IBM CEO Arvind Krishna Talks Infrastructure Deals

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, podcasts, radio, news.

**Ed Ludlow** (0:07)
Shares of IBM trading near their lowest level since November 24, September of 2024 The company dialed back its full year sales forecast after a pretty steep drop in mainframe sales which weighed on results. Joining us from New York is the co-host of Bloomberg's The Close, Romaine Bostick, alongside IBM CEO, Arvind Krishna. Romaine.

**Romaine Bostick** (0:27)
Arvind, you've seen the reaction amongst investors here. Some concerns here about that lowered sales forecast overall, as well as softness in software. You've characterized this as basically a shortfall for one quarter that is limited to capex sensitive areas of the portfolio, but that's still a meaningful area of your portfolio.
Were sales coming into that quarter? Was that pipeline overstated?

**Arvind Krishna** (0:51)
I don't believe so, because when we look at all the deals that didn't close, I think we have done enough verification, including with the clients, to know that they were very real, and it was a re-prioritization of the capex spend at the end of the quarter. This was pretty confined to, I'll call it the Fortune 100, the deals that were within a subset of those. Now, one third of what didn't happen has already come back. So that tells us that this was a re-prioritization and those deals were very real, as opposed to us being optimistic in our projections.
And Romaine, I would also add, I think that maintaining our free cash flow tells us that we have levels around productivity and conviction and confidence in the business. And that is also, I think, going to serve our investors well, but the next few months will tell us that.

**Romaine Bostick** (1:43)
Well, on that cash flow figure, yes, and that certainly pleased a lot of analysts and investors out there, that billion-dollar number of protected free cash flow growth, you're maintaining the dividend as well, but you're largely done that so far by cutting costs. So that raises the question that if we are anticipating slower growth on the revenue side, does that mean more cost cuts are in store?

**Arvind Krishna** (2:05)
So, the bulk of our cash flow growth over the last four years has actually been on adjusted EBITDA. So that tells you that this is mostly through revenue growth, and our model has always been that we are, the last dollar is more productive and more profitable than the first dollar. So we've been growing revenue 4 or 5 percent, and we've been growing cash flow up in the 7, 8, 9 percent. So that's kind of our model and we intend to keep maintaining that. Now, right now, if we drop revenue by one point, because we said 4 to 5 instead of 5 plus, we can absolutely make it through productivity.
Cost cuts is an interesting question. Cost cuts doesn't always come down to people reduction in headcount. Our headcount has been more or less flat over the last many years. I think there's a lot of third-party spend where we are going to get a lot more efficient with that third-party spend than we have been always.

**Ed Ludlow** (3:04)
Bloomberg Tech is live on Bloomberg Television and Bloomberg Radio, and we're speaking with the IBM CEO, Arvind Krishna. Arvind, good morning.
You want to focus on accelerating revenue growth and accelerating profitability. And just really simply, I'd love to hear what you're asking the team to do differently now in response to all of the factors that you outlined.

**Arvind Krishna** (3:25)
So, Ed, really, so if I look at our software business, 80% of it is already an annuity, consumption, OpEx-based business, 20% of it is a CapEx business. If we think that the CapEx headwinds are going to continue, but 80% is already growing at about 8%, we want to put a lot more focus, so we're going to direct a lot of the team with forward deployed engineers, with people who are focused on deploying the software at clients, much more technical help, and make that 80% grow even faster.
Products like Red Hat, Confluent, Hashi, all fit that model. On the CapEx side, we have to make sure that while we can continue to do it, don't depend upon outsized growth on that side to go there. Then on the supply chain, can we leverage all of our capability in the supply chain to make sure we have enough distributed infrastructure in storage, in Unix systems, that people can fulfill all of the demand? Because we came out of the second quarter with half a billion dollars of backlog in that part of the portfolio. So those give you an idea of the kind of changes that we're making already, not just for the rest of the half.