RESEARCH TRIANGLE PARK – Arvind Krishna delivered a comprehensive pep talk to Wall Street analysts after IBM delivered a financial report that topped expectations Monday evening, taking them step by step through the strategy he is implementing as Big Blue’s chairman and CEO. “We remain on track,” he declared.

And Krishna had words of praise for Raleigh-based Red Hat (later telling CNBC that CEO Paul Cormier is staying in place), noting the growth that Red Hat is helping bring the giant (revenues up 20% year over year).

Jim Whitehurst is gone as president of IBM but the former Red Hat CEO who helped lead the company’s integration with Big Blue after the $34 billion merger nearly three years ago, drew praise.

But Krishna, who beat out Whitehurst in the battle to become CEO and chair when Ginni Rometty retired, spent most of his time defending his hybrid cloud-artificial intelligence play, the growing number of acquisitions, the pending spinoff of the Global Business Services (GBS) group as a separate company, and much more.

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IBM Red Hat

Initial reaction to Whitehurst’s departure was not positive, and questions have been asked about Krishna’s strategy. Will it work?

Well, the numbers seem to indicate his moves are working. For two consecutive quarters, IBM’s top exec has had plenty of positive news to share. Here are Krishna’s comments, slightly edited for brevity:

“We continue to make progress this quarter.

Our revenue growth improved to 3% as reported, led by global business services and our software business, and we grew adjusted free cash flow for the first half. Across every industry, enterprises are using technology to redesign business processes, whether it’s automation in manufacturing, telemedicine in healthcare or omnichannel in retail. These digital transformations are enabled by a hybrid cloud environment. The technology and services we provide to our clients enable their business growth and productivity increases and improved customer experiences.

“This is why our strategy is focused on hybrid cloud and AI. At the same time, the overall spend environment continues to improve. With the economy reopening in many parts of the world, many markets and industries are getting back on track. …

“I want to be clear upfront that with our results over the last two quarters, we remain on track to achieve our financial expectations for the year, revenue growth at actual rates and $11 billion to $12 billion of adjusted free cash flow. We continue to take decisive steps and make the investments required to execute on our strategy. This includes making acquisitions that strengthen our portfolio, offering new innovations and digital capabilities to our clients, expanding our partner ecosystem, accelerating changes to our go-to-market model while also instilling more of a growth mindset among our teams and building a more client-centric culture.

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“We are executing the separation of Kyndryl, which is still on track to be completed by the end of the year. The recent announcements within our senior team also support and reinforce our strategic priorities. While there have been a number of changes,

“Jim Whitehurst will step down as President but remains as a senior advisor to me and the rest of the leadership team. Jim worked on many parts of our strategy, including the integration of Red Hat.

“Nearly three years since we announced the acquisition, there is no doubt this integration has been successful. Jim remained a strong believer in IBM and our strategy. Given his background, I understand his desire to become an investor.

“Going back to the execution of our strategy, we are pleased with the early signs of progress on the significant changes we are making.

Hybrid cloud & AI

“But as you would expect, it will take time before we realize the full benefit of these changes. Our strategy around hybrid cloud and AI is resonating among our clients and bears repeating.

“Hybrid cloud is more than a strategy. It’s the reality for our clients today.

“They have multiple public clouds, private clouds, on-premise workloads and are dealing with stringent regulatory and security requirements. Our hybrid cloud platform gives clients the ability to flexibly deploy and manage data and applications across any environment. With hybrid cloud, clients can derive two and a half times more value in comparison to other approaches. Our strategy is platform-centric.

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“Linux Containers and Kubernetes are at the heart of our hybrid cloud platform, allowing clients to write once, run anywhere. Our software portfolio, including Cloud Paks built on Red Hat OpenShift, runs cloud native. Our GBS experts work with clients across every industry to accelerate their digital transformation journeys through hybrid cloud and AI. Our systems and industry-specific public clouds provide differentiated infrastructure.

“This platform approach drives compelling economics to IBM and our ecosystem partners. This quarter, we continued to make progress in the execution of our strategy. More and more clients have chosen our technology and services as a lever for business growth. We now have over 3,200 clients using our hybrid cloud platform.

“That’s almost four times the number of clients just prior to our announcement of the Red Hat acquisition. GBS is helping to drive this platform adoption as we modernize and manage our clients’ applications in a hybrid cloud environment. This work is accelerating, and we have now grown to 700 GBS, Red Hat based client engagements since the acquisition. Our hybrid cloud platform is proving to be of immense value across industries. …

AI, quantum, acquisitions

“Our efforts are focused on bringing our AI technologies to horizontal processes. GBS helps our clients build intelligent workflows and transform their core business process, whether that be a supply chain, talent management or customer service. This allows them to boost productivity and improve the customer experience. An example of this is the work we are doing with CVS Health.

“As COVID vaccines began rolling out in the United States, IBM built in just a few weeks an AI-powered assistant to help CVS Health deal with the massive influx of calls. Watson Health handled more than 10 million calls in three months, improving the customer experience and reducing costs. Keep in mind, this is for one vaccine and one use case. As use cases expand, the benefits will grow.

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“This is a compelling value proposition, and we’ve recently deployed Watson Assistant to other clients, ranging from York University to DFW Airport to PayPal. These examples and others reflect our ability to build powerful AI capabilities for business, for which we are also externally recognized. IBM was again ranked No. 1 in IDC’s artificial intelligence market for 2020 market share.

“And IBM has been named a Leader in Gartner’s 2021 Magic Quadrant for Data Science and Machine Learning Platforms. Since we announced our new go-to-market model in January, we have made significant changes to our sales model and are providing clients with a more technical and experiential approach. Every client I have spoken to sees the value of this approach. They are pleased to co-innovate with IBM, leverage our Garage methodology and derive value more quickly from our solutions.

“While we invest to expand our ecosystem, we are also investing to enhance our portfolio. In the second quarter, we announced a series of products to further differentiate our hybrid cloud and AI capabilities. …

“Meanwhile, we continue to complement our organic investments with acquisitions. Turbonomic is an ARM provider that helps optimize the performance of any application or resources. It builds on the recent acquisition of Instana for APM and observability and the launch of IBM Cloud Pak for Watson AIOps to automate IT operations with AI. We are reinforcing our ecosystem play in GBS with the acquisition of Waeg, a leading Salesforce consulting partner in Europe.

“These are near-term opportunities. At the same time, we are focused on emerging and longer-term opportunities such as quantum computing. Quantum is an area of incredible promise slated to unlock hundreds of billions of dollars of value for our clients by the end of the decade. To help business and society reap the benefits of quantum computing, we have put a road map in place to build 1,000-plus qubit computer by 2023.

“We are forging a series of major partnerships to advance the business and science of quantum computing and post quantum encryption. This quarter, we have announced we’ll join forces with the University of Tokyo in Japan, the STFC Hartree Centre in the United Kingdom and the Fraunhofer Institute in Germany. This builds on the partnership we announced last quarter with the Cleveland Clinic. Before I close, I’d like to quickly comment on some of our initiatives around societal issues.

Corporate responsibility

“This month, we released our 2020 CSR [corporate social responsibility] Report. In it, you will see our efforts to apply the power of our technologies to advance societal progress such as applying supercomputing resources in support of COVID-19 research. We have made the important commitment to reach zero greenhouse gas emissions by 2030 without the use of carbon offsets. We are taking a series of actions to increase our diversity representation, and we are being transparent in our diversity and inclusion scores, as you can see in our report.

“To close, let me reiterate my confidence in our strategy. Our second-quarter results demonstrate the progress we are making toward achieving our two financial objectives: sustainable mid-single-digit revenue growth post separation and strong cash generation.”

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