IBM talks up cost savings, including 'workforce rebalancing'

Real estate consolidation, 'productivity initiatives' mean Big Blue is upping annual savings target to $3B

IBM is recasting its ambitions for annual run rate cost savings by upping the target by another $1 billion, and will pull multiple levers to get there – including a completion of the Weather Company’s asset and job cuts.

The enterprise tech bellwether has just filed results for calendar Q4: revenue edged up four percent year-on-year to $17.4 billion; Software was up 3.1 percent to $7.5 billion; Consulting grew a 5.8 percent rise to $5 billion; and Infrastructure was up by 2.75 percent to $4.6 billion. Financing fell to $200 million.

Operating profit for the quarter ended December 31 was up to $3.75 billion.

CEO Arvind Krishna said IBM had entered the financial year with the intent to throw its muscle behind cloud computing and software, including AI - though it does not break out AI turnover in a standalone division, so progress is hard to decipher.

He said the sales pipeline for generative AI and WatsonX in Q3 was in the "low hundreds of millions, since then demand continues to increase and our book of business in the fourth quarter is roughly double the third quarter amount."

"There was a balance of both large and small transactions across both segments," Krishna added. "Enterprise use cases of addressing code modernization, customer service and digital labor continue to offer meaningful near-term benefits to clients."

IBM highlighted work with customers using the WatsonX code assistant for Red Hat Ansible, including a pilot with Citi "where initial results point to substantial developer productivity and core quality improvements that have led to plans for a rapid expansion focused on scaling for enterprise-wide outcomes."

Other clients in this space range from NatWest to Lockheed Martin, Boehringer Ingelheim, and Seville Football Club, which is using WatsonX to find the right players to sign by describing attributes that are then scanned across more than of 200,000 scouting reports.

In a rundown of the biz dynamics in the quarter, CFO James Kavanaugh said software was boosted by its Hybrid Cloud Platform sales, and Transaction Processing. zSystems still benefited from a refresh cycle, and Red Hat revenues went up eight percent.

"Clients are also prioritizing cloud modernization and cloud-based application development projects. This focus on digital transformation and AI initiatives to drive productivity and cost savings has been consistent throughout the year," said the chief financial officer. All of this brought in consulting dollars to IBM.

For the year, IBM grew two percent to $61.9 billion, with Software and Consulting up by five percent each, and Infrastructure down five percent. Operating income was $7.5 billion, up from $1.78 billion, as total expenses fell to $25.6 billion from $31.5 billion.

IBM expects "similar macro trends" in 2024 to the ones it experienced last year. Krishna said: "Every client I speak with is asking about how to boost productivity with AI and how to manage their technology stack, much of which is deployed across a hybrid environment, public, private and on-premises. These trends continue to fuel demand for both hybrid cloud and artificial intelligence."

Kavanaugh said IBM remains "laser focused on productivity initiatives" to "digitally transform our business processes and scale AI within IBM. This includes simplifying our application and infrastructure environments, streamlining our supply chain, aligning our teams by workflow, reducing our real estate footprint, and enabling a higher value-added workforce through automation and AI-driven efficiencies."

IBM had set a target of making annual run rate cost savings of $2 billion by the end of 2024 and has passed the $1.5 billion mark, which it said freed up money to invest in beefing up productivity and investments in technical and industry skills.

"This remains our playbook going forward. And given our success to date, we now believe we can achieve at least $3 billion in annual run rate savings by the end of 2024," said the CFO.

Cap-ex was down by around $400 million, said Kavanaugh, "reflecting actions to optimize our real estate portfolio. These actions reduced our net CapEx although had limited benefit to our profit performance."

"We are seeing increased productivity in our business, which will lead to workforce rebalancing fairly consistent with 2023 levels," he added.

Given the way other tech vendors have started the year by cutting their workforce, IBM likely won't be the last to follow this playbook. ®

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