The Motley Fool Interviews IBM CFO Jim Kavanaugh

In this podcast, Motley Fool co-founder Tom Gardner and contributor Matt Frankel talk with IBM Chief Financial Officer Jim Kavanaugh about the new IBM.

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A full transcript is below.

This podcast was recorded on March 01, 2026.

Jim Kavanaugh: Over the last three plus years, we've created more value for our shareholders than the prior 111 years combined.

Mac Greer: That was IBM Jim Kavanaugh. I'm Motley Full producer Mac Greer. Now, Motley Full co founder and CEO Tom Gardner and Motley Full contributor Matt Frankel recently talked with Kavanaugh about the new IBM and about what AI means for IBM's future. Now, I should note that this interview was recorded on February 10, prior to the big decline in IBM's stock price over concerns about Anthropic' new CBA coding tool. Hope you enjoy the conversation.

Tom Gardner: Well, hello, Fools. We're so excited to spend the next half hour or so with the Chief Financial Officer of IBM, Jim Kavanaugh and Matt Frankel, our Hidden Gems investment analysts helping out throughout Jim. Thank you so much for this time.

Jim Kavanaugh: Great. Thank you, Tom. I appreciate you having us here and looking forward to an engaging discussion with both of you.

Tom Gardner: Let's hope we don't let you down. We're so excited about this. I will say for investors of the Molly Fool, we have eight recommendations of IBM. Those investments have done quite well for us. We take a very long term perspective with our investment strategy, so we're always looking to hold our investments for at least five years. Obviously, there are so many transactions in the marketplace and so much excitement about trading and sports betting and all the other things that people get drawn into. But we're very convinced that the best returns come in the equity markets to those who find businesses that are making improvements, solving the problems of the world, generating cash flow from it. It is within that frame that we begin our conversations. I'll just start, Jim with maybe the standard question you might expect that investors or some investors may still think of IBM as legacy services and hardware versus software, AI, and all of the R&D investments that IBM has been making. But what would definitively change that perception, do you think? What milestones should investors be watching as proof that we have a real transformation a foot here, and it's a couple of years in at least.

Jim Kavanaugh: Yeah, well, thank you, Tom. I appreciate it. I think that's a great place to start because we today at IBM, we firmly believe we're a fundamentally different company than what we were 5-7 years ago under Arvin's leadership now as he's taken over the reins of the IBM company. But we've embarked several years ago on a major strategic transformation that I would argue was all about reinventing IBM. It was everything come from portfolio optimization and a bunch of moves around that I'm sure we could talk about to underlying fundamental operating and business model transformation. To arguably the most important piece of what Arvin has really embedded instilled in IBM, a cultural transformation. We are a very different company. It starts with our strategy, a very focused strategy around what we believe are the three most transformative technological shifts that we're seeing today, Hybrid Cloud, AI, and emerging right now and becoming reality very soon quantum. You take a look at it, we have done a ton of work around building a software led platform centric company to capitalize on those three strategic shifts with a very important integrated value proposition of infrastructure. Yes, we still have a infrastructure led by the most enduring platform mainframe, but we also have a software business that we could talk about and a consulting business that brings an integrated value proposition together that has a multiplier effect of every time we land a platform dollar.

Now, to your point, what is it going to take? Well, let's just put this in perspective. You've been following us, and we really appreciate the recommendations from you and the team overall, your trust, your confidence, and the investment overall in our great company. But what we've done over the last handful of years, we've taken a company that was in structurally declining portfolio growth, incrementally dilutive margins, and a free cash flow engine that was stagnant at best to declining. Over the last three plus years, we had built a durable, sustainable revenue growth model. We've improved our operating margins over the last 3.5 years by 1,000 basis points. We have basically almost 2.5 times our free cash flow, five plus billion dollar of growth over the last three years. By the way, the market has rewarded us on capitalizing on that. Put it in perspective over the last 3-5 years, our TSR is about two X, the S&P 500, and it's well above the S&P tech. Over the last three to five years. IBM, Tom, as you know, you've studied us quite well. We just celebrated our 114 year anniversary. Over the last three plus years, we've created more value for our shareholders than the prior 111 years combined. Hit all time stock price, all time market value, all time enterprise value overall. Now you say, Well, where can we take this company going forward to your question? Well, we laid out at our investor day last year in February, about a year ago to almost a day here today. We said that we were going to fundamentally build the next leg of our shareholder value creation model that is built on three pillars, accelerating this revenue growth even faster in this company, five plus percent led by double digit growth in our software book of business. Two continued operating margin leverage, about 100 basis points per year. We think we've got significant headroom still to go. Three a free cash flow engine that is going to grow faster than revenue, expanding free cash flow margins each year that creates investment flexibility. You bring all that together, and the way I summarize it to investors, our investment thesis, higher revenue growth, higher operating margin company, strong free cash flow yield, high return on equity, and a very attractive return to shareholder program with our dividend policy. That's how I would sum up the beginning of this discussion too.

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Ken: I'm Ken.

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Mac Greer: This is going to be a bit of a walking tour or a pub crawl because we're going to go in a couple of different directions and return back, circle back to some points you've just made around productivity and about change management and the culture at IBM today and the changes that have emerged over the last couple of years. But I want to turn right now to what's happening with AI agentic AI and IBM's business. I bundled three questions together in one. In fact, I had these three questions, and moments ago, I just turned to GPT and said, let's put it into one question. Let's see how well it did with this. Jim, how does organizational disruption from agentic AI compare with earlier technology shifts like Cloud or mobile? Where the tools evolve, but headcount and core roles largely stayed the same at companies. Now here's where we're getting the blended question. How is this disruption different than Cloud or mobile, and our clients finding that effective AI adoption requires rethinking their team structures and their roles rather than just layering in AI onto existing workflows? If so, third part, what share of IBM's consulting engagements include AI driven workforce transformation or change management? How does that all weave together, if you can, three questions into?

Jim Kavanaugh: Okay. Well, you'll have to help me because I'm actually, as a CFO, I'm not very good at multiple part questions, as you know, from our earnings calls. But I'll revert back to you and you can refresh from the. But let's take your first one. Then we'll go from there. What is in the history of the information technology industry? What has technology always been? It is a way to drive productivity and a source of competitive advantage. I would argue for worlds, economies, industries, society at large, this next evolution of agentic AI is going to be, and I believe the most powerful form of competitive advantage and productivity that we will ever see or let me personalize. I'll ever see in my professional lifetime overall. But if you go back time and you look at the client server technology shifts, the advent of the services industry, the middleware era, to the Internet, to the globalization era, to most recently 10 years ago, plus the Cloud explosion, technology has always brought competitive advantage. It's always brought more productivity. Read that GDP. That's why it's the second most highest contributor to GDP behind healthcare. I think this is going to be the same thing. Now, I think your second question had something to do, I think, around labor or human capital, et cetera. I think around technology and Gnai AI. Gnai AI will influence every workflow, every job, every skill, and every industry, without a doubt. By the way, revert back to your first P A question. In all of those technological inflection shifts that have happened, we have gotten more GDP growth. We have gotten more labor and human capital growth. Is it in the same areas and disciplines? No. Because the value equation has to change. New industries were created, new markets were created, new companies were created, new skills, new job disciplines were created.

That's the evolution, I think, naturally, of what technology does. I think the same thing is going to happen with AI overall. AI will influence. Now you bring it back, and I think I remember your third part of your equation around consulting. By the way, I would argue today that is a huge differentiator in the IBM company because we are the only integrated information technology company that brings an innovative tech stack across hardware, software, services, platforms, AI Hybrid Cloud quantum, with a consulting business at scale across 175 countries that drives platform adoption and scale overall. I will tell you an AI, let me bring it home to myself because not only a CFO, I have the fiduciary responsibilities for the company. I also have and been entrusted by Arvin and the Board, everything from the strategy to the portfolio to all of the operations of the company. When you think about how we're deploying AI to productivity, this is tough work to reinvent a company it requires you to fundamentally change and rethink how you run workflows in a company. How do you run each R? How do you run supply chain? How do you run procurement? How do you run finance? How do you run sales, development optimization? The consulting aspect of bringing industry domain knowledge and strategy, technology, business consultancy is essential, I think, for companies because companies to get the scale and value realization of AI, they have to fundamentally change the way workflow gets done. Yes, it starts with data, but it's all about workflow optimization, and it ultimately is going to change operating in business models. Consulting plays a very important role. Hopefully, I touched your three, if I vaguely remember.

Matt Frankel: You nailed them. Matt. Well, I'm going to do WT dating combine two of my questions. It's because the first one's short. This is definitely just a financial question. In your our quarter earnings, you reported that your AI book grew by $3 billion to 12.5 billion. I think was just for investors watching who might not know exactly what that represents, can you break down what that means and how investors should think about its growth? The second part is, how does the acquisition of Confluent? How does that play into your AI strategy from a long term perspective? How will that strengthen that number even further?

Jim Kavanaugh: Sure. I mean, we're extremely excited about the Confluent. If you hopefully can see over my shoulder, we have a little of the props around some of the acquisitions and capabilities, but I'll come the Confluent here in a minute. First around the AI book. First of all, IBM deploys Enterprise AI. We're an enterprise company that improves the economics around real work, boosting productivity. Driving increased innovation, starting in driving competitive advantage, as I talked about technology, and it's also fueling growth. Our book of business, we exited 2025 inception to date, so call that almost two years, $12.5 billion book of business. By the way, in the quarter, it was north of $3 billion to your point. Thank you. Underneath that, it's really made up of, again, platform model. Because we participate in all facets of models, software agents, assistance, orchestration. Software book is about, excuse me, note of $2 billion. By the way, in 2025, up nearly 80% overall.

The remaining call that North at $10.5 billion is our consulting book of business. That's our strategy and technology advisory work around AI. That's our data transformation services to get companies ready to scale and deploy AI, and that's our intelligent operations where we do application modernization, hybrid Cloud architecture, et cetera. That gives you a little bit of the background. We're extremely excited about where we think AI is going. You look at studies that have been produced, whether it's BCG, McKinzie, you name they're calling trillions, like four trillions of value creation over time around AI when it's at peak. By the way, interesting thing on that, just a little sidebar. Only about a quarter of that is productivity. Three quarters of that is actual new sources of growth, new industries, new companies, new markets, and having an innovative tech stack and a consulting business at scale plays to our advantage. Now, get to Confluent. Confident, we're extremely excited. Open source company we're very big in open source, starting with the initial Linux Foundation that we started, but Red Hat acquisition, Hashi Corp, Confluent plays extremely nicely to our strategy overall. Confluent, leading open source company around data streaming events real time, foundational for Gnai AI overall. It is going to become the glue. If you think about Gnai AI, yes, you've got models. Yes, you've got applications and by the way, we've been public, we think there's gonna be an explosion in applications that are going to occur. On top of those applications, Matt, as you know quite well, there's going to be multiples of agents that call on those applications. What does confluent do? It's going to be the smart data platform that is going to be foundational for us to have companies scale AI because it brings the integration of applications, of data, of security, of governancex, of intelligence together. Think models, applications, agents, and the connectors of all that is going to be the underlying data connector around confluence. We couldn't be more excited. By the way, it fits our M&A strategy. What do we look at in M&A? We look for category leading technologies in structurally growing markets where we can add unique value inside IBM around integration and around delivering synergies on top of our platforms. This fits extremely well with that overall.Expands our TAM, very important area, so we couldn't be more excited.

Matt Frankel: Just a quick follow up. Let's just take these four factors and if you have a formula for them or how you evaluate them from one quarter to the next, one year to the next. That would just be share buybacks, dividends, acquisitions in R&D. Taking those four different games you can play, how do you think about each dollar that comes in with cash flow and where to deploy it?

Jim Kavanaugh: Well, discipline the capital allocation always starts with investing back in our business. That is both an organic and an inorganic, to the extent we remain disciplined around our set of M&A criteria. Strategic fit to our Hybrid Cloud NI strategy. Synergistic value because every dollar we invest inorganically, we got to get a multiple synergy. It's got to pull software. It's got to pull consulting. It's got to pull our infrastructure platform, and it's got to have an attractive financial profile. Our capital allocation strategy always starts with the biggest value creator, which is utilizing cash in the most productive and effective way to create long term sustainable competitive advantage. From there, then, as a CFO and public company, you've got to look at any excess cash above your leverage ratios on how you would have an attractive return to shareholder program. Given our investor mix, and by the way, we've been doing a very good job of changing that over time, but we have a very sticky, a very loyal retail base. They love the dividend, and we remain. We've been very transparent. We remain committed to a secure, modestly growing dividend over time. I think right now we've given a dividend for what, 100 plus years, and we've raised our dividend. We're an Aristocat right around 30 years in a row, and we feel very confident we've been able to grow into a pretty attractive, still attractive dividend yield at a very appropriate now payout ratio, much better than where we were five, six years ago. And then from there, given the free cash flow generation engine, Tom, that we've been driving here and the vector of growth. Our return to shareholder program, we're approaching about 40% from a payout ratio. It gives us a lot of strategic optionality on how to distribute value back to our shareholders. If we see something that is very attractive and organically, we're going to continue our organic engine. You can bet on that. That's priority Number One. R&D, our research investment, our quantum investment, and the next leg of emerging technology. But if we see something very attractive that fits our M&A criteria, that will be highly prioritized. Otherwise, we'll look at strategically diversifying how we return of value to shareholders. We're about at that payout ratio that allows us to have a lot of flexibility. I call that a high quality problem.

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Matt Frankel: Final question is like the ski jump in the Olympics. It's not going to be a long runway to the question, but we're going to give you the opportunity to stick it quickly because we know we need to respect your time. Be as succinct as you'd like to be. I just like to hear from you. You have a 30 year history at IBM. Arvin has a 35 year history. You came in as, I believe, stepped in as CFO in 2018, Arvin to CEO in 2020. We've heard about it through your points in this conversation. I could probably answer this. But anything special you'd like to give us about what the Arvin Krishna years mean. As distinct from what came before at IBM. Maybe if you wanted to go in this direction also, I'd love to hear transformation culture, how you're fair to every employee in this time of great change while relentlessly pursuing the prosperity and success you want for all the stakeholders of the company with these new technologies.

Jim Kavanaugh: Arvin and I go back 20 plus years. We became very close when I was the controller of the company back in 2007. He was running parts of our software portfolio overall. We actually built a relationship on the business that ultimately led to a friendship outside, but it was a business relationship on what I would call one day a mentoring relationship, deep technologist, me deep business model, operating model, financial model, et cetera, and we learned from each other. Another day, it was a reverse mentoring. We became very, very tight, and our paths have crossed around different portfolio moves over time, Red Hat being the biggest piece. But what do I think what he's done around this company? Number 1, I think it will go down in history. He is probably engineered one of the most strategic reinventions of an iconic information technology company that's ever existed. I say that proudly at the end of the day. There's a reason why we're here 114, going to celebrate 115 years. What has he done? I think if you take a look back at it, I said to someone earlier this morning, I think there's three things that are important, which by the way, go back to when Arvin and I were talking when he was interviewing with the succession plan to become the next CEO. I asked him, I said, What do you want to be known for? Where do you want to take IBM? I had just become CFO. By the way, a lot of their behind the scenes, things have happened leading up to both of our positions. But, Number 1, he said, IBM historically is always delivered differentiated value over 114 years when we had high value innovation platform models that we could create distinctive advantage. Arguably, we haven't had one since the middle era in the early 2000. ALA, his vision, Hybrid Cloud AI, Red Hat acquisition, and what we've done with the portfolio. He wanted to convert IBM into a platform centric business, opening up IBM, which I think is one of the most underappreciated things he's done in the company, creating strategic partnerships, moving away from historical proprietary IBM to one that is competition and strategically complementary to other areas. Point number one. Number 2, he had a changed the mindset in this company that we've got to drive durable, sustainable growth, a growth mindset overall.

Three, I think, culturally, what has IBM always been known for? Responsible ethical technology that makes a difference in the world, in industry, society at large, technology for good. I think in a very short period of time, when you Check 1, Check 2, Check 3. He's well on his path. And I think that goes back to how I answer your first question. That market valuation and how the market is looking at us, while that is great, that's in the rear view mirror, all time stock price, all time enterprise value created more value in the last three years than the previous 111. What makes us most excited is the engagement and momentum of every IBM with a step in their walk Right now. I think that's a pride statement, and that's a relevancy statement. What clients. That's how I would wrap it up.

Matt Frankel: Jim Kavanaugh, the CFO of IBM, thank you so much for this time. We're very happy investors thus far, and looking forward to the next five plus years both learning from you as a business, enjoying the experience of getting to meet you in this situation and making money for putting our money at work. That's the mission of the Mali Fool to create a world that is smarter, happier, and richer. You've given that to us in this time. Thanks very much, Jim.

Jim Kavanaugh: Appreciate it. Thank you again. I appreciate your trust and confidence in investment. We'll keep making it work for you.

Mac Greer: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against. Don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Full editorial standards, and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley Full Money team, I'm Mac Greer. Thanks for listening, and we will see you tomorrow.

Mac Greer has no position in any of the stocks mentioned. Matt Frankel, CFP has no position in any of the stocks mentioned. Tom Gardner has positions in Confluent. The Motley Fool has positions in and recommends International Business Machines. The Motley Fool recommends Confluent. The Motley Fool has a disclosure policy.