PayPal at 53rd Annual JPMorgan Global Technology: Strategic Initiatives and Growth

On Wednesday, 14 May 2025, PayPal Holdings Inc. (NASDAQ:PYPL) participated in the 53rd Annual JPMorgan Global Technology Conference. Jamie Miller, CFO and COO, highlighted PayPal’s strategic focus on execution and technology advancements, while also addressing macroeconomic challenges. The company remains committed to enhancing transaction margins and exploring growth avenues in credit and branded checkout.

Key Takeaways

• PayPal is focusing on four strategic initiatives, including platform convergence and a diversified business model.
• Venmo continues to grow, with a 20% increase in revenue and a 70% rise in debit transaction volume.
• PayPal’s credit strategy includes a $6.5 billion exposure across all credit products, with a focus on Buy Now Pay Later (BNPL).
• Branded checkout redesign is enhancing user experience and expanding to European markets.
• The outlook remains cautious due to macroeconomic uncertainties, with potential e-commerce deceleration.

Financial Results

• Transaction margin dollars showed stability in 2024 and are expected to continue growing in 2025.
• PayPal’s financial performance is bolstered by processing, value-added services, credit, debit, branded checkout, and Venmo.
• The take rate has decreased due to changes in product mix, but high-margin products like payouts and debit are performing well.
• Operating expenses are projected to grow at less than half the rate of transaction margin dollar growth, maintaining low single-digit growth this year.

Operational Updates

• PayPal’s strategic initiatives include a redesigned operating framework and a focus on platform convergence.
• Venmo’s growth strategy includes core Venmo, Venmo debit, and pay with Venmo, with notable increases in average revenue per account.
• Branded checkout improvements aim to enhance consumer experience and increase merchant conversion rates, with significant upgrades in the US and Europe.
• Braintree is experiencing 2% TPV growth, with expectations for acceleration in the second half of the year.

Future Outlook

• PayPal is cautiously optimistic about its positioning in the macro environment, leveraging its global diversity.
• The company is exploring inorganic growth through tuck-in acquisitions and adjacencies to strengthen its foundation.
• Despite macroeconomic uncertainties, PayPal anticipates continued growth in transaction margins and strategic initiatives.

Q&A Highlights

• Jamie Miller emphasized the importance of Venmo’s management structure and growth vectors.
• PayPal’s credit exposure is substantial, with a focus on growth in BNPL and merchant lending.
• The Venmo debit card is gaining traction, with 10% of new users opting in and significant year-over-year growth in transaction volume.

For a detailed understanding, readers are encouraged to refer to the full transcript below.

Full transcript - 53rd Annual JPMorgan Global Technology:

Unidentified speaker, Interviewer: Alright. Thanks everyone for for joining for the next session. This is PayPal.

I’m gonna do a fireside chat with with with Jamie here, I took a lot of questions from the investment community, but really excited to have Jamie Miller here. She’s the chief financial and operating officer at PayPal. Think first time at at our conference, at least from a tech perspective, Jamie. So welcome. Thank you for

Jamie Miller, Chief Financial and Operating Officer, PayPal: Thank you. Thanks for having me.

Unidentified speaker, Interviewer: Yeah. You’ve, you you’ve been really busy. There’s a lot going on at at PayPal, you know, excited to get right into it. But I thought, if you don’t mind starting, right, you’ve taken on the COO role. So I’m I’m curious what your mandate is in that regard.

I know you focus a lot on on execution, but you’re seeing so much of of of the ops now. So can you just give us an update on what that entails?

Jamie Miller, Chief Financial and Operating Officer, PayPal: Yeah, absolutely. You know, when we came in, excuse me, a year and a half ago, we were really focused on putting just a different kind of structure into how we run the company, how we set strategy and connect that to execution. And I think the extension into the ops role is just another leg of that. You know, we have fundamentally redesigned and re architected the operating framework. And one of the things we did particularly in the last three or four months is really reset how we think about our strategic initiatives.

How we get laser focused around our four big initiatives that we talked about at Investor Day and put metrics underneath that and really have that be the guide for our teams as we get into executing and making sure that strategy drives through ops and results in the financial performance that we want for the company. Then that’s really what it’s about is connecting all of those things. And so, when you think about my remit, it is the structure connection of all of that. But if you think about it and just as an example, Venmo is a great one. You know, Venmo is an asset that we’ve had for a long time.

And I think we got a lot of questions for a while about, okay, this has been here. You know, what are you guys doing with this? Can you grow it? And you know, it’s really exciting to see how when you put the right management structure around it and really getting into, okay, customer back, product features, what are our vectors of growth, debit, pay with Venmo, the core product, and and just to have that rhythm and structure around it when you start to execute. I mean, we’re really seeing that pay off in places like that.

Good. So it’s really exciting.

Unidentified speaker, Interviewer: No. It’s a good example. Think just to just to build on that and then I think I’ve heard you and Alex, Steve, and Ryan, others talk about better execution. What what would you attribute that to? I mean, you you mentioned focus and people and and management.

Of course, that’s important. But what about, you know, improvements in technology and some other factors? Is there a way to assign attribution to that?

Jamie Miller, Chief Financial and Operating Officer, PayPal: Yeah. Well, I guess I’d just say yes, yes and yes, right? It is people. We refreshed the entire leadership team about a year ago and having fresh perspective and you know candidly the objectivity to cut through things and drive focus has been huge. Focus, you know I talked a lot about that in terms of the reset of our operating rhythms and kind of getting really really focused on the connection of all of that.

That has been really important. But the technology piece has been really important as well. And you know we have a new CTO, Srini Venkatesan who came from Walmart. So he’s very deep across commerce. And you know other new leaders, Jeff Pomeroy for example across processing.

They have been really instrumental in helping us not only drive across our platforms but really innovate faster and bring more velocity to how we do it. And so I would say it’s all of the things you talked about, but it gets back to being laser focused on what we need to do.

Unidentified speaker, Interviewer: Yeah. So before we get into the business and the details, just one more on that. So with the underlying technology that’s in place at at PayPal, you know, we follow the name here basically for a couple decades, nearly. Is the technology that’s in place today allowing the company to move at the pace it wants to go, or is there still more work to do? I’m I’m just curious where you are in that tech journey since we’re at a tech conference.

Jamie Miller, Chief Financial and Operating Officer, PayPal: Yes, for sure. So, we talked at Investor Day about our platform convergence that we have underway. And as Srini came in, he has really had his eyes on two things. One is really innovating and executing with velocity with our engineering team. And the second though is platform convergence.

You know, we have a number of different products and tech platforms We have a huge opportunity to continue to consolidate that and build once, replicate many. And so when you look at those two things, it’s really an and not an or. We are doing both at the same time. And what I love about Srini, and I just was telling him this yesterday, like his superpower is his ability to like be a very clear thinker and get to the heart of problems, but then really make complex things simple and translate that to execution.

So, an ability to leapfrog in terms of how we can execute, but at the same time, he is ruthlessly focused on that convergence layer and getting that

Unidentified speaker: to support that velocity as well.

Unidentified speaker, Interviewer: Good. No, I thought we’d leave with that because I know we get caught up in the business and basis points, but I know there’s a lot of hard work that’s going on underneath, and and that’s why I wanted to cover that really quickly. So maybe just to to get out the way I have to ask the macro question, Jamie, and and sort of what you’re what you’re seeing in terms of latest trends on on the ground because PayPal’s got a pretty unique view, right, of not just what’s happening in The U. S. And ecom, but globally.

What can you tell us about consumers, SMBs, enterprises? Any take us around the world. What do you

Jamie Miller, Chief Financial and Operating Officer, PayPal: Yeah. Well, I’d say it’s largely been pretty consistent. Know, we’ve got a relatively strong consumer. I’d say the consumer behavior has been relatively consistent. When you look whether it’s U.

S. Or outside The U. S, you know there’s been some choppiness here and there. But you know by and large it’s holding. And I think things are broadly in line.

I think that you know the macro, the new headlines every day doesn’t always help. But hopefully, we’ll get to some level of policy certainty here over the next few months and we’ll be able to all of us, I think, move beyond that. When you look at The U. S, we’ve been pretty encouraged. We’ve talked before about the fact that we have seen an uptick in our consumer growth fourth quarter and that’s really held in the first quarter and second quarter.

And when you look at the product features we’ve rolled out, when you look at the debit card and a lot of the work we’ve done to really launch Omni and bring that halo, that habituation back to branded checkout, you know I think our actions and our execution are really continuing to sustain some nice change there. And when you get outside The U. S, you know the consumer activity has been pretty good. One thing I’m really excited about is that we are just starting now to bring all those same product features over to Europe and we’ve launched NFC as an example in Germany and so there’s a lot of different things whether it’s NFC, whether it’s our new branded checkout product redesign, know those implementations whether it’s buy now, pay later, a lot of new innovation coming to market there that I think is going be really exciting.

Unidentified speaker, Interviewer: There’s a perception that PayPal is very oriented towards SMBs, but I don’t think that’s quite the case. So, can you set us straight on that?

Jamie Miller, Chief Financial and Operating Officer, PayPal: Yes, for sure. So SMBs, we said at Investor Day, they’re about they’re just under 15% of our TPV. So when you start to really size it, it’s a significant population for us, certainly in terms of numbers of merchants and how we work with them, whether it’s solopreneurs or SMBs themselves. But when you actually look at the percentage of how we work and how that fits through our financial profile, it’s probably a little bit smaller than that.

Unidentified speaker, Interviewer: Okay. And then just a couple more spend questions. Discretionary versus non discretionary. I know that gets a lot of airtime. Where does PayPal land in that?

Jamie Miller, Chief Financial and Operating Officer, PayPal: Yeah. So, I would say a couple of things. First, we’re pretty diversified.

Unidentified speaker: Right.

Jamie Miller, Chief Financial and Operating Officer, PayPal: And when you look at us compared to where we may have been three or four years ago, that diversification has continued to I think expand. We’re about 50% retail, 50% services. And when you look at us 40% U. S, sixty % international. So, when you start to look at the array of that across size of merchant or even across spending categories within retail and services, know it ends up being something that as spend moves in one part of the world we typically can capture it in a lot of different ways in another.

Whether that’s geo shifting or whether that’s you know type of spend shifting. So as we you know look at the macro environment we’re in where there’s maybe a little bit more uncertainty overhang around how some of that may shift. We feel pretty good about our positioning around that and our global diversity.

Unidentified speaker, Interviewer: Okay. Last one, I know the tariff and de minimis stuff is always changing so I’m most afraid to ask it but just help us frame sort of the exposure there with respect to cross border trade and how PayPal is involved there.

Jamie Miller, Chief Financial and Operating Officer, PayPal: Yeah. From a de minimis side of things, so our TPV that relates to China goods shipping into The US de minimis, you know under the de minimis exemption. Whether that’s China direct into The US or you know merchants who may have supply chains that with warehousing sitting in The US, US to US shipments, that’s less than 2% of our TPV. And even when you look at just broadly cross border activity, a significant portion of our cross border activity is intra European corridors as well. So, just gets back to that diversification principle.

Unidentified speaker, Interviewer: Okay. Thanks for going through that. So bringing to the quarter, I thought I’d start to ask your transaction margin dollars, it did outperform in the first quarter. I always like to appreciate what surprises the company. Can you give us a little bit more on what were the drivers of upside?

Jamie Miller, Chief Financial and Operating Officer, PayPal: Yes. So, transaction margins. So, we’re really excited to see the stability in our transaction margin dollars growth. We’ve seen just nice trends in ’twenty four and that continuing into ’25. And when you look at first quarter, we saw processing and value added services be a nice contributor, credit and debit as well, branded checkout of course and Venmo.

And so when you look across all of it, I’d say the portfolio that’s driving our transaction margin dollar growth, I hate to overuse the word diversified, but it really is and it’s been durable. It’s been very consistent across quarters. When you look at processing and value added services in particular, it is the fourth straight quarter of transaction margin dollar contribution from that which is a nice inflection and change for us.

Brian Essex, JPMorgan’s software analyst, JPMorgan: And

Jamie Miller, Chief Financial and Operating Officer, PayPal: a lot of hard work went into that. But when you look at debit, when you look at credit, Venmo, branded checkout, and again it gets back to the execution. All of the execution vectors that support that, you know that’s what’s really consistently driving that for us.

Unidentified speaker, Interviewer: Okay. Good. So you kept the outlook unchanged

Jamie Miller, Chief Financial and Operating Officer, PayPal: Yes.

Unidentified speaker, Interviewer: Which seems prudent given uncertainty out there. But we get asked the question about how much of that is conservatism versus maybe some caution that is warranted for no change?

Jamie Miller, Chief Financial and Operating Officer, PayPal: Yes. I’d say it’s really both. Okay. You know, we had a really strong first quarter across the board. And you know, our guide for the second quarter and where we are, we think it’s going be a very solid second quarter.

When you look at our second half and full year guide, it certainly is not run rate in terms of what that implies. And you know what we looked at was a couple of things you know with the macro uncertainty and you know hopefully that’s beginning to resolve a bit, but we’ll see. We really wanted to make sure we had room in case there was some dislocation. And so that bakes in I’d say two to three points of e comm potentially e comm deceleration. You know if we do see some consumer shifting happening.

And, you know, we just wanted to be prudent as we looked at second half and make sure that we were well positioned to move the company and pivot if we needed to.

Unidentified speaker, Interviewer: Okay. No, very fair. Digging in a little bit deeper, so thinking about I want to ask about the company’s credit appetite risk management. That’s a big factor for you. And not to advertise our work, but we did a survey recently on on online checkout, and PayPal scored very high as a preferred buy now, pay later

Jamie Miller, Chief Financial and Operating Officer, PayPal: Mhmm.

Unidentified speaker, Interviewer: Provider, and, you it’s been consistently doing that we run the survey. So given that appetite, it does seem like there’s demand for that product or that tender type. I’m curious how willing you are to run with that lean into that a little bit harder understanding that there’s a credit consequence as well.

Jamie Miller, Chief Financial and Operating Officer, PayPal: Yeah. We fundamentally rebuilt the credit team as we brought in new management. And I would say top to bottom, refresh the team, our underwriting, our risk appetite, the processes that support it. And I think when you look at PayPal, we are such a safe trusted brand globally and our footprint is so huge. But buy now pay later has been an opportunity that we haven’t leaned into as much as we could have.

Know buy now pay later not just you know it’s a credit product that we can be very successful with but more importantly it’s a really strong contributor to the stickiness of branded checkout and bringing kind of that halo effect around how our consumers engage with us. So, we have you know in the second half of last year really pivoted to growth with respect to credit. And to be clear in the macro environment, the team is very structured and monitoring really carefully. So if something shifts, we can pivot very quickly. But you look at the buy now pay later portfolio and it’s pretty interesting because it’s core buy now pay later, call it pay monthly, pay in two, pay in four, it is merchant lending.

So really helping our small businesses around you know working capital lines or you know business lending And it’s also consumer, consumer revolving credit. Across all of those really connected back into our product, but it’s also very short duration. And so, when you compare us to our peers, short duration about forty days is the average buy now pay later you know maturity or cycle date. You know you look at it, it’s pretty small average order value. So, it just demonstrates our ability to pivot and move.

But it also puts us in a position with merchants and consumers where if things do get to be a little tougher in the environment, we can really help them. I mean merchant credit where it’s tied to assets, where we do sweeps. So, we’re comfortable with the risk appetite. It really helps us lean in and helps our small businesses as well. And the same thing on the consumer side with rewards, with loyalty and some of the programs we’re launching around that.

I think we can have a really nice continuum of how this can play.

Unidentified speaker, Interviewer: Yeah. I mean, it should build goodwill, right, on both sides.

Jamie Miller, Chief Financial and Operating Officer, PayPal: And growth.

Unidentified speaker, Interviewer: Growth. Yeah. And ultimately growth and retention. Just so then, just to close this out, the balance sheet exposure across all of your credit products, can you remind us of that Jamie?

Jamie Miller, Chief Financial and Operating Officer, PayPal: Yeah, it’s about $6,500,000,000

Unidentified speaker, Interviewer: Right.

Jamie Miller, Chief Financial and Operating Officer, PayPal: And you know we’ve got a good chunk of our buy now pay later off balance sheet, you know where we routinely sell those loans. And you know our challenge to the team is to really to keep this relatively balance sheet light. And we price the product for economics to sell. And our economic return on both the product and the halo that it brings is very, very healthy. And it’s something I think that’s very manageable for us.

Unidentified speaker, Interviewer: Okay. Good. So, let’s talk about branded checkout. Have to talk about that. Took twenty minutes to get there, by the way.

Same thing. Our survey work showed, of course, PayPal is still very dominant, right, as as a checkout provider. There’s a big shift towards modernization and and and sort of the modern checkout that that PayPal is rolling out today. I think I wrote down 45% of US traffic is now upgraded. So for the for the benefit of those that haven’t used it I’ve used it.

Actually, it’s, you know, much, much easier. Can you just give us all you know, how is the experience better? What’s been what’s the impact on feedback been, pricing implications, that that kind of thing?

Jamie Miller, Chief Financial and Operating Officer, PayPal: Sure. So our branded checkout redesign is really about bringing just lower latency, better experience, better off rates. It really improves not only the consumer experience, less app switching things like that. But it also most importantly improves conversion uplift for our merchants. And that is what they’re really excited about.

You know as we’ve rolled that out, were at about 45% as of the April. And really from a starting point back in October of you know just starting. So, I think nice execution there from that perspective. The conversion uplift that we’ve targeted to see, we’re really seeing that as we’ve watched cohorts and really seen the movement through. And you know as we look at this, that’s U.

S. That we’re talking about which you know that U. S. Translates to you know very low double digit when you look at it on global scale. But we’re now bringing that product redesign to the European markets as we speak and that’ll start in Germany and The UK and then really scale across all of Europe.

What’s interesting is that our European merchants many a much higher percentage are on the latest integration of our branded checkout products. So, that should happen a lot more quickly. And then, you know, when you look at how that scales through just even our own performance, it will take time. Mean this they have to ramp it within their own experience. You know, we have to get consumers acclimated to it.

But we should begin to see some of that lift in the second half as well.

Unidentified speaker, Interviewer: Okay. Yes. Going second half, going into the holidays. But yes, I think as more people see it, I think it will be interesting to see how the perception changes. But as a follow on to that, US has been earlier, but you said, generally speaking, Europe’s a little more modern.

But you mentioned, I think, on the call that some of your higher yielding European countries actually performed quite well on on branded checkout. Why is that? They haven’t quite gone to the latest version, but what what’s happening there?

Jamie Miller, Chief Financial and Operating Officer, PayPal: You know, I think our brand, when you look at us globally, know, we’re a very global brand. We’re a safe, secure, trusted brand. And in particular, when you look at Germany as an example, I mean PayPal is the verb. We think of Venmo as a verb here in The U. S.

PayPal is the verb there. And it’s just a very habituated product with high levels of consumer engagement. And Europe has been a very successful market for us. And I think U. S.

Is more competitive and it’s certainly something that has more players in some respects. And that’s something that is really beginning to shift too. You know I talked before about our focus on The U. S. Market and that’s why we started with our product design you know rollout first in The US.

You can see us bringing buy now pay later monthly that product rollout and launch first in The US. PayPal everywhere the debit product which is really exciting. You know it’s also something that we first launched here but it’s all around you know, reviving the brand and really reminding people that as you work with PayPal, it’s going to be the safest and most secure, but it’s also going to be the most rewarding way to pay. But again, really rehabituating and really bringing back people back to PayPal.

Unidentified speaker, Interviewer: Yeah. And you’re and you’re doing that at a time when it feels like there’s always competition. I know as long as I’ve followed it. I remember some of the older CyberCash and all these other companies, but Apple Pay is moving into the desktop, right? Buy now, pay later companies are pushing very hard with brand and curating, shopping and deals what have you.

And Stripe sessions, you guys had your developer conference. I think Stripe also spoke about Stripe Link and some of the efforts that they have with vaulted payments. How does all of that fit? I mean, you talked a little bit about the trust, but the moat that PayPal has against these players. What are you watching?

Where do you see potential for some change competitively?

Jamie Miller, Chief Financial and Operating Officer, PayPal: Yeah. And maybe I’ll talk first about what I get most excited about when I look at our business. And then I’ll talk about change as well. Please. Because you talk about moat and you know it’s really interesting because you can look at us from the outside and say, okay, you’ve got really amazing global presence.

You’ve got this huge consumer base in terms of 400,000,000 consumers and tens of millions of merchants. And so, market position is really clear. But when you really live in it for a while what I get most excited about is our position with merchants and how we work with them is really, really important to them. And so being a processor at scale, being someone who brings 400,000,000 consumers to them every day with very strong conversion and un auth rates. And when you look at how we work around value added services, it is really unique.

And merchants want us to bring them even more. And so that position I think competitively and just with us, I think is very powerful and it’s underappreciated I think. You know the other side of it is and you know it’s funny as I was walking in someone said oh you’re from PayPal, I love your product and I love it because it is, I feel very safe with it. And you know that brand power with respect to consumers in this two sided network that we have, That really means a lot. And those are the kinds of things that as we build this and fundamentally invest in the foundation around durability, around you know how do we habituate that even more.

That’s what we’re investing against. And that’s why you see us focus on branded checkout and you buy now pay later, pay with Venmo, but also the habituation around it with consumers, with debit, with getting our brand in the market in a different way so people can pay with us anyway anywhere and and have that come back to that.

Unidentified speaker, Interviewer: Yeah. No. I think with the advertising, I think you’re definitely pushing that, and it makes sense. Yeah. Habituation means everything in payments.

So you you mentioned Venmo a couple of times. Let’s talk about Venmo. 20% revenue growth in the most recent quarter. Maybe just unpack that for us. How how did the the growth build up across all the different, you know, monetization potential around Venmo, including pay with car pay with Venmo?

Jamie Miller, Chief Financial and Operating Officer, PayPal: Venmo is a super exciting product. So, I could talk about this the whole time. You know it’s been an asset as I said before that’s been around for a while, but I think it’s a real opportunity for the company and we’ve really set out to just go deeper with our consumers there. And when you look at our growth vectors for Venmo, I really break it down into three main categories. And I’ll start with sort of core Venmo which is what everybody’s known over the years.

Which is you know getting into customer backed, what product features, what innovation, what things do we need to bring to have people really love this product even more and work in it. And so when you look at things like split pay and Venmo groups and auto reload and direct deposit and things that get people in and have it be something that just helps them with their day to day how do they spend, how do they work. Super exciting product features and it really grows instant transfer and other ways that we can continue to monetize. But that’s been very basic for a long time. That’s been what we’ve been doing.

I think what’s been important about Venmo growth has been the layers we’ve added to it. So, you take Venmo debit and maybe you know about Venmo debit, maybe you don’t. You know, this is where you can have Venmo have a debit card that fits right into your tap to pay. So as you’re sharing dinner with friends and somebody pays you on Venmo, you can turn around and tap to pay and pay for that dinner. Or in my case, I used Venmo groups to go on a trip.

Everybody paid me for the Airbnb. I had $1,000 in my Venmo account. I came back to New York and paid for my dinners and paid for my different things you know just by tapping to pay with Venmo.

Unidentified speaker, Interviewer: Yep.

Jamie Miller, Chief Financial and Operating Officer, PayPal: So, that kind of product that number one brings us you know economics that are as good as branded checkout. Just that tap to pay piece of it. But it also brings you back to the product and now you’re you know using the product in different ways. But that growth has been really tremendous. Our onboarding and reboarding right now as an example 10% of people are opting into the Venmo debit card.

Our Venmo debit TPV grew 70% year over year. So, know, really nice shifting there. And the last place is pay with Venmo. And you know this is something that has been growing at 50% year over year. And it’s you know branded checkout button, it’s Venmo.

If you haven’t used it, I really encourage you to. It is a delightful experience. Know as you use it across different particularly mobile vendors. It’s just it’s awesome. And so, what I love about it too is vendors are super excited about it because they’re we’re bringing to them a population of consumers that they want to have access to.

They love the brand. And so, whether it’s our partnerships with some of the quick serve restaurants like Taco Bell or you know really rolling out across some of the other big merchants. We’ve had a really great appetite in the market for it. So, you come back to that and you look at you know average revenue per account. You know we’ve been at 12% growth last year.

But when you start to look at you know pulling along that continuum that I was talking about, you move to you know debit that brings a five to six x lift in ARPA. When you moved take that and build on that and move to pay with Venmo and other things, it just continues to increase that. So, we’re just at the beginning, but I think it’s a really exciting flywheel that we’re starting to drive there.

Unidentified speaker, Interviewer: Yes. It does feel like you’re stacking a lot more products to drive, again, habituation and more usage and inflows and spending that down. So for us as sort of external analysts, investors, should we be tracking ARPU? Is that the best way to sort of measure the success and the penetration engagement with that user base? How would you suggest we evaluate that, Hormant?

Jamie Miller, Chief Financial and Operating Officer, PayPal: Yeah, I think with respect to Venmo, sure. I think that’s actually the way we look at it internally. We look at the different metrics that ladder into that. And I think over time that is probably for Venmo the best thing to track on that. You know with respect to the broader PayPal, I think there are different metrics you have to look at because you look at processing and vast, you know, it’s very different and you start to look across credit and other places, know, there’s different metrics of growth there too.

Unidentified speaker, Interviewer: Yeah. No. This feels like there’s a lot of room for Venmo from an ARPU standpoint, but we’ll keep asking hopefully the right questions on that. Let’s do PSP or Braintree. Two percent TPV growth last quarter.

Is it fair to say that growth has bottomed given some of the price to value initiatives that you’ve put in place?

Jamie Miller, Chief Financial and Operating Officer, PayPal: Yes, I think that is a fair characterization. We had 2% growth in the first quarter. And I think what’s important to kind of look underneath the covers there a little bit about is that Braintree was slightly negative in terms of growth and that was offset by small business processing and by value added services growth. So, continued nice performance there. In second quarter, I think the profile will be roughly similar.

And then second half is when you’ll see that acceleration of growth begin again.

Unidentified speaker, Interviewer: And then so is that just a function of other than comps and everything else, just wins in the marketplace? It feels like there’s a lot more we call it load management, just jump ball situations on Braintree. What’s happening trend wise competitively?

Jamie Miller, Chief Financial and Operating Officer, PayPal: So, is the lapping of some of the larger renegotiations we had last year. But in addition to that, value added services growth has been really strong. And we’re seeing that continue to layer in with merchants. And so, that is a nice factor for growth there too. And I’d say the other piece of it is that when you look at our merchant relationships and we’ve talked about this a little bit.

You know as we really set out to you know we call it have different kinds of price conversations with them. I think what has been you know a nice evolution for us is really having those relationships become even more strategic as we did it. You know as we really talked about you know we want to talk about how we work together and we want to make this really good for you. But we need to be in a better place too. Let’s talk about how we do that.

It’s just a different kind of conversation. And so, what has been a nice surprise is that we do have positive and healthy you know growth in volume and other services coming out of that as well. So I think you see it across the board in different ways.

Unidentified speaker, Interviewer: Okay. Good. I know we’ve talked about a lot, right? There’s so much difference in business model and take rate is fair or not an output of all of this. So, what should we expect in terms of take rate trends for PayPal in the short to midterm?

Jamie Miller, Chief Financial and Operating Officer, PayPal: So, right now, take rate has come down. And it’s come down to a couple of different reasons actually, mostly product mix related. Part of it is what we were just talking about you know as Braintree has declined in TPV. You know Braintree has a large U. S.

Sort of credit card processing element to it. And so as that has come down take rate has come down as well. But we’ve also seen the growth of lower take rate but high margin products. So things like payouts, our debit product, a lot of the omni work we’re doing is again lower take rate, but very high margins, so really healthy mix shift and that’s causing a part of it. And then you see a little bit of shifting across branded checkout as well in terms of you know higher growth in large enterprises versus SMB, higher growth in Europe.

So, some of that is there as well. And you look at take rate over time, as Braintree continues to shift back and as we see that, that’ll cause a little bit of remix there. But there’ll be some puts and takes, I think.

Unidentified speaker, Interviewer: But the incremental margins have still been very healthy your overall margin profile adjusted has been strong as well. Anything to it doesn’t feel like there are lot of constraints to margin expansion. You’re able to invest and still expand on the margins. But tell us where you are as COO here, not as CFO, I guess both, the confidence and your ability to commit to margin expansion.

Jamie Miller, Chief Financial and Operating Officer, PayPal: And I’ll talk about it both at the transaction margin level as well as at the op margin level. And we’ve got really good confidence around the durability of our transaction margin growth profile. We talked before about the different things that we saw come through in the last couple of quarters, but when you start to double click into those, in each one of those has shown really nice and consistent durability. Take processing as an example. You know that’s something that while we only had 2% TPV growth in the first quarter, know we saw a really nice transaction margin growth and we expect that to be a point of contribution for the year in terms of growth from that perspective.

We expect similar things across other products. But when you look at what’s driving that and our ability to continue to remix OpEx, that’s something that when we set out and really looked at planning ’24 and beyond, you know we knew we had a lot that we could harvest around our current OpEx profile. And we also knew that to really drive growth in the company, we had to invest more in engineering and product and in marketing. We’re not we haven’t been investing nearly our fair share in marketing. So to date, we’ve remixed already about four hundred to five hundred million dollars into those areas just by driving more automation, becoming more efficient, to shifting headcount.

And as we go forward, that’s the play we continue to expect as well. We expect OpEx growth to be at less than half the rate of transaction margin dollar growth. This year it should be low single digits say. But that play and how we do it, we continue to think that we’ve got nice runway to do that and self fund.

Unidentified speaker, Interviewer: All right. Good. So, just I have to ask just on the inorganic side. Is that or even maybe divestitures as well. But just thinking about the inorganic, we’ve seen some consolidation in the sector.

I’m sure you’re seeing that. And even even more strategic minority investments across the the group, is that a bigger consideration now that you’ve seen the peer group doing a little bit more of that?

Jamie Miller, Chief Financial and Operating Officer, PayPal: You know it’s something we watch and something that we look at all the time. I would say that our focus has been on really driving durability and stability of our foundation. And so really getting our products kind of back to basics with our consumers, driving the right kinds of improvements into them and really building out what we want to be the growth engine for the company. And I think you’ll see us looking more at tuck ins, adjacencies, you know things that can really enhance the growth profile. But we’ll be really thoughtful and judicious about it.

I think anything we do we want it to be highly aligned with strategy And we would want it to be something that we seek very clear line of sight as to how we execute and how it really drives growth and enhances the value of the franchise.

Unidentified speaker, Interviewer: Yes. Okay. Good. I know we’re almost out of time. I think just to close out.

Right? I respect the company’s ambition to to grow with ecommerce. I think that’s the right call. We’ve always called PayPal a sleeping giant, and it feels like you’ve woken it up with some with some some good change here. What what what ultimately is it gonna take for the company to get there?

Jamie, is it really tracking branded checkout? I know that gets so much attention, but there’s so many other things you guys are working on. We talked about Venmo, but can you order that for us? What what should we expect from the outside to get to where you want to be?

Jamie Miller, Chief Financial and Operating Officer, PayPal: You know one of the things that I think is most underappreciated about us is the diverse set of margin drivers that we can really inflect here at PayPal. And I’ve talked about all of them certainly branded checkout is really important. And it’s one that is a core product and how people experience us in that is really important and that’s why we’re investing so heavily against that and against our brand against the experience. But when you get beyond that processing and value added services, debit and credit and Venmo, all of those individually are large growth vectors for us. And I think that is a really important portfolio for us to drive.

But when you start to look to at how with Agentic Commerce, when you look at advertising, when you look at crypto payments and crypto rails, Those are places that we have made significant pushes into. In some cases, we’ve had great assets that we’ve been sitting on and we’ve already got a huge head start. But when you start to look three, five, seven years out in some of the other vectors that’s just simply going to enhance those core areas. I think those are the kinds of things that you’re going to see PayPal doing and create the durability around our profile.

Unidentified speaker, Interviewer: Alright. That’s good stuff. I wish we had more time to talk about AgenTic and Stablecoin, but it’s good. We covered a lot of stuff and I appreciate the time as always, Jamie.

Jamie Miller, Chief Financial and Operating Officer, PayPal: Great. Thanks so much.

Unidentified speaker, Interviewer: Thank you so much.

Brian Essex, JPMorgan’s software analyst, JPMorgan: Right. Good morning, everyone. My name is Brian Essex. I’m JPMorgan’s software analyst. And with me today, I have, Rob Thomas, senior vice president of software and chief commercial officer from IBM.

So Rob, thank you so much for joining us.

Unidentified speaker: Great to be with you, Brian.

Brian Essex, JPMorgan’s software analyst, JPMorgan: Maybe a great place to start. Maybe we can start a little bit with your background. I think you’ve been with IBM for quite a while, but would love to get a quick take on your experience with IBM, and maybe then step into, the broader enterprise technology landscape and what kind of shifts you’ve seen, over the recent years, how you see it evolving in the future based on the tenure that you’ve had at the company?

Unidentified speaker: I’ve worked in every part of IBM. I started in consulting, did that for a number of years. And then microelectronics, spent a couple years living in Japan, leading microelectronics across Asia. And then joined software, I think it was around 02/2007, ’2 thousand and ’8. And I’ve really been in software since then.

Ran engineering in software, M and A, ran go to market. So most of my roles since then have all been focused in software. And I think that’s probably maybe the biggest pivot if you look at the last five years for the company is becoming more product centric, still a very important consulting business, that’s a key part of what we do, but I would say more product centric. And at this point, software is nearly 45% of IBM’s revenue, which is a dramatic change if you think about you go back twenty years in terms of what IBM is. And I think that represents what today’s IBM is, and I’m actually very optimistic on that.

Brian Essex, JPMorgan’s software analyst, JPMorgan: And maybe if you could reference back to your experience five plus years ago. What was the focus of the business then? How is it really different now? Like Arvind is more of a technologist, and he’s leading you in of in that direction. But how does that substantially differ from the way the company used to be run?

Unidentified speaker: I would say a few things. Arvind is definitely a technologist. And so you even see it in the culture and the management system. Meaning, once a month, we’ll sit down with all the product and technology leaders in the company, and, you know, Arvin will really dive deep on topics. And I think that sets the right tone on urgency and expectation of depth and really becoming a technology focused company.

So I think culturally that’s had a great impact. If you think about the software business itself, if you go back about five years, the story is really about focus. I think we knew what we were good at, and there was a point in time where we drifted from that a little bit. We kind of moved into healthcare applications, things like weather. Our view was that’s really not what we’re great at.

And so as we’ve kind of reworked the portfolio, those pieces are no longer part of IBM, but that’s enabled us to focus on what I think we’re really good at, which is infrastructure software. We want to solve hard problems for clients on resiliency, availability, automation, these data, like these are the kind of things that we understand very well. It’s kind of who we are as an engineering team. And so I think just putting that kind of focus has enabled us to really, I’d say, change the trajectory of the business. I mean go back five years, I think software was growing 2% -ish.

Last year, we did 9%. We’ve talked about how our ambition is moving towards double digits. I mean it’s a pretty dramatic change in just a few years.

Brian Essex, JPMorgan’s software analyst, JPMorgan: And maybe take a step back and reflect on a number of years ago, IBM acquired Red Hat. It was transformational acquisition for the software business.

Unidentified speaker: How does that play into the way the businesses develop today? Maybe let’s start with the basics on Red Hat because I think people see it as part of our hybrid strategy, which obviously it is. But I think there’s a little more depth to the role that Red Hat plays in the world. First, it starts with security. The biggest exposure for any company in security tends to be the operating system.

And the brand promise of Red Hat is we will deliver the most secure, the most stable operating system in the world. And that still matters a lot, especially if you think about hybrid cloud expanding to public, private, edge. So the role that Red Hat plays in securing the operating system, providing up gates, application compatibility, this is like really fundamental for enterprise technology. Next is OpenShift. And I think many people will talk about OpenShift as a vehicle to run applications across multiple clouds, which is true.

But I think the story there is a little deeper, which is if you look back, I’d say early two thousands, the wave that we rode in IBM and software was around J2EE and WebSphere. And that was, you know, our view at the time was this is probably a twenty year tailwind for the application architecture that will play out in companies. And we view containers, and OpenShift is the container product, container management platform, as similar. Meaning, we think this is a twenty plus year wave in application architecture. And I think we’re still very early in that.

So while we’ve done incredibly well with OpenShift, nearly a billion and a half, growing 40%, like we’re just at the start of what we think is a long term tailwind in application architectures. Next for Red Hat is AI. And the reason you see us doing things in AI, it kind of ties back to those first two. It’s making models available as part of Red Hat Enterprise Linux AI, making models available in OpenShift. So so by design, we’re kind of connecting the AI strategy for Red Hat into those first two trends, which we think, again, have multiple years behind them.

And I’d say then maybe the unexpected surprise is the tailwind in virtualization. In the last year, the world’s really come our way looking for alternatives on virtualization. And for clients, that’s a decision of do I just want to change exactly what I have, in which case they can use Red Hat virtualization? Or do I want to think about modernizing my applications, which moves them down the path with OpenShift? And I’d say we’re kind of indifferent on that decision.

We want to meet them where they are and help them through that. But all of those factors together, that’s really what Red Hat is. And this is why you can see some of the momentum in the business, high teens booking growth in Q1. We did mid teens revenue. And we’re pretty optimistic.

Yeah.

Brian Essex, JPMorgan’s software analyst, JPMorgan: That leads me to jump ahead a couple of points because you mentioned virtualization. Can you talk about what you’re seeing, from your clients that are currently on VMware or potential clients that are currently on VMware, that kind of migration opportunity. What are those conversations like? And why would they choose to go the OpenShift route versus other solutions in the market like a Nutanix?

Unidentified speaker: Not every client, but some clients are looking for alternatives. And so we think that can be a catalyst for us. And the decision on an alternative, it really comes back to your applications, which is where do I want to run applications in the future? And do I want to just take what I have sitting in one place and duplicate that? Or do I want to think about my overall application strategy?

So when we go in and do an assessment for a client, which tends to be pretty quick, in two weeks we can give them a pretty good view. Here’s your application estate. Here’s what you should modernize in place versus here’s what you should move to containers. In two weeks we can tell them pretty quickly what is the right direction. And sometimes it ends up as just Red Hat virtualization, sometimes it goes down the container path.

But it is effort to do. As I tell every client, this is not trivial. And so if you you think you’re up against a deadline, you kind of need to get moving now. And I think this is why we’ve seen some good momentum in bookings on this topic over the last year, meaning hundreds of millions of dollars in bookings, because people, they see a level of urgency here if they’re going to do something. And I think this is where maybe it’s the combination of IBM and Red Hat.

Clients trust IBM. And they know that they can rely on us in any conditions, ups and downs. And so I think kind of that brand promise coupled to what we can deliver with technology in Red Hat, it makes for a really good option for clients.

Brian Essex, JPMorgan’s software analyst, JPMorgan: Do you have any visibility into what clients have decided with VMware? I mean, you had the acquisition happen a short while ago. You had a choice to renew for a short period of time. But with regard to customers that might migrate on to an alternative solution, whether it be IBM or another vendor, you mentioned deadlines, Do you have a lot of visibility into when those deadlines are approaching, when they’re actually going to have to take action as opposed to getting caught off guard and what those horizons might look like over the next few years?

Unidentified speaker: I don’t think there’s one answer for that. Many are kind of looking this as a multiyear view to think about their application strategy. That’s every discussion that I’m in. Because even if you want to do something instantly, that’s not very practical. And so this is about you do need to get started though.

If you want to do something, you need to get started. And I think we’ll see how that plays out over time. Got it.

Brian Essex, JPMorgan’s software analyst, JPMorgan: And then maybe taking a step back real quick on the overall macro environment. Have to ask a macro question. Can you comment on buyer behavior today? What are you seeing from a macro perspective? And how has that changed, if at all, over the past few months in your view?

Unidentified speaker: If you go back to January, we hosted a dinner with CEOs in Davos. I’d say a ton of optimism at that point, really based on the belief there would be less regulation, which is obviously pro growth. And I think that part has played out. I think since then, yes, obviously, a little more uncertainty, which is never great. But as we look at it for our business, our geographic diversity is very good.

I mean we’re 50% Americas, thirty one % Europe, nineteen % Asia Pacific. So we’ve got good geographic diversity. You look at the software business, 80% is recurring revenue. So IBM tends to do well in times where there’s a level of uncertainty because we have good diversity and clients know that they can rely on us. As you think about the bigger picture, I always try to think about what is not going to change.

Even if there’s a lot of things changing, what is not going to change? And there’s kind of an old equation in macro that says GDP growth comes from productivity growth plus population growth plus debt growth. You look around the world, I don’t think there’s going to be really population growth. There’s a few places, but in aggregate there’s not going to be. Okay, so that won’t be a driver of GDP growth.

Debt growth, maybe, but I would say that’s probably unlikely. And so then the only answer for GDP growth becomes productivity. So I don’t think regardless of any ups and downs in the short term or medium term, there’s productivity. And if anything, since the start of the year, this has been a catalyst for clients coming to us to saying, what more can we be doing to drive productivity in our business? How can we leverage AI?

How can we leverage technology? So in terms of things that don’t change, focus on productivity is not going to change. Focus on resiliency is not going to change. I’ll call it flexibility, kind of coming back to our focus on hybrid cloud. Now every company, every government is realizing they need a level of optionality in how they deploy technology.

There’s a lot of discussions on sovereign clouds. And if you’re thinking about building a sovereign cloud, I think the only answer is actually leveraging Red Hat for that. That’s kind of the promise of open source. And so kind of focus on the things that don’t change because then we can keep running the business.

Brian Essex, JPMorgan’s software analyst, JPMorgan: Got it. Super helpful. And then maybe just to kind of bring that back to the performance of the software business. You delivered 9% growth in the first quarter. And Jim guided to software revenue approaching double digit growth this year.

Maybe if you can bring it back to the positioning of the software business and the overall portfolio for software today and the key drivers of where that confidence comes from and getting into that like approaching double digit level?

Unidentified speaker: Sure. Let me start with kind of the basics. When we looked at the software business a few years ago, I spent a lot of time kind of studying why do large companies struggle to innovate. And kind of two things stick out to me. One is over time, as companies get big, you get more managers and process coordinators than builders, engineers.

And so we focused heavily, if you go back to 2020, on building engineering capacity and software. And this takes many years to play out, but it’s actually going quite well for us. So one big focus is just on do we have the raw capacity and talent to innovate. The second part of innovation, and I think this is the other place large companies struggle is, innovating requires a tremendous amount of patience. And most large companies do not have that.

We want to release a product and if it’s like, hey, if this product is not a billion dollars within a year, we’re going to give up. And I think we’ve really changed that mentality in IBM that we’re going to be really patient about iterating on new products. And I think probably the two best examples for today are things like Watson X Orchestrate and Concert. These are both overnight successes in four years into it. So, like, we’ve been at this for four years.

It’s been two steps forward, one step back, which I think is the whole process of iteration when you’re building. And we’re starting to hit something. Like, think for Orchestrate, the first product was literally four years ago. It was an internal implementation that we did. It didn’t work very well.

But now we’ve kind of found our way to I think we’re right at the center of what’s happening in agents because we’re able to deliver all the orchestration for agents. And in the past, maybe we would have given up after a year, but now we’re four years into it. And I’d say similar with something like Concert, where we announced Concert at Think last year. And then this year, we had the CIO from Deutsche Telekom on stage talking about how what used to take hours in terms of patching vulnerabilities, they can now do this with AI using Concert in minutes. Like, that was a really gratifying story to me because we stuck with Concert for four years when we weren’t getting a lot of customer traction.

So I think the story here is about iteration to become great at innovating. And I think we’d lost that muscle for a while, but it’s coming back. How do you see that in the software business? Today, we’ve got, I think, a great business in automation. Did 15% growth last quarter.

And this is the business we weren’t even really in five years ago. And now I’d say it’s one of the major areas of growth in software, everything for how you automate technology, operations, networking, FinOps. So that’s been a really good catalyst for us. Data, which has been, as I mentioned at Investor Day, data has been a little bit slower for us. But I’d say we’ve developed a thesis around what we think is the most ignored part of data, which is unstructured data.

That led to our announcing the intent to acquire DataStax. And I think I’m encouraged by what we can build around unstructured data, which I think is probably an ignored part of the market. Last area would be transaction processing. And I always get a lot of questions on transaction processing. This is our mainframe software.

And I think the story here is twofold. One is there are consumption dynamics and volatility is actually good for us because clients need more capacity. They’re doing more transactions, I think that can be good. I think there’s also an innovation story though. We had not built a lot of new products for Z software, if you look at the 2010 to 2020 period.

And you look at since 2020, we’ve built a lot of new Code Assistant for z, Watson X Assistant for z, IntelliMagic, which is AIOps for z. And when you bring new products onto this platform, I mean, know exactly who the clients are. They’ll definitely take our calls. And so if we can demonstrate value with new products, they will adopt new products. And so I’m encouraged about the progress we’re making there too.

Yes. Wanted to touch

Brian Essex, JPMorgan’s software analyst, JPMorgan: on transaction processing because you mentioned it. I know a lot of investors struggle with that a little bit. I struggle with it a little bit. Just in terms of like how should we think about the visibility that you have into the growth of that business? It’s been surprisingly strong, relative to what it’s seen in the past.

Is that just MIPS volume? Or is it that you’ve had new products that drive better volume on the platform? And I know from a vertical perspective, you’ve got retail, financial services, travel that all kind of like support that. But how do we think about the health of that business and the key drivers as we try to assess the growth potential of that transaction processing business?

Unidentified speaker: I think there’s three main factors. One is there’s consumption. So why do people use mainframe in the first place? It is the best platform and the most economical platform for transactionally intensive workloads. Now, there are things on mainframe that probably don’t belong there.

So we work with clients on mainframe modernization. If they’re doing mobile apps or something like that, that probably doesn’t make sense on mainframe. So if we help them move those off, you know, that could take MIPS down. But we try to focus on what are the things that uniquely run best and most economical on mainframe, that’s transaction intensive workloads. And we see when we help clients optimize and have the right strategy on mainframe, they will use more because it is the most economical place to do that.

So there’s an element around consumption. There’s an element around pricing. And we have proven that as we take price actions, we can sustain that and people will stay on the platform because they get so much value on the platform. And then third comes back to new products. And I think if you think about what’s really different than the last few years, it’s probably that third piece, which is delivering new products and new innovation on the platform.

And kind of back to my comments on innovation, I’d say we’re just getting started there. I mentioned three. We’ve had other things we’ve tried that don’t work as well. So we’ll continue to iterate. But I think we can deliver more and more product here.

Great.

Brian Essex, JPMorgan’s software analyst, JPMorgan: You made a comment on talent a little bit ago. And I think whenever someone thinks about talent in IBM, they think about the consulting business. What about the software business? How have you seen your ability to attract and retain talent on the software side of the business to help you innovate and iterate on that platform? And where are you sourcing talent from?

Unidentified speaker: We are able to, I’d say, almost recruit anybody that we want. The gap, if you will, is, as I said at the start, IBM is nearly 50% software. Most people don’t know that yet. So that’s like a well hidden secret, even though it’s right in the numbers. And so there is normally a process with some people to kind of explain what is IBM today.

Because I think IBM for so long was a hardware company, and then for so long was a services company, that great software engineers, they’re like, I’m not sure I want to do that. But once they understand who we are, it actually becomes pretty easy. We’re able to recruit around the world. We have kind of focused our global innovation centers. We do a lot in The US, a bit in Canada.

We’ve gotten much bigger in India. We opened a lab in Saudi Arabia last year. We still have sites in UK and Germany. So we have good geographical diversity. And we find we can recruit senior talent from other technology companies who want to do that.

We can easily recruit from universities. We do that in a really targeted way. So I feel really optimistic about, I’d say, the progress we’ve built in terms of building a leadership team here and then scaling that out.

Unidentified speaker, Interviewer: Got

Brian Essex, JPMorgan’s software analyst, JPMorgan: it. And then you previously mentioned orchestrate, so we’ll tie back to that. And I thought it was really interesting at the recent THINK conference. It showcased the AI automation, how it’s used to drive better productivity. Can you highlight how you use AI and automation on the software side of the business?

Unidentified speaker: And how does that tie into recent announcements like Orchestrate? So maybe I’ll start with just what’s the AI strategy and products, then I’ll come back around to your question. When we look at AI, I would view it almost as a stack and I would simplify it to three layers. One is you have models. And we’ve made significant investment in Granite models that we open sourced.

I think our place in the world with models is what I’ll call small language models. Focused on specific domains, tuned to client data, we think there’s a really good spot in the market for that. We’ve then partnered with Meta for Lama, we’ve partnered with Mistral so that we have open alternatives for larger parameter models, which often serve different type of use cases. So the strategy is really multi model, and we have a good feeling for where we can differentiate our own models. Like, one of the pleasant surprises was we open sourced a time series model that’s out on Hugging Face, and it’s the most downloaded time series model in the world.

So there is certain domains where we know we can lead. So that’s kind of the bottom of the stack, which is models. Next part is what I would call the AI middleware or orchestration. This is where I would put Watson X Orchestrate. This is how do you get multiple models to act together at the same time.

So if you have an application and want, instead of the user deciding which model to use, you want the application to choose the best model based on performance or cost. That’s what I mean by middleware. It provides governance around models if you want that. So we’ve made a significant investment kind of in that middle layer of middleware. And then at the application layer, we have things like Watson X Assistant, which does very well for customer service, employee service, planning analytics, which is really the number one product in the world for financial planning and budgeting.

So that’s kind of the stack. It’s like what we can deliver on applications for middleware, then for models. We partner at all layers of that stack. One of the announcements last week was has built a tax application using our AI stack. And last year, we announced Dun and Bradstreet built an ASP procurement application, their data using Watson X as the stack.

And so I think really pleased with the product strategy here and how that’s playing out. Back to your question, what does this mean in terms of how we run the business? Well, we use a lot of AI to make our own engineers more productive. So we deploy Watson X code assistant, and we’re generating 30% of our code right now using AI. And I know there’s a lot of claims that engineers are going to go away.

I actually don’t believe that at all. I actually think the sweet spot is, I don’t know, twenty, thirty, forty, 50 percent. I think engineers still have a long run-in this world. But it can be a great complement to your engineering team. So that’s one example.

Another example I’d give is just even automating our processes for how we release products. This used to be a very long process. You know, releasing a new product would take six to nine months. And that six to nine months has now become a week. And to give you evidence of that, when we closed the acquisition of HashiCorp, normally we would close an acquisition and then the product would be generally available under IBM terms, typically in six to nine months.

And we made the HashiCorp products generally available eight days after the acquisition closed. And that’s an example of AI automating what was a bunch of manual processes around around security checks, certifications, that type of thing. So I’m encouraged by the speed that this has put into our business. Got it. You mentioned HashiCorp, so

Brian Essex, JPMorgan’s software analyst, JPMorgan: I’ll jump to a different topic, kind of related. But, with that acquisition came a meaningful amount of dilution. How have you supported management confidence in covering that dilution based on the operations of the software side of the business?

Unidentified speaker: Well, we look at the full picture, and M and A is always in our model. And so it’s obviously conscious in the back of our head. What we saw with HashiCorp was a very unique asset that we thought could really accelerate everything that we’re doing in hybrid cloud. The vision of that team was we want HashiCorp running in every data center. And core of their value proposition was clients are going to be running in one place, typically on premise.

And if we could automate how they move to cloud and how they move to multi cloud, then that would be a winning position. Actually, Hashi actually means bridge in Japanese, which is the whole idea was the bridge between a single implementation to multi cloud implementation. So to us, it was the perfect asset at the perfect moment for what we’re doing. And in terms of synergy, I would say three main areas. You’ve got Terraform plus Red Hat Ansible, which is how do you automate getting started on day one and then all of your day two operations.

I think that’s a great lever. Second would be Vault and OpenShift. So anybody using OpenShift is trying to manage all of their API keys and their secrets and Vault with an integration makes that very easy to do. And then thirdly, and I think this surprised some people, but we did release Vault on mainframe. Because many clients actually start with mainframe as where they manage some of their security permissions.

And so I put in Vault on mainframe. In our view, this opens up a whole new market for that product. And so we looked at the opportunity. We looked at the synergies. And we thought this was too good to pass up.

Brian Essex, JPMorgan’s software analyst, JPMorgan: Got it. With that, I just wanted to take a test of the audience and see if there are any questions in the audience. No? Okay. We’ll move on.

If there are, just raise your hand. We’ll try to get to you. I think we have a few minutes left. I think one of the things I wanted to mention that now the one, Hashi Kobi mentioned DataStax. You’ve had a meaningful amount of growth come from M and A.

And I think the management has kind of like indicated that a substantial amount of future growth will come from M and A. As you’re focused on building out the software business, what would you say the top three to four areas of interest are from M and A pipeline perspective and there’s gaps you’re looking to fill in your platform?

Unidentified speaker: It would all come back to kind of the areas we talked about. We’re obviously looking for how do we accelerate our lead in hybrid cloud. One example was we bought Neural Magic, which is the company behind VLLM, which is, think of that, a way to inference across different chip architectures. That became part of what we’re doing in Red Hat. So anything that would accelerate what we’re doing in hybrid cloud, that is of a big of interest.

Second would be in automation. Like I said, I think we’ve built a lead where for anybody that wants to do automation of technology and operations, IBM is going to be the partner of choice. So anything that accelerates that. Like to give you an example, we’ve done a decent bit in software defined networking. We acquired NS1.

We acquired Pliant. We acquired SevOne. And that was our view of this an adjacent market to what we know well. This would give us really good TAM expansion. And we’ve built some products, but we also thought we could accelerate what we were doing through M and A.

So that’s an example in automation. For data, I kind of talked about the opportunity in unstructured data. But I think the opportunity in data is broad. From data integration to data cataloging to analytics. There’s still a lot happening in data.

And so that will be an area. And then I’d say we’re opportunistic around mainframe software, or TPS. We’ve done a few smaller ones here or there. But if that can, I’d say, accelerate roadmaps for how we’re thinking about innovation, we

Brian Essex, JPMorgan’s software analyst, JPMorgan: would do that. Got it. And I want to circle back sorry, I’m jumping around a little bit, but I want to circle back to Red Hat for one minute because I did get a lot of questions from investors on this. Still growing very nicely. This quarter, it was a little bit slower growth than it was in the fourth quarter of the year.

I know historically, Jim’s called out that there’s a consumption piece of that business. Can you help me understand how meaningful is the consumption piece? And how meaningful of a role did that play on performance this quarter for the software business? I don’t

Unidentified speaker: think I’d draw the line that directly. When we talk about a consumption business, a lot of this is software running on hyperscalers. So there’s an OpenShift managed service on AWS and there’s one on Azure. Clients can obviously tune that up or down based on what’s happening in their business. But I’m not sure I would point to that.

On Red Hat, I’d kind of come back to we’ve made really good progress over the last, I guess, six quarters now, where we’ve shown really sustained higher bookings growth. And if you kind of come back to the tailwinds I talked about, new version of RHEL, momentum there, OpenShift, I think we’re still in very early days of containers. And if you believe my comments that this is a twenty year trend on applications, Say very optimistic there. AI is still very early. And that’s, I’d say, all upside.

And then again, we kind of got this tailwind with virtualization that I’m not sure we even expected a couple years ago. And that’s been a pretty good catalyst catalyst for us.

Brian Essex, JPMorgan’s software analyst, JPMorgan: Got it. And then wanted to hit on partnerships real quick. What role do ecosystem partnerships play in your business? And can you share some examples of successful collaborations that have contributed to the growth of the software business?

Unidentified speaker: I think the most obvious one, when you think about TAM expansion, is what we’ve done with hyperscalers. In 2020, we had zero IBM software products in AWS marketplace or in Azure marketplace. And we made a conscious decision that it was a part of the market that we were missing out on. Now we have nearly a hundred products on AWS, about half that on Azure. It just opens up a whole new distribution channel.

A way that clients can leverage their committed spend to acquire software. And so that’s, I’d say, one dimension of partnerships that I think it was just a part of the market we were missing. And that’s been all upside for us, which has been good. I think the second piece was working with systems integrators. So yes, we have a consulting business.

And our consulting business is a great catalyst for what we’re doing with Watson X and generative AI. But we can’t afford to ignore the rest of the systems integration market. We put a pretty big explicit focus on we’re going to partner with Deloitte, I mentioned we’re going to partner with Accenture, LTI Mindtree, many of the Indian SIs. And that’s created a lot of opportunity that we were just missing out on because we can’t just be a captive to our own consulting business. So that was expansion.

We’ve done a lot working with ISVs on what we would call embedded AI. So ISVs that aren’t going to invest, you know, a billion dollars of R and D to go after AI, they can use our AI to make their products better. You know, Box talked about this at LamaCon last week, how they’re using Watson X, that’s one example. We’ve done it with Adobe, with Salesforce, Qualtrics, I mean, hundreds at this point. And so these are all different ways, I’d say alternative routes of distribution, whether it’s hyperscaler marketplaces, working with SIs, ISVs that are embedding our technology.

I think it was really important to diversify our distribution and how we attack revenue growth.

Brian Essex, JPMorgan’s software analyst, JPMorgan: Got it. Maybe last one for me. Made a lot of really exciting announcements recently. What gets you most excited about the future of IBM? I think IBM is one

Unidentified speaker: of the most important companies in the world. And clients for a while were questioning the relevance of IBM. And I think that’s completely gone away. People are now leaning in. They think we nailed it on the strategy around hybrid cloud and AI.

So the client sentiment has changed dramatically. So I’m very optimistic about that. I’d say secondly is I think everything we’ve talked about here, we’re actually just at the start of. Whether it’s go to market transformation or innovation and products, these things do take a lot of play out. And we got some quick, relatively quick near term successes in the last four years.

But we are just at the beginning, and that’s probably what excites me the most. Excellent. With that, we’re out of time.

Brian Essex, JPMorgan’s software analyst, JPMorgan: Rob, thank you very much for joining us and thank you all as well. Good to be with you. All right, great.

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