 from theCUBE studios in Palo Alto and Boston. It's theCUBE, covering IBM Think. Brought to you by IBM. Welcome back to theCUBE's coverage of IBM Think 2020, the digital version of IBM Think. Bill Smith is here. He's the general manager of IBM Global Financing. Bill, thanks for coming on. Thank you very much for having me. I've been looking forward to it. Yeah, me too. So, you know, I remember the days of the glory days of IBM, you know, leasing. I used to run the leasing program for a couple of years at IDC and it was just, it was an awesome time, but things have changed a lot. I mean, IBM has really transformed its financing army. What do we need to know about today's IBM Global Financing? Well, some things are still the same, but as you said, a lot is different. We coincidentally are celebrating our 40th anniversary this year. A big part of our business is now software and services financing, a lot of project financing. We still do a lot of hardware business, but it's a much, much smaller portion of our $30 billion asset base. So it's a great business. It was a great business back then when you were involved in it, the very profitable and interesting business today as it was then. As I said, big difference though, a lot of software and services. Yeah, well, of course, I would have mentioned that most, if not all, mainframes are still leased, but now you've expanded it to many, many more areas. What can you tell us about some of the financial metrics? What's the profile of the business look like? Yeah, sure, it's a big business. It looks a lot like a bank. We're around 30 billion in asset. We do business in 40 plus countries around the world. 26% return on equity. Most of the portfolio is very high percentage of that portfolio is investment grade. So a couple other key metrics is we actually isher our own debt. We became an SEC registrant a couple of years ago. We have many debt holders. We only have one owner and one equity owner, and that's IBM. It's a very good business, about 2% of IBM's revenue, but about 10% of IBM's profit. Yeah, well, so now this is important aspect that I want to drill into. When people look at the IBM balance sheet, they'll go out or whatever, Yahoo finance and say, oh my gosh, look at all this debt. Must be, I know, of course, the red hat acquisition is part of that, but you're carrying a lot of the debt as part of the financing operation, but people need to understand it's a very profitable and very high quality debt. And I wonder if we could just address that. Yeah, one of the big benefits to becoming an SEC registrant is the amount of transparency that we were able to provide the investors. So unlike other captive financing companies that just get rolled into different units or parts of the books, we actually report in the segment, reporting every quarter. We certify just like a public company would. We're still wholly owned subsidiary, but the level of transparency is really great for the investors, which is why debt holders were able to willing to buy our paper. It's still a very client-based business. We do very specialized structures. We only do business in NIT as I told the board many times, IBM board many times. We don't do planes, trains and automobiles. We only do IT and really 99% of our businesses is IBM only. So you talked about branching into software and services. I'm interested in how the client base has transformed as a result of that. Sure, there's a lot of digital transformations going on. There's still a lot of ERP implementations around the world, very large project. So we described that as project financing. So a client will come to us and say, Bill, we'd like to match the benefit of this very large GBS or services engagement that the IBM team is leading. We'd like to match the benefit when we have the cash outlay. So we'll put a structure together that will delay the payment for when those benefits begin to come online for the enterprise and then match payment with when benefits are actually received. It's proven to be a very, very effective financing instrument for us but highly effective economic instrument for the clients. Well, it also gives, if I'm contracting with IBM services, you've got a major incentive for the services organization to deliver value as soon as possible and that aligns everybody, doesn't it? It absolutely does. We have a lot of business partners where we'll do similar structures as well. So other integrators, with the Red Hat acquisition and clients moving to a hybrid cloud model, sometimes there's a migration that will take place between the traditional legacy systems and when they move to that cloud. Well, that bubble of expense we take care of. So we'll finance that migration effort for the client and again, match their cash outlays with when they receive the benefit from that cloud migration. You know, back in the day, there were tons of leasing companies who would take the risk and predict the residual values and then they'd take the paper and then it was just an awesome business. And of course, the government provided some incentives to do that with the investment tax credit. What about things like refurbished equipment? Is that still something that you do today or is that a thing of the mainframe past? Yeah, that's a great question. You know, it's still a really important and a sustainable business for us. We take equipment back that comes off of a lease or sometimes a loan, but typically a lease and we will refurbish that or remanufacture that equipment and then put it back into market. Oftentimes it goes into our services organization for them to use with their clients, the global technology services typically. You know, we will remanufacture or remarket about 29,000 IT devices a week. 16,000 tons of IT equipment in a year around the world. So these remanufacturing refurbishing centers. So it's a, even though the hardware business has come down in its percentage of IBM's business compared to software and services, it's still a very, very big business, as you can see by the size of the number of equipment and the tonnage. What about some of the initiatives that are, you mentioned, you know, the digital transformation, a lot going on with cloud, machine intelligence. I mean, those big projects, you know, some of them are still multi-year, even though several people say, oh, there's no more multi-year projects, but digital transformations are multi-year projects, even though you might take them in chunks. But I'm going to capitalize those. Can I finance them as well? What role does IBM finance play in that? You absolutely can. And that is a big, big part of our business today. So the client will say, look, I've got a very large digital transformation project that's going to take place in four countries. We are looking for an opportunity to match those cash outlays with when those countries come online or when we begin to receive the benefits. We also want to finance some of the software that goes with this digital transformation. And we also want to finance the IT infrastructure that's required. So we may put those services, software, and hardware on different financial instruments, but it looks like one total bill for the client. And it's a global footprint. So we're able to handle the different currencies around the world. And again, most importantly, match those cash outlays with when the benefits are received. So Bill, as long as I've been in this business, IT investments from a CFO's perspective have always been viewed as a higher risk, granted higher reward. But the CFOs would say, okay, you're going to have to have a little higher IRR for this one because the business moves so fast, technology changes so quickly. How are you seeing the CIO to CFO conversation evolve? What's your advice to CIOs in terms of how they talk to CFOs? That's another really good question. So I was just on with actually two clients this morning. One was the FO, the other one was a treasurer. And they were asking my opinion about this financial instrument and getting some advice actually. The conversation went, look, it's not really a cost of debt issue. The cost of money is always part of the economic vision. But oftentimes those clients use the financing instrument as a way to manage the asset, manage the asset throughout the life of the project. They also want to focus on the delivery, the quality of the delivery that takes place during these very, very large project financing engagements. So the CFO specifically said, look, I really like the business case. It's quite clear when we're going to receive these benefits. What I'd like to know, Bill, is how do you view the risk of the implementation? And we were able to share with them the risk work that we do with the GBS team, our level of confidence that it will be done on time and on budget and the skill level of the partner team that's been assigned. So it actually has allowed us to have a different conversation with different group or senior level at the account. CFO, treasury, sometimes the controller. Yeah, but you play an important role in de-risking the business case. And as well, I mean, I would imagine right now in these uncertain times that IBM global financing can provide liquidity to businesses who need it that you are confident, are stable business, but might need some help getting through this pandemic. We can. And as you said, what makes us a little different is we make credit decisions on what we call arms length credit decisions for a standalone, albeit half the financing company. So we're very, very focused on maintaining the right investment grade of the portfolio. We're going to make really, really good prudent risk decisions. That being said, we have some fabulous IBM clients that have been clients for a long time. We worked very closely with them understanding their financial structures, what's important to them. And they're very transparent with us about what financial challenges they have. So we'll continue to provide that liquidity. We are going to be very prudent but we'll certainly help those really good clients. Well, Bill, last question is kind of, where do you see this going? What's your kind of vision for IBM global finance and give us a little glimpse of the future? Sure. You know, I think you'll see us continue to migrate in the direction that the IBM company moves. The IBM company is aggressively moving toward the hybrid cloud model. We'll continue to provide those migration services. We'll continue to do some short-term financing. A part of the business we didn't talk about was the commercial financing. We provide short-term working capital to IBM's 6,000 business partners. So to help them with their free cash flow running their businesses, that's a pretty big business for us. We'll do about 14 billion or so in financing to that commercial financing business. So I'll see that continue as well. And then finally, I'm sure you'll see us continue to grow the software and services financing as well. And we'll stay with a very, very high financing rate for whatever is left of IBM's hardware portfolio. Well, the point you made about the partner financing is huge. Like you said, it helps them bridge their free cash flow and makes IBM a more attractive partner for those resellers and partners. It does and we've been in that business for a very, very long time. Oftentimes we're one of the largest creditors for those partners. So the liquidity that we provide them to allow them to run their businesses day to day with that short-term working capital is something that we're very committed to over the long-term for IBM product and services. So IBM Global Financing, a very important and strategic part of IBM's business, a differentiator of very few companies actually can provide that type of service to their clients. And so Bill, I really appreciate you coming to theCUBE and sharing that with our audience. Great to have you. Yeah, thank you very much for having me. It's been a real pleasure. Yeah, our pleasure as well. Thank you for watching everybody. This is Dave Vellante for theCUBE, our continuous coverage of IBM Think 2020. We'll be right back right after this short break. You're watching theCUBE.