International Business Machines : Prepared Remarks (93 KB) pdf

Introduction

Thank you. This is Patricia Murphy, and I'd like to welcome you to IBM's second quarter 2022 earnings presentation. I'm here with Arvind Krishna, IBM's Chairman and Chief Executive Officer, and Jim Kavanaugh, IBM's Senior Vice President and Chief FinancialOfficer. We'll post today's prepared remarks on the IBM investor website within a couple of hours, and a replay will be available by this time tomorrow. To provide additional information to our investors,our presentation includes non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We have provided reconciliation charts for these and other non-GAAP measures at the end of the presentation, and in the 8-K submitted to the SEC. Finally, some comments made in this presentation may be considered forward looking under the Private Securities Litigation Reform Act of 1995. Thesestatements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filings.

So with that, I'll turn the call over to Arvind.

CEO Perspective

Thank you for joining us today. In the second quarter, we drove solid results, reflecting the investments and changes we have been making to execute our strategy. With this performance, we continue to deliver on our model of mid-single digit revenue growth.

Technology plays an important role in today's business environment. In fact, nearly every client I speak to believes that technology serves as a fundamental sourceof competitive advantage. It serves as both a deflationaryforce and a force multiplier - and is especially critical as clients face challenges on multiple fronts, from supply chain bottlenecks to demographic shifts. Given its ability to boost innovation, productivity, resilience, and help organizations scale, IT has become a high priority in a company's budget. As such, there is every reason to believe technology spending in the B2B space will continue to surpass GDP growth.

With this demand backdrop, we are executing our hybrid cloud and AI strategy. We have made changes to our portfolio and focused investments in our offerings, technical talent, our ecosystem, and go-to-market model. Demand for our solutions remains strong. We continued to have double- digit performance in IBM Consulting, broad-based strength in Software, and with the z16 platform launch, our Infrastructure business had a good quarter. By integrating technology and expertise from IBM and our partners, our clients willcontinue to see our hybrid cloud and AI solutions as a crucial source of business opportunity and growth.

Hybrid Cloud and AI Progress

Let me now delve a bit deeper into the progress in the execution of our hybrid cloud and AI strategy. Hybrid cloud is about offering clients a platform that can straddle multiple public clouds, private clouds, and on- premise properties - all the way to the edge. Our platform, based on Red Hat, allows our clients to consume powerful software capabilities driven by open-source innovation. Our software has been optimized to run on that platform and includes advanced data and AI, automation, and the security capabilities our clients need. Our global team of consultants offers deep business expertise and co-creates with clients to accelerate their digital transformation journeys. Our infrastructureallows clients to take full advantage of an extended hybrid cloud environment.

As a testament to the success of our strategy, we continue to increase adoption of our platform with over 4,000 hybrid cloud platform clients, including more than 250 added in this past quarter alone. Apart from working with a greater number of clients, those who adopt our platform tend to consume more of our solutions across software, consulting and infrastructure - expanding our footprint within those clients. Recently, clients such as PNC, Barclays, and Citi have chosen our hybrid cloud capabilities to unlock more business value and meet rapidlychanging client demands.

Organizations everywhere are also under intense pressure to fast-track their digital transformation and harness the power of their data. With the world now creating two-and-a-half quintillion bytes of data each day, artificial intelligence, or AI, is the only way to process this enormous amount of data - from hybrid cloud environments all the way to the edge. That is why AI adoption is steadily on the rise. According to a new study released by IBM last quarter, 35 percent of companies are now using

some form of AI in their business. Manyof those companies are using AI and automation to address demographic shifts and move their employees to higher value work. This is one of the many reasons we are investing heavily in both AI and automation. These investments are paying off. In addition to the strong revenue performance in automation and data & AI software, we recently received two important recognitions. We were named as a leader in the latest Gartner Magic Quadrant for APM and Observability,and in the Forrester Data Fabric Wave for our Cloud Pak for Data.

Over the last several quarters, I've highlighted the importance of the growing ecosystem of partners to our platform-centric strategywith leading firms like SAP, Salesforce, Adobe, Oracle, Microsoft, and AWS. This quarter we continued to expand and extend our partnerships - I'll expand on just two. We announced a strategic collaboration agreement with AWS to offer a broad array of our softwarecatalog on AWS. This includes capabilities that span automation, data and AI, security, and sustainability. Second, with Tech Mahindra, we launched Synergy Lounges to empower businesses with innovation technologies and services for key industries such as telecommunications, manufacturing, banking, healthcare, energyand utilities. The first Synergy Lounge was established in Bengaluru with a focus on edge, 5G and software-defined networking solutions with hybrid cloud. This will be followed by the opening of three more centers in London, Seattle, and Melbourne.

Clients aren't just simply buying softwareor hardware - they're entering a relationship with a company that's going to help them navigatethe future of technology. This is why innovation and our ability to invent what's next remains so important. Quantum is a great example of our commitment to advance the future of technology. Building on our progress of a 127-qubit quantum computer currently in our cloud, we have committed to

demonstrate the first 400-plus qubit system beforeyear end. This will help us move forward towards our roadmap to deliver a 1,000-plus qubit system next year and a 4,000-plus qubit system in 2025. One of the implications of quantum computing will be the need to change how information is encrypted. We are proud that technology developed by IBM and our collaborators has been selected by NIST as the basis of the next generation of quantum-safe encryption protocols.

In another example of innovation, our new z16 system becamegenerally available in the second quarter. The z16 is designed for cloud-native development, cybersecurity resilience, quantum-safe encryption and includes an on-chip AI accelerator, which allows clients to reduce fraud within real-time transactions.

Given the importance of cybersecurity, in this past quarter we also acquired Randori, a leading attack surface management and offensive cybersecurity provider. This builds on the recent acquisition of ReaQta and the launch of QRadar XDR. It's one of two acquisitions in the second quarter, and over 25 in the last two years.

Another major focus area across all stakeholders is ESG,which isn't just a regulatory requirement or about being a good corporate citizen, it's alsoa business opportunity. A poll conducted by the IBM Institute for Business Value shows that 50 percent of CEOs see sustainability as one of their highest priorities. And over 80 percent of CEOs believetheir company's sustainability investments will improve business results and accelerate growth. To accomplish this, companies need to leverageAI to turn the mountains of data they collect into sustainable action. SL Green Realty Corporation, Manhattan's largest officelandlord, is a recent example. They are using Envizi, an IBM solution, to manage their ESG indicators across