IBM, Rometty outline Red Hat strategy: Here's how the parts fit together for IBM growth

The short version is that IBM brings the mission critical workloads and global customer base. Red Hat brings the vehicle that takes those workloads multicloud both horizontally and vertically.
Written by Larry Dignan, Contributor

Ginni Rometty, CEO of IBM, said the addition of Red Hat would turbocharge the company's financials, enable it to better target cloud customers and return Big Blue to growth.

At IBM's Investor Briefing 2019, the primary topic was the Red Hat purchase. Rometty and other IBM executives including Red Hat CEO Jim Whitehurst outlined how the two companies would go forward strategically.

The focus of Friday's talk revolved around how data, AI workflows, and hybrid cloud would come together. "Eighty percent is still to be moved into a hybrid cloud environment," said Rometty. IBM has called that movement chapter two of the cloud.

Rometty's talk was high-level and focused on what customers want out of moving mission-critical apps and workloads to the cloud. "Hybrid cloud is the destination because you can modularize apps," said Rometty, who talked multicloud, security and open-source standards for containers and operating systems.

Why is IBM and Red Hat a good combo? Rometty noted that IBM runs 90% of the credit card transactions globally, built mission-critical apps, and has the installed base of workloads. Red Hat brings the vehicle to chapter two of the cloud. "This takes great incumbency to this journey," said Rometty. "You have to have trusted relationships with 30,000 clients and an understanding of the processes."

Red Hat brings Red Hat Enterprise Linux, OpenStack and OpenShift as standards to combine with IBM services and global footprint. "IBM owns the origin position, and we now own the new destination position that transcends all clouds," said Rometty. "It allows you to build once and run anywhere."

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For Rometty, the Red Hat sales pitch to investors as well as customers is critical. She bet the company on the $34 billion purchase of Red Hat and has to deliver growth.

Friday's talk revolved around the following strategy.

  • The horizontal play: Sell more Red Hat. IBM has optimized its software for Red Hat OpenShift. "Call it middleware everywhere," said Rometty.
  • The vertical play: Sell more IBM services tied to Red Hat to industries. "We've already had many calls out of telcos for use cases," said Rometty.

"There's plenty of opportunity," said Rometty. "We'll incent the entire IBM sales force to sell Red Hat while keeping Red Hat's independence across all clouds."

The financial go-forward plan for IBM revolves around scaling Red Hat. "All of this returns IBM to growth and increased cash flow," she said.

Red Hat with IBM workloads

Whitehurst said Red Hat is aiming to be the open system for the cloud. While noting the market opportunity, Whitehurst emphasized Red Hat's independence and ability to keep a wide variety of cloud partnerships. His take is that IBM and Red Hat broaden the ecosystem for more partners.

"This accelerates the opportunity for OpenShift but also the ecosystem," said Whitehurst."This is net new workloads and functionality for the industry."

Whitehurst emphasized Rometty's take that IBM brings a lot of new workloads to the Red Hat platform and cloud overall. 

Key slides that sum up Whitehurst's talk were:


Cloud Paks' key, new workloads

Arvind Krishna, senior vice president of IBM Cloud and Cognitive Software, outlined the company's plan to make its portfolio cloud-native and horizontal. "If we look at our software capabilities, Cloud Paks are really about making our software cloud-native and on OpenShift." 

In some ways, Cloud Paks are a way of taking IBM's various applications and creating suites for AI and other functions. For instance, Cloud Paks for Data will include Watson Studio, Knowledge Catalog, OpenScale, and Machine learning.

These packages can also create a halo for IBM and Red Hat as well as IBM Public Cloud, said Krishna.


IBM's services unit will also play a big part in driving OpenShift and bringing more workloads to Red Hat.

Here's how IBM sees its services units playing into Red Hat, Cloud Pak, and digital transformation.


And now the money round

Martin Schroeter, senior vice president of IBM Global Markets, outlined the go-to-market plan. The key priorities are to maintain Red Hat's independence, neutrality, and use IBM's customer base to scale its new unit.

Red Hat keeps its own sales force focused on its software. Compensation plans stay. "We will maintain the approach of being neutral in their ecosystem," said Schroeter.

Schroeter added that IBM and Red Hat have mapped joint clients and have plans to grow accounts as workloads move. International scale will also help Red Hat grow. IBM plans to expand Red Hat in more than 30 countries. Most IBM customers are not substantial adopters of Red Hat, but when they are, they spend $450,000 a year on average.

The joint customer base goes like this (note the math is simplified and for illustration purposes):


And here's the international opportunity. 


CFO James Kavanaugh outlined the financial profile that'll emerge from these go-to-market strategies. Kavanaugh said Red Hat and IBM have high-value profit pools to target.

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In a nutshell:

  • IBM's revenue growth will improve 200+ basis points over five years.
  • Operating gross margin accretive in year one with operating earnings accretive in year 2.
  • In 2021, financial performance should accelerate with Red Hat with a $1.5 billion incremental free cash flow.

Kavanaugh added that Red Hat's $3 billion annuity revenue profile with mid-teens growth would bolster IBM's software business. Red Hat's financials should bolster the longer-term view over the next few years.

In the near term, earnings will be diluted until 2021 even though cash flow gets a boost. Deferred revenue adjustments are the primary reason for the diluted earnings. 


Photos: From the first PCs to the ThinkPad – classic IBM machines

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