IBM's Strategy in the Global AI Market
2023-08-01
IBM recently held a call meeting to discuss their strategy in the artificial intelligence (AI) market. The meeting focused on topics such as data privacy and the selection of AI models for clients. During the meeting, the company emphasized its role as a trusted advisor and expressed confidence in its ability to capitalize on market opportunities.
One of the most important topics discussed was the company's strategy for navigating the complexity of the AI market and helping clients choose the most appropriate models for their needs. The Chairman and CEO of IBM, Arvind Krishna, highlighted the interest and understanding of AI by geography. He noted that the interest in AI is not limited to the U.S. but spans across all markets and industries internationally. However, the level of maturity in embracing AI and utilizing it to interact with clients and employees varies across different regions.
According to the discussion, North America is the most advanced region in terms of AI adoption, followed by Western Europe and some advanced markets in South America. Asia and the Global South are slightly behind in terms of technology adoption, with Japan being cautious but quick in experimenting with AI.
The meeting also touched upon considerations of sovereignty, data privacy, and the need to not solely depend on a few international players. IBM emphasized the importance of private models and models that can be customized and left behind with clients.
The market outlook for IBM is positive. The company has experienced significant growth in its mainframe programs, leading to increased opportunity and strong renewal rates. They expect low single-digit growth with the potential for additional price increases due to inflation. The company has seen 8% growth in the first half of the year and is confident in sustaining this growth. However, they anticipate more challenging comparisons in the second half of the year. On the consulting side, growth has slightly decelerated but the company is still pleased with their performance and has not observed any changes in client buying behavior. They have also seen strong signings growth and believe they are gaining market share in areas such as digital transformation, application modernization, data and technology, and AI.
The key drivers of IBM's business include pricing optimization, value and differentiation offered to clients, take-up with mission-critical transaction processing, human capital-based business and consulting, improvement in operating discipline of revenue, operating margin, and cash from profit, signing new AI offerings in the consulting side of the business, efficiency in the software development process, gen AI's impact on productivity, working on mission-critical systems, and the potential disinflationary impact of gen AI.
In terms of product and service plans, IBM is focusing on hybrid cloud and AI. They aim to bring new innovations to market, expand strategic partnerships, make investments in targeted growth markets, and unlock value through productivity initiatives.
During the meeting, the most important Key Performance Indicators (KPIs) discussed were international expansion and penetration in larger clients. IBM aims to increase its presence in international markets by expanding its distribution channels to target international clients. Additionally, they want to increase their market share and penetration in larger clients by leveraging their existing client base.
The company's outlook for the full year of 2023 includes expectations of constant currency revenue growth of 3% to 5%, free cash flow of about $10.5 billion, and an expansion of operating pre-tax margin by about a half a point year to year. The tax rate for the year is expected to be in the mid to high teens range, and currency translation is anticipated to have a fairly neutral impact on revenue growth. The company also expects revenue growth at the high end of software's mid-single-digit model, with consulting revenue growth in the range of 6% to 8% and an expansion of consulting pre-tax margin by at least a point. However, infrastructure revenue is projected to be roughly flat over the midterm model horizon, with a decline in 2023 impacting overall revenue growth by over a point. The pre-tax margin for infrastructure is expected to be in the low teens. Overall, the company has expectations for higher-growth in the coming quarter/year.
IBM has made progress on its strategic initiatives. They have continued solid execution of their hybrid cloud and AI strategy, with strength in their growth vectors of software and consulting. IBM is focused on helping clients speed up their transformation journeys, modernize their applications, and optimize their business workflows. They are bringing new innovations to market, expanding strategic partnerships, and making investments in targeted growth markets. The company's strategy revolves around hybrid cloud and AI, which they consider as the key drivers of business innovation. They have a leading container platform called Red Hat OpenShift, and their consultants use their technical and business knowledge to drive adoption of their technology platforms. IBM also highlights collaborations with partners, such as Air Canada, to improve their digital capabilities. Overall, the company seems to be making progress on their strategic initiatives.
The participants of the call meeting included Patricia Murphy - Senior Vice President, Investor Relations, Arvind Krishna - Chairman and Chief Executive Officer, Jim Kavanaugh - Senior Vice President, Chief Financial Officer, and various analysts from Bank of America Merrill Lynch, Evercore ISI, AllianceBernstein, Credit Suisse, Morgan Stanley, Stifel Financial Corp., BMO Capital Markets, and Melius Research. The meeting discussed various aspects related to the company's approach to data usage, the importance of selecting appropriate models, and the potential opportunities in the AI market. The overall tone of the meeting suggested that IBM is confident in their solutions and ability to navigate the complexity of the AI market.