Every IBM Investor Should Keep an Eye on This Number
A single number underscores how quickly IBM (NYSE: IBM) is tapping into the artificial intelligence (AI) opportunity right now.
Have you heard of Big Blue's so-called book of business for generative AI contracts? Here's a primer.
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What is Watsonx?
The Watsonx generative AI platform was unveiled in May 2023, about six months after OpenAI's big ChatGPT launch and three months after Alphabet presented its Gemini tool (née "Bard").
Like other large language models (LLMs), Watsonx helps humans analyze large datasets and text libraries. But Big Blue's system brings unique qualities to the table, such as robust data security and the ability to audit the source material for each AI-powered statement. This system wasn't made for easy, consumer-level access, but for large-scale business adoption.
The testing and approval processes can take time, but then they result in long-lived deals with high dollar values. So IBM wasn't quick out of the gate, but Watsonx is building serious momentum:
|
Quarter |
Generative AI book of business, according to the company in its conference calls |
|---|---|
|
Q3 2023 |
"Low hundreds of millions of dollars" |
|
Q4 2023 |
"Roughly double the third-quarter amount" |
|
Q1 2024 |
"Greater than $1 billion" |
|
Q2 2024 |
"Greater than $2 billion" |
|
Q3 2024 |
"Over $3 billion" |
|
Q4 2024 |
"Over $5 billion" |
Data source: IBM's earnings calls.
IBM's unique metric
These book of business numbers are not straight software sales. They measure long-term subscriptions and contracts in the chosen area, similar to deferred revenue or accounts payable. IBM has used it with Red Hat and hybrid cloud sales in the past, and now provides it for generative AI deals.
The average deal term varies between one and two years, so it'll take several quarters before these billion-dollar commitments are converted into revenue and profit. And only one-fifth of the contracts are related to Watsonx's actual software, with the rest coming from consulting services.
So IBM is experiencing explosive growth in Watsonx deals, as enterprise-class clients complete their tests and decision-making processes. Generative AI will generate plenty of actual business for Big Blue in the coming years.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anders Bylund has positions in Alphabet and International Business Machines. The Motley Fool has positions in and recommends Alphabet and International Business Machines. The Motley Fool has a disclosure policy.
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