International Business Machines‘ (IBM 0.96%) the strategy centers around hybrid cloud computing and artificial intelligence (AI). In the cloud computing market, IBM’s acquisition of Red Hat forms the foundation of its hybrid cloud platform. For large companies and organizations looking to modernize their infrastructures and applications, aiming to save money, unburden legacy technology or deploy new technologies like AI, IBM’s hybrid cloud platform offers a way forward.
IBM’s AI strategy is similar. The company launched its watsonx AI platform last year, providing enterprise customers with a platform for developing, training, deploying and managing AI models and agents. Since that launch, IBM has booked nearly $3 billion in AI-related business and is now adding more than $1 billion in new business each quarter.
While these software platforms are at the heart of IBM’s overall strategy, it is the consulting business that is ultimately doing a lot of the work. Large organizations need not only software, but also guidance, solutions, implementation and other services as they move through complex and protracted modernization efforts. A company with on-premises servers running legacy applications needs a lot of help transitioning to a hybrid cloud architecture and deploying new AI workloads.
Remember that $3 billion AI business? About 80% of this total was booking consultation, with the rest coming from software. IBM’s consulting business is a key differentiator for the company as it goes after the hybrid cloud computing and enterprise AI markets.
A smart purchase
An important aspect of IBM’s consulting business is that it is free to build solutions for clients that include non-IBM products and services. Through a wide range of partnerships, IBM’s consulting arm builds solutions that include competitive cloud platforms such as Amazon (NASDAQ:AWZN) Internet Services (AWS) and Microsoft (NASDAQ:MSFT) Azure and competing software from companies like The burden. This agnosticism is one reason IBM’s consulting business works.
On Thursday, IBM announced plans to acquire Applications Software Technology, a global Oracle consultancy. IBM competes with Oracle in numerous areas, but the company also acknowledges that armies of potential customers currently use Oracle software. By serving these customers and their Oracle-related needs, IBM can bring in new customers and potentially sell them additional products and services along the way.
Because much of Oracle’s software is mission critical, a customer going through a modernization effort is likely to stay with Oracle software. With this acquisition, IBM expands its ability to serve these customers.
Bet on partnerships
IBM’s growing collection of strategic partnerships, such as its partnership with Oracle, is bringing in billions of dollars in business that IBM would otherwise not earn. In the cloud computing market, these partnerships are especially important. While IBM has its own public cloud platform, a potential customer will most likely want to use AWS, Azure, or some combination of the two. By building solutions that incorporate technology that customers want or need, IBM opens the door to far more business than it would otherwise win.
As IBM shares trade near all-time highs, the company is performing well as its platform and advisory strategies pay off. The company expects to generate more than $12 billion in free cash flow this year, and that number has the potential to grow further in the coming years. Based on this forecast, IBM stock trades for about 17 times free cash flow.
This acquisition of Oracle Consulting may not be a major development, but it is another step forward in the company’s consulting strategy. As enterprises race to modernize, IBM is increasing its appeal as the partner of choice.
Timothy Green has positions in International Business Machines. The Motley Fool has positions in and recommends International Business Machines and Oracle. The Motley Fool has a disclosure policy.
