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IBM Has a Secret Weapon That's Bringing in Billions

Motley Fool - Wed Dec 13, 2023

Part of International Business Machines' (NYSE: IBM) strategy is to sell clients on its platforms. OpenShift, a container platform that enables running workloads across multiple clouds both public and private, is at the heart of IBM's hybrid cloud computing business. Watsonx, a new enterprise AI platform from IBM, looks to fill the same role for the company's AI business.

These platforms come with a multiplier effect, as CFO Jim Kavanaugh explained during a recent technology conference. Every $1 of revenue spent on one of IBM's platforms generates between $3 and $5 of additional spending on software, and between $6 and $8 of additional spending on services. IBM has adapted much of its software to run on Red Hat's OpenShift, and its consulting arm steers clients toward its lucrative platforms.

The secret sauce

While IBM builds solutions for clients around its own platforms, those platforms need to run somewhere. IBM offers its own public cloud computing platform, but it's a small player in an industry dominated by Amazon Web Services and Microsoft Azure. Enterprise customers are going to be biased toward using one or both of those leading platforms. A digital transformation solution that doesn't involve AWS or Azure is likely a non-starter for many of IBM's customers.

IBM's consulting business has always been agnostic when it comes to putting together solutions for clients. While IBM sells a wide variety of software, hardware, and services, the company partners with other technology providers and aims to build the best solutions for clients. In the cloud and AI era, this agnosticism is really paying off.

IBM has recently entered into a variety of strategic partnerships with leading technology companies, including AWS, Microsoft, Cisco, Oracle, Salesforce, SAP, Adobe, and a few others. IBM competes with these partners in various ways, but it's also happy to include these competing products in the solutions delivered to clients.

A solution from IBM may involve migrating workloads to AWS and managing a customer's AWS cloud environment. It could involve deploying SAP's cloud ERP software to Azure, or helping a client move their on-premises Oracle database to Oracle's cloud. OpenShift can run on any cloud, public or private, and a portion of the watsonx platform is already available directly on AWS.

These partnerships are now driving a significant number of bookings for IBM. Here's Kavanaugh during the technology conference: "[O]ur strategic partnerships, remember, we came from nowhere, to now, we've got multibillion-dollar book of businesses with AWS, with Microsoft, with SAP, and next up are going to be Salesforce, which we're close, and with Oracle and Adobe coming up the rear."

For these technology partners, working with IBM makes a lot of sense. The company has long, deep relationships with enterprise and government clients. IBM's partners want access to that customer base, and through strategic partnerships, IBM can deliver that access while also driving the adoption of its platforms. The end result for IBM is billions of dollars in business that it may not have otherwise won without striking these alliances across the technology industry.

Steady growth

Despite an uncertain economic backdrop, IBM's core software and consulting segments are putting up solid results. Software revenue grew by 6% year over year in the third quarter (excluding the impact of currency), and consulting revenue was up 5%. IBM called out Red Hat and strategic partnerships as key drivers of its consulting growth.

For the full year, IBM expects revenue to increase by 3% to 5%, and for free cash flow to rise by more than $1 billion from 2022 to $10.5 billion. While the state of the economy will always have an impact on IBM's results, the company's embrace of strategic partnerships is working well in an environment where enterprises are looking to adopt cloud and AI technologies that lower their costs and boost efficiencies.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Timothy Green has positions in International Business Machines. The Motley Fool has positions in and recommends Adobe, Amazon, Cisco Systems, Microsoft, Oracle, and Salesforce. The Motley Fool recommends International Business Machines and recommends the following options: long January 2024 $420 calls on Adobe and short January 2024 $430 calls on Adobe. The Motley Fool has a disclosure policy.

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