 Live from Las Vegas, Nevada, it's theCUBE. Covering IBM World of Watson 2016. Brought to you by IBM. Now, here are your hosts, John Furrier and Dave Vellante. Okay, welcome back everyone. We're here live in the Mandalay Bay for day one wrap up of the IBM World of Watson event conference. This is the encapsulation of all the big data events from IOD, information on demand 10 years ago, to just last year, IBM Insight and the Insight economy is now up level to World of Watson, using the Watson brand and product name, but there's a lot more than Watson here. It's a lot of goodness around IOT and other existing IBM data products. I'm John Furrier with my co-host Dave Vellante, head of research at Wikibon.com, co-founder of SiliconANGLE Media as well as myself, co-founder of SiliconANGLE Media. Breaking it down, Dave, this is the wrap up segment. So what do you think? I mean, we had a lot of people on. I was just very impressed with this Bob Lord guy. He's a, you know, he's a web 1.0 guy. I've been through web 1.0, 2.0, 3.0. Now we're on cognitive IBM is taking that pioneering mojo in digital and bringing it into a user experience in the B2B space, bringing B2C to B2B. That's a great, great distraction. Bob Pachiano came on, laid out the business of the analytics group. What do you say, $18 billion businesses? 18 and a half billion. 18 and a half billion. He has been, his trajectory. I mean, there's some zigs in there, maybe a zag once in a while, but, you know, on a path basis, they've been directionally correct now for, I'd say, good four or five years. So I want to stay on that for just a second. So actually, I want to up level at a second. You and I were talking at lunch about sort of the three businesses, data center and cloud, analytics and big data, and cognitive AI, IoT as sort of the third bucket. IBM, my view anyway, sucked all the oxygen out of the market with regard to big data. IBM owned that and won, basically the big data. You're seeing all the, not all, but many of the big data companies struggling, some of the public companies are really hurting. IBM is doing very, very well in big data. And what they did is they took this collection of things like Cognos and their information, management business, their analytics business, et cetera, put it together, call it the insight economy, and then IBM insight, the flagship show, really of IBM for several years, dominated. And they super glued their analytics business to the big data theme and they crushed it. Now that's evolving and it's quite interesting to see. So Bob Pitchiano's business is half, almost half of IBM's strategic initiatives. That's pretty substantial. What are the strategic initiatives? I mean, educate the folks, what are they? Okay, so it's cloud, it's analytics, it's IoT, really are the big three. This part of that's the security. It's everything that's growing inside of IBM. But they're not strategic initiatives like as a one-off. They're business units. It's their business strategy, right? Well, yes, and it was interesting to hear, I think it was Bob talk about, and I wanted to ask him to go back to those days when they were planning on entering these big markets. Bob Lord talked about the hard markets that they've gone after, the hard problems that they've solved, oncology, the big healthcare problems, security. Those are big markets that IBM, I'm sure it took a long time to understand, right? When IBM goes to understand the market, it does big studies, it spends a lot of money researching, and it gets the answer. And then it says, okay, here's where we're going. Cloud, analytics, IoT, cognitive. And now you're starting to see that. So those areas comprise the strategic initiatives. They are decades-long initiatives. Other big strategic initiatives for IBM was e-commerce. You remember that back in the day. The web sphere grew out of that. So thinking about John, those sort of three buckets that we talked about that were sort of, you laid it out. Data center in cloud, analytics and big data, IoT and cognitive and AI, what do you see IBM headed? Well, I mean, look, when we go to events, we try to use the intro segment and the wrap up to kind of do our reporting as well as commentary of what's IBM. And what I'm about to report is a little bit controversial, but I will tell you that it's what people are talking about in the hallways and I got sources on this. And that is that IBM is actually cutting the old guard out of IBM to bring in new blood. And it's causing a little people to freak out a little bit, but I think it's needed. IBM has been this big machinery for decades and decades and they've done great work. They're still innovating, but there's going to be some people who are going to be forced out. And the comments that I've been hearing are things like, if you're an old-time IBMer and you're not moving fast enough or you're causing things to go slower, you're going to be gone. And I heard that came down from the top from Jeanne Romney. So that's a culture that's consistent with the Staples guy who we talked to today who said, hey, you bring in new blood, you bring in agile, it's a wholly different mind game. So, you know, not mind game, but like developer game. But IBM is basically saying, look it, we got to be agile. We have land and expand business model. They're growing in the strategic areas. If you don't have your running shoes on, you're out. I think that's healthy. I don't think that's negative on IBM. HP, we hear, is laying off some folks. That's just a pure cost cutting, you know, knock it down. Not just a kind of clean house. They have too many people there. I think IBM is a little bit more of like a cultural thing. So this is a big moment with an IBM. All things are pumping on all cylinders. The VMware deal with AWS was interesting. That might put IBM on its heels in this cloud business. But analytics has value propositions that were good bets. Now do they have the execution potential with the personnel to pull it off? Well, I mean, IBM is such a large company. You bring up an excellent point about the cultural shift. But what IBM has done historically over the years, it gets behind some mainspring of profit. I'll call it. You know, it used to be the mainframe and then it was e-commerce. And then they had these sort of orthogonal businesses that were throwing off cash and they sort of artificially plugged in. You know, the storage guys were talking about e-commerce. Okay, fine. And they're probably talking about Watson today. Okay, it's sort of not a clean fit, but the vast majority of the company gets behind this. They dog food it. They use it internally. And then this big machine starts to gain momentum through the IBM distribution channel and boom. And one thing about IBM is, yes, revenue's been flat to down each year. But cash- How many consecutive quarters of loss that they have? About 18, I think. And no, not losses. No, IBM's not lost money. No, they've shrunk. I reduc- 18 consecutive quarters of- Of year to year reduction in revenue. And then basically they were flat on a constant currency basis this past quarter, which is a milestone for them. Does Watson help them with that? Well, yeah, the strategic initiatives are now 40% of the business. But so IBM throws off in the last 12 months about $13.5 billion in free cash flow. It's a substantial cash machine. So you just can't ignore that. Now, IBM returns a huge portion, about two thirds of that cash to shareholders in the form of dividends and stock buybacks, which has helped prop the stock up. Look it, if the stock is undervalued, it's a good buy. Look, here's the direct question. You know what I'm saying about that? So they've been buying stock back for years. If this stock takes off, that's a huge advantage for IBM for all the stock they've taken off the market. So here's the question. I have my opinion, but I want to get your take first. Is IBM moving the shells around on the numbers just to kind of look good on paper, or are they actually playing the long game, in your opinion? Yes, they're doing both. Of course, every company does this. You see... Amazon did it. Amazon Web Services were hiding the ball, moving things around. Oracle? Amazon hit Oracle, clearly does it. EMC did it for years, certainly VMware. They changed the way in which they report. Makes it harder to model. IBM, for example, will not tell you what Watson revenues are. How absurd is that? They report on all different things. This geography, that geography, this... Why do they do that? I suspect because the number's not as big as they'd like to see it. And then at some point... Or is it an ingredient enabling other things? Well, that's me... Or the jury's still out. They count it. They count it. But they don't want Wall Street tracking that performance per se. That horse is not out of the barn yet. Yeah, that's probably pretty lumpy. Because there's probably still a lot of services involved in that, right? So it's probably a little unclear. It's probably less predictable. So let's be careful until... Look at Amazon. Same thing. They weren't reporting AWS until they really had their act together. There's probably some double counting. I think they got forced to break it out, didn't they? I mean, IBM would. And IBM will, too. I mean, AWS put it out there. People want to know what Watson is. IBM won't talk about it. They'll talk about the growth. All right, so here's a question I asked Bob Pachiani. Bring the heat and he kind of cut me off and I had to rephrase. What I was trying to get to was, I'll ask you this question. Can IBM as a culture of sales and the very marketing-oriented culture, they actually used to call sales and marketing representatives not sales. They didn't want to have that used car salesman kind of approach. And they had big ticket items. They had big deals. They had relationship selling. It was really strategic. They listened to customers. They still do have that. But now as you go cloud, the transaction point, entry points, land and expand. Smaller ticket items, lower price, but expand that contract value. This is how they are growing. This is what cloud companies do. This is what the new normal is, Dave. Can IBM's culture handle this new sales culture, contracts, operational machinery? Can they make the machinery of processing and operationalizing their business be nimble enough to do land and expand and do they have the sales culture in your opinion? I mean, a big part of that is their channel and their ecosystem. IBM's obviously been very strong, belly to belly sales company, but the ecosystem is growing. And I think a key to that, John, is developers. Can they get leverage out of developers? So you've educated me over the years on developers. You got companies that have to push to get developers. And many of those fail. You got companies where the developers just come to them. I mean, the best example is Amazon. ServiceNow is sort of an outlier example where they had this burgeoning developer community that exploded, obviously Microsoft, very developer-friendly Google Apple. IBM had to push, right? And it seems like it's starting to take hold. Still not, you know, you get the Alphamotus example, still not enough of those, but it looks like Watson is that big differentiator for IBM, but I'll defer to you. What's your take on certainly my assertion? It's really that key to that land and expand. In my mind, it's developers and are they succeeding? My opinion is, Dave, I think IBM is struggling with this. I don't have any firm data on this, just buzz and hallway conversation around the fact that it takes a lot longer than people think to make these kinds of cultural shifts, especially with sales organizations and you have channels. These are, as you said, cash machines, right? So, you know, and they have other business, by the way. So Watson, even though it's called the Watson Show, they're taking a real risk there calling it Watson because it's a product name. It's really more insight. It was actually a better name, some people think. And so IBM is a cash machine. So you have all this machinery pumping out all this cash and yes, they got to get to the news. So I think it's not as going as well as they are saying one, but that might not be a bad thing because it takes time anyway. The key is, I believe it's a long game. In my conversation with all the execs that we talked to that I've had one-on-ones with, you can see it in their eyes. They're not giving you the canned answers. They're truly playing the long game. We've tested them over the years here in theCUBE and to see if they've had any body squares on strategy, they're not, they're marching down the same thing. They're going cloud. I think they're making the investment and they're going to take the medicine and wait for that first quarter to pop up and kick up with a new trajectory on new revenues. And that's going to come from the sales culture. It's going to come from the operational machinery. So I think IBM and the Genie, did Genie comment about getting rid of people who are in the way, the older IBMers? The processes may be too long. It might be too many forms to fill out. Well, the hard question. All that stuff is built into the DNA. So they got to get that oiled up a little bit. Well, the hard question that I wanted to ask Bob, we ran out of time and he wouldn't answer it anyway, but IBM gross margins declined in the quarter. And I believe part of the reason was the shift toward the ratable model. They haven't ramped up their cloud business yet. I would want to know from him, and again, he wouldn't answer or he'd have to kill me. He would joke, is he experiencing that in his $18 billion, $19 billion analytics business? I'm not as freaked out about that, John, as some of the analysts are. I mean, I can understand why they're a little concerned because you would think that as the mixed shifts from professional services, the cloud and software as a service, that margins would go up. But you look at a lot of these companies now that are making that shift, the gross margins start out smaller and then they got to get to volume. So I suspect that's what's happening, but don't know for sure. But to your point, no question IBM is playing the long game. This is a company that invested in China decades before anybody else did. They were investing in, and still are, in Africa, beyond South Africa. They make these big bets well, well ahead of time. And then that's really what Watson is. That was what their analytics business was. They decided to get out of the microelectronics business, which is an interesting little data point there for you. They decided to get out of the x86 business, chasing differentiation and value, not revenue. The microelectronics business is interesting. IBM had about a $1.7 billion annual licensing business, IP licensing, that's declined now. It's still about a billion dollars. I wanted to ask Bob as well, do they participate in that? IBM's got so much intellectual property. That is just like 100% gross profit, right? So can they get that back up? They lost that when they sold off, sort of gave away, paid somebody to take the microelectronics business. Yeah, and I'm impressed with Bapachiano. I got to say, again, we've had one-on-ones with him, and we challenge him, and he's not afraid to answer the questions. And I have the most respect for executives like Bapachiano, because when they stand up to the hard question, Dave, they're basically saying, I'm ready to answer anything, and that's what I like about him. But also, he's got a great sixth sense. He's got a good nose for the business, and he knows the technology fabric of landscape, and he's set a course I think is solid. The question is, when does the fruit come off the tree? So at some point, this portfolio plantation strategy has to bear some fruit. So to me, that's where I look for the rubber to beat the road. I want to look for that quarter growth that's going to be not a negative. So they've had 18 straight quarters of down revenue. That's the first thing that I would ask Watson, how do I increase next quarter's revenue? Yeah, good question for Watson. Well, I think we're getting very close, John. And I think you're asking the right question about the long game, and I believe that IBM is playing that long game, and that is why. So the key for them is they got to get those strategic initiatives up over 50%. You know, they're over that 40% milestone. Now, they got to get them up over 50, 60%, and that's going to drive the growth. And the key question will be, is did they make the right bets? And are those bets sustainable? Or was it a dead cat bounce? And I don't think it is a dead cat bounce. I think if they're making big bets for the long term, transitioning their massive customer base to these new growth initiatives, that's a winning strategy. The cloud game is a leverage game. So we talked about this with the monetization question. So we had Interpol Bandari. I asked him a specific question, and then we got onto data monetization. And the data monetization question is hard because if you try to go too early to grab the cash, you can get ahead of yourselves and fall flat on your face. So the monetization question brings up the same question with the cloud. The leverage of the cloud, Dave, is all about when does it kick up? There is a slingshot effect of revenue. The question is, when is that moment where, okay, the strategy kicks in, you get the flywheel of the ecosystem, you have SaaS products, platform services, and then the revenue kicks up? That to me is going to be the tell sign if this thing plays out. Now, if IBM gets scared and pulls the plug too early on that strategy, I think they got to go all in, go big or go home on that strategy. Listen, I don't think they're going to pull the plug. I told you, I've said this before, the number one question I used to get from folks in the industry was, how long does Ginny have? And I used to answer, it's long enough to prove she's right. And I hope I'm right on that. I don't see IBM pivoting now. I mean, it's now finally starting to take hold. So I would be very surprised to see that up. Dave, great to host with you on day one. You're watching theCUBE. Day one wrap up here at the World of Watson, the Mandalay Bay. It's theCUBE live on the set here at the World of Watson. Thanks for watching. We'll see you tomorrow all day coverage. This is theCUBE. Good night. Today, I am helping people work better.