IBM reported third-quarter results on 21 October, and software revenue grew 9 percent at constant currency. The headline numbers matter less to customers than a passage in the earnings call about enterprise licence agreements, or ELAs. IBM’s chief financial officer explained how the business works, and it is one of the clearer public descriptions of how IBM thinks about large software customers.
If you have an IBM ELA, or are about to be offered one, it is worth reading what was said. IBM’s filing with the US regulator gives the formal figures, and a second transcript of the call is useful for checking how the remarks were phrased.
What the CFO said
Jim Kavanaugh described a transactional part of IBM’s software business that is about 20 percent of the software book, which he put at roughly 32 billion dollars a year. He said two-thirds to three-quarters of that transactional part is ELAs, which he described as strong incumbency positions built over decades around the mainframe.
The rest of the software book is the recurring base. IBM said that base grew 8 percent to 24.9 billion dollars, and software added about 595 million dollars of the 772 million dollar rise in total revenue, which shows how much of IBM’s momentum now rests on software.
He said ELAs grew by more than 20 percent in the quarter, with net revenue retention above 130 percent. In plain terms, existing customers on ELAs are spending, on average, about 30 percent or more than they did a year earlier. He also said IBM builds a distributed software business on top of the mainframe, with three to five dollars of software for every dollar landed on the platform.
Flexibility, and what it is for
Kavanaugh said IBM gives ELA clients flexibility on where they choose to direct their ELA spend, between data, automation and transaction processing. That flexibility is a genuine benefit. It lets a customer shift commitment towards what it actually uses as its priorities change.
He also said Red Hat is not part of IBM’s ELAs. That matters for anyone assuming an ELA covers the whole IBM portfolio. Red Hat subscriptions are a separate purchase, with their own terms and renewal dates, so they need to be managed on their own calendar.
How IBM describes monetising capacity
The most useful passage for a buyer is about capacity. Kavanaugh said IBM’s model is that the more mainframe capacity is out in the market, the greater the opportunity to monetise value, including price. He reported that installed MIPS are up by the high teens over six quarters of the z17 programme, and that shipped MIPS are up by more than 100 percent, which he called the future monetisation opportunity.
Read as a customer, that is a signal. IBM expects growth in your installed capacity to translate into growth in what you pay for software. Capacity upgrades, new workloads on specialty engines and consolidation projects can all change the base your software charges rest on. It is sensible to understand that link before a hardware decision is taken rather than after.
Slipped deals
IBM also said about a quarter of its software acceleration came from large deals that slipped from the second quarter and closed in the third, and about three-quarters from net new business. Deals do move between quarters, and customers sometimes have more leverage than they realise when a vendor needs a deal to land. It does not mean every deal can be pushed, but it is a reminder that timing is part of the negotiation.
What to do with this
Start by understanding your own ELA. Know which products and metrics it covers, how much flexibility you have to move spend between product families, and what the terms say about growth in the base. Check whether any Red Hat spend sits outside it. Look at how your software charges relate to installed capacity, and model what a planned upgrade would do to them. Ask for protection on the growth assumptions, such as a cap on uplift or a fixed metric for the term.
Finally, think about timing. If your renewal is near the end of an IBM quarter or year, ask what IBM needs from the deal, and what it would give for early commitment or longer terms.
Questions to ask at renewal
An ELA is a negotiated contract, and the terms vary. Even so, some questions apply to almost every one. What is the metric, and what happens to it if your capacity or workload changes? Is there a cap on increases for the term, and does it cover the products you add as well as the ones you started with? What flexibility do you have to move spend between product families, and does it need IBM’s approval each time? What are the rules for adding or removing products part-way through? What happens at the end of the term if you do not renew?
Ask also about verification. Many large software agreements give the vendor the right to check usage, and a flexible ELA can make it harder to see exactly what you are entitled to. Keep your own record of what you run, so that you can answer a verification request from evidence rather than from memory.
Why it matters now
IBM is telling investors that its mainframe business is growing again and that software is the way it monetises that growth. At the same time its larger customers are expanding their commitments. If you sit inside that group, the direction of travel is up unless you actively manage it. That is not a reason to avoid an ELA. It is a reason to know what you have signed and to review it before it renews.
How to read an ELA from the customer side
An ELA usually trades a commitment for flexibility and a better unit price. The commitment is real, and it often grows at renewal. The flexibility is useful only if you understand it well enough to use it. Many customers sign an ELA and then find that they cannot say how much of the entitlement they use, which products drive the spend, or what would happen if they reduced a part of it.
A simple annual review fixes most of this. List each product covered, the quantity you are entitled to, the quantity you actually deploy and the cost per unit. Mark where spend is rising and why. Bring that to the renewal discussion. A customer who can show what it uses negotiates from evidence, and a customer who cannot tends to accept the vendor’s version of the baseline.
Conclusion
IBM’s third-quarter call gave an unusually direct account of how ELAs work and how the company expects them to grow. Customers on ELAs are expanding, flexibility is a selling point, and capacity growth is how IBM expects to monetise the mainframe.
Treat the call as intelligence. Understand your own agreement, test it against what IBM said, and plan hardware and renewal decisions with the commercial link between them in mind.
