

Patrick Moorhead: So, Daniel, let’s move to the next topic and that is IBM Earnings. To the surprise and the delight of IBM shareholders, IBM absolutely knocked out of the park. They beat on the top. They beat on the bottom. And they had a really good guide.

Some of the things I’d like to point out on the software side, it was all about transaction processing. I mean, up 23% and that’s nearly a $6 billion business. And listen to this, Daniel, 79% gross profit margins. You got to love that. A $5.8 billion business with almost 80% margins. It’s a beautiful business.

Second quarter in a row, the IBM infrastructure team absolutely delights. Half the size of the revenue from software, but infrastructure at 50% gross margin. Oh my gosh, death of the mainframe. It’s dying. Long live the mainframe. IBM Z was up 88% on fire. If you want constant currency, okay, 98%, a doubling of the mainframe business which is completely amazing. Up from year on year 30%, that Z16 is absolutely kicking in. Congratulations to Ross Mauri and the team there.

And I’m going to final finalize with IBM Consulting. I don’t follow them very closely, but nearly $6 billion in revenue at 26% gross margin. And it’s like, “Wait a minute, what’s up with the margins?” Well, Accenture margins are around 30%. So, let’s just say Accenture’s best in breed on consulting. There were around a respectable area. And some of the highlights there, big business coming in from Salesforce, SAP, AWS and Azure integrations. And hybrid cloud was up 28%.

And the final thing I’ll say about the business is nine quarters of growth in consulting, net-net, IBM CEO Arvind Krishna. The strategy and the plan is working.

Daniel Newman: Yeah. You hit a lot of things on the head. And I think it’s worth noting without FX, this quarter would have looked even better. The constant currency and the strength of the dollar has definitely weighed on every tech company with global exposure earnings. This was a good quarter, very good quarter. It would have been an even better quarter. And just think about that.

Now, you got to look at the macro-environment, Pat. Everybody came into this quarter thinking the earnings are going to be garbage. And if we’ve looked at the advertising like the Snap earnings early on, if you look at some of the chip data, some of the consumer, some of the downgrades that Apple has seen, there seems to be a clear agreement that consumer is going to be hit.

But this was kind of a coming out party for the enterprise part of the earning cycle to say, “Hey, maybe the enterprise cloud, AI, data center, edge, IoT, parts of commercial compute are going to actually hang in a lot better than people thought.”

Patrick Moorhead: Yeah.

Daniel Newman: And this to me continues to be an indicator of businesses are going to make hard choices right now, but hard choices of hiring or freezing hiring versus investing in key technologies that are going to enable business to do more with data, deliver better customer experiences, secure and meet compliance requirements, where are you going to spend?

Well, we’re going to stop hiring but we’re going to build processes that are going to automate workflows and improve our enterprise and make sure that we come out of this pandemic a different company than we came into it, which is something that I think most of your best leaders right now are sort of indicating is that we came out of the pandemic and now we’re going to have to come out- sorry, let me be more clear- coming out of this recession, so the pandemic came out, we accelerated, money was falling out of the sky, companies could hire everybody, spend everything. It was whatever it takes to get it done. Now, we’re going to get more strategic. And this was very well seen in the numbers.

Now, this isn’t all macro. Some of this is about performance. Arvind Krishna had a very clear vision. He spun off Kyndryl because Kyndryl was like a boat anchor to the company’s growth. He understood that the company could not grow with a business like that that was continuing to be such a large percentage of revenue but didn’t have any growth trajectory. So, let that be spun off, let the Kyndryl team focus on getting that back to growth. I think they’re doing a decent job of that.

But IBM now is, “We’re a cloud company, hybrid cloud. We’re AI. We’re automation. We’re zeroed in on this. Higher margins, higher growth. We will deliver to the street even as a slightly smaller company.” And clearly, that vision that by the way he shared with you and I sitting down at this year’s Six Five Summit has come to fruition.

So, is the next quarter going to continue to be tough? Yes, I think the macro is tough, inflation, interest rates, tougher economy, bad policy coming out of Washington. But good companies perform well in every economy.

Patrick Moorhead: Yeah, I really enjoyed the conversation we had with Arvind at his office in New York, Armonk. And one of the things that you had stressed this big time and I think he acknowledged that technology can be anti-inflationary. Now, I’m wondering, “Wait a second, can technology be anti-recessionary where essentially business is going down but the way to get more business and lower your costs is to invest in more technology?”