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CNBC Exclusive: CNBC Transcript: IBM Chairman & CEO Virginia Rometty Sits Down with CNBC's David Faber Today on "Squawk on the Street"

WHEN: Today, Tuesday, May 13th

WHERE: CNBC's "Squawk on the Street"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with IBM CEO Virginia Rometty. Video from the interview is available at CNBC.com.

All references must be sourced to CNBC.

DAVID FABER: WE'RE VERY HAPPY TO BE HERE IN MIDTOWN MANHATTAN, AS YOU SAID, AT THIS DIGITAL EXPERIENCE LAB WITH GINNI ROMETTY, WHO IS THE CHAIRMAN AND CEO. FIRST TIME AND WE'RE VERY HAPPY OBVIOUSLY TO BE HERE AND HAVE YOU. THANK YOU.

VIRGINIA ROMETTY: THANK YOU, DAVID. GLAD TO BE HERE.

FABER: FIRST OFF, WELL, WE'RE HERE, OBVIOUSLY, IN A DIGITAL EXPERIENCE LAB WHERE YOU BRING YOUR CUSTOMERS, YOUR CLIENTS AND TO HELP THEM SORT OF FIGURE OUT IDEAS AND WHAT THEY CAN DO IN TERMS OF A LOT OF DIFFERENT THINGS. I KNOW WE'RE GOING TO SPEND A LOT OF TIME TALKING ABOUT THESE NEW INITIATIVES AND I KNOW THIS IS NOT THAT NEW, BUT THE GROWTH INITIATIVES AT THIS COMPANY DURING THE COURSE OF THIS INTERVIEW. BUT WHEN IT COMES TO GROWTH, GINNI,THERE IS CERTAINLY A QUESTION AS TO WHETHER SO MANY OF THE DIFFERENT THINGS – DATA, CLOUD, MOBILE, WATSON – WHETHER THEY ARE INCREMENTAL OR WHETHER THEY ARE TRULY GOING TO CHANGE THE PROFILE OF THIS COMPANY. WHICH IS IT?

ROMETTY: THEY ARE TRULY GOING TO CHANGE THE PROFILE OF THIS COMPANY. AND IF YOU THINK ABOUT IT, ACTUALLY THEY'RE GOING TO CHANGE THE PROFILE OF THIS INDUSTRY. AS I LIKE TO THINK OF IT, THE INDUSTRY IS REORDERING AND IT'S ACTUALLY NOT ANY ONE OF THOSE, DAVID. IT'S THE CONVERGENCE OF THESE. SO IF YOU TAKE CLOUD, IF YOU TAKE DATA, YOU TAKE -- I WOULD ACTUALLY BROADEN IT BEYOND MOBILE TO SOMETHING CALLED ENGAGEMENT. THOSE ARE SHIFTS THAT TAKE IN, IN TOTAL, THIS CONVERGENCE. IT WILL REORDER THE INDUSTRY AND WE WILL LEAD THAT. WE WILL LEAD IT FROM THE ENTERPRISE PERSPECTIVE AND THAT'S VERY DIFFERENT THAN SAYING JUST THE CONSUMER SPACE. AND THAT'S WHERE WE HAVE BEEN VERY DILIGENTLY FOCUSED ON INVESTING AND LOTS OF RESULTS TO SHOW FOR IT.

FABER: WELL, ALRIGHT. AND YOU KNOW, WHEN YOU SAY YOU'RE LEADING IT FROM THE ENTERPRISE PERSPECTIVE, WHAT DOES THAT ACTUALLY MEAN? AND WHEN YOU TALK ABOUT RESULTS TO SHOW FOR IT, TELL OUR AUDIENCE, TELL YOUR INVESTOR BASE AND EMPLOYEES WHAT YOU'RE ACTUALLY TALKING ABOUT?

ROMETTY: YOU KNOW AND WHEN I SAY WE'RE GOING TO LEAD IN THOSE THREE SHIFTS, TAKE DATA AS ONE. AND I'VE OFTEN SAID IT WAS THE WORLD'S NATURAL RESOURCE, IT WILL BE FOR THIS NEXT CENTURY. AND WHAT I MEAN BY THAT, BIG DATA, ANALYTICS, YOU KNOW, DATA IS NOTHING UNLESS YOU REFINE IT. THAT IS KIND OF THE ANALOGY WITH A NATURAL RESOURCE. AND I HAVE TO TELL YOU, AND YOU KNOW I SPEND TONS OF TIME WITH CLIENTS. EVERY CEO I TALK TO WILL TELL YOU THAT DATA IS GOING TO BE THE BASIS OF THEIR COMPETITIVE ADVANTAGE. SO IT'S NOT THE DATA ALONE. THE ANALYTICS AROUND IT. AND ONE OF OUR BIG STRATEGIES AND WE HAVE HE BEEN WORKING ON IT FOR YEARS, IS AROUND CHANGING INDUSTRIES AND PROFESSIONS WITH DATA AND BOY, WE'VE INVESTED $30 BILLION IN THIS AREA OVER TIME. WE'VE GOT OVER 30 ACQUISITIONS PLUS IN THIS AREA. AND AS I LOOK AT THE RESULTS TO SHOW FOR IT, JUST LAST YEAR, WE ENDED 2013 OUR BIG DATA ANALYTICS BUSINESS, IT'S $16 BILLION RIGHT. SO I MEAN, IF IT WAS A STANDALONE COMPANY, IT'S HUGE. $16 BILLION HAVING GROWN 9%. AND THIS IS ALL AROUND A PORTFOLIO FOR DATA ANALYTICS AS WELL AS, AND MAYBE WE'LL TALK ABOUT IT, YOU KNOW, WATSON. SORT OF THE REALLY EMBODIMENT TO FUTURE IN THIS WHOLE AREA OF DATA AND ANALYTICS. SO, THAT'S ONE OF THE IDEAS FOR THE ENTERPRISE.

FABER: RIGHT. $16 BILLION OFF ABOUT $100 BILLION REVENUE BASIS.

ROMETTY: YEAH.

FABER: NOT INSIGNIFICANT.

ROMETTY: NO.

FABER: GROWING. THE CONCERN AMONGST INVESTORS, CERTAINLY, IS THAT THERE ARE PARTS OF THE BUSINESS THAT AREN'T GROWING.

ROMETTY: YEAH.

FABER: AND THAT THESE IMPORTANT INITIATIVES FOR YOU WILL TAKE QUITE A LONG TIME AND IT'S STILL NOT QUITE CERTAIN THAT YOU'RE GOING TO BE ABLE TO ACHIEVE THE GROWTH RATES THERE TO OFFSET WHAT YOU'RE SEEING IN THE REST OF YOUR BUSINESS.

ROMETTY: OK SO FIRST, I THINK IT'S IMPORTANT TO THINK ABOUT WHAT WE DO IS, I MANAGE THE COMPANY AND WE MANAGE THIS COMPANY TO MOVE TO HIGH VALUE. OVER TIME. THIS IS HOW YOU GET TO BE 103 YEARS OLD. IT'S NOT THE FIRST TRANSITION WE'LL MAKE AND WON'T BE THE LAST ONE WE WILL MAKE. SO I THINK OF THE AREAS THAT'S IMPORTANT TO THINK OF THE WORD MIX AND WHERE WE'RE GROWING IT'S IMPORTANT TO GROW IN THE RIGHT AREAS. SO AROUND DATA, $16 BILLION, UP 9%, AROUND CLOUD, IN FACT WE ENDED LAST YEAR AT ALMOST $4.5 BILLION. HIGH GROWTH. UP 69%, UP OVER 50% IN THE FIRST QUARTER. AND IN THIS WHOLE AREA OF ENGAGEMENT – SOCIAL, MOBILE, SECURITY – BECAUSE TO ENTERPRISE CLIENTS THIS IS GOING TO HANG IN THE BALANCE. SECURITY, SECURITY. SO IMPORTANT TO HAVE GROWTH IN THOSE AREAS. THE OTHER PART OF THE PORTFOLIO, I CALL IT OUR CORE FRANCHISES. NOW, THEY STAY FOREVER YOUNG. I MEAN WHAT OUR JOB IS, IS TO CONSTANTLY INNOVATE THOSE. AND WHILE THEY MAY NOT BE – THEY MAY ACTUALLY BE DECLINING OR SLOW GROWTH, BUT WHAT THEY DO IS THEY INCREASE, THEY ABSOLUTELY INCREASE IN VALUE OVER TIME. AND THAT'S IMPORTANT BOTH FOR CLIENTS, IT'S HIGH VALUE TO CLIENTS, AND IT'S HIGH VALUE TO OUR INVESTORS. I MEAN I TALK TO OUR INVESTORS ALL THE TIME AND YOU KNOW, OFTEN I'LL SAY, YES, HOW MUCH OF OUR REVENUE DO YOU THINK IS ANNUITY OR REOCCURRING, RIGHT? AND PEOPLE DON'T REALIZE IT. IT'S OVER 50% OF OUR REVENUE, OVER 60% OF OUR PROFITS. THAT'S A MANIFESTATION OF HAVING A HIGH VALUE BUSINESS THAT CONTINUES TO CHANGE.

FABER: RIGHT. THE ABSENCE OF REVENUE GROWTH RECENTLY THOUGH, AT THE COMPANY, DO YOU BELIEVE THAT IS CYCLICAL OR IS IT SECULAR?

ROMETTY: IT IS AN INTERESTING POINT BECAUSE THERE ARE PARTS OF THE BUSINESS AND WHERE WE'VE BEEN CHALLENGED, PARTS ARE CYCLICAL, PARTS ARE SECULAR. SO AS AN EXAMPLE, SOMETHING I CALL CYCLICAL IS SOMETHING CALLED OUR MAIN FRAME PIECE OF HARDWARE. NOW, IT'S IMPORTANT FOR EVERYONE TO NOTE, I MEAN, FOR IBM, LESS THAN 15% OF THE COMPANY IS HARDWARE ACTUALLY.

FABER: EVEN THOUGH MANY PEOPLE STILL IDENTIFY THE COMPANY WITH THAT, I'M SURE MANY PEOPLE OUT THERE STILL THINK YOU SELL PCS.

ROMETTY: YOU KNOW 85% IS HIGH VALUE SERVICES, HIGH VALUE SOFTWARE. RIGHT. IN FACT, WAY INTO THE 20 PERCENT SOFTWARE. WE HAVE REALLY MOVED THIS COMPANY. BUT WHEN I TALK ABOUT THINGS LIKE WHEN I SAY THE MAIN FRAME LIKE THAT, YOU TAKE A LOOK AT THAT AND THAT HAS BEEN REINVENTED MANY DIFFERENT TIMES. BUT WHEN I SAY CYCLICAL CHALLENGE YOU ASKED ME ABOUT IT, IT IS A VERY PREDICTABLE CYCLE THAT THAT HAS. BEEN REINVENTED MANY TIMES, RUNS ALL NEW WORK LOADS, IN FACT. 60% OF THE MAIN FRAMES OUT THERE ACTUALLY RUN LINUX. YOU KNOW, VERY MUCH REINVENTED FOR THE FUTURE. BUT WHERE WE ARE RIGHT NOW IS THAT CYCLE BEFORE ITS NEXT LAUNCH OF A NEW PRODUCT. SO I CALL THAT CYCLICAL. BY THE WAY, I CONSIDER SOME OF THE GROWTH MARKETS AROUND THE WORLD TO BE CYCLICAL IN CHALLENGE RIGHT NOW.

FABER: AND THAT WAS A CONCERN I'M SURE THESE ARE THINGS YOU'RE GOING TO ADDRESS TOMORROW AT THE ANALYST DAY MEETING AND GET A LOT OF THOSE QUESTIONS FROM THE ANALYSTS –

ROMETTY: YEAH. YES AT INVESTOR DAY.

FABER: AND LISTENING TO AND READING THE TRANSCRIPT OF YOUR FIRST QUARTER ANALYST CALL, THE CFO OF COURSE HANDLES THAT. THERE WERE QUESTIONS ABOUT WHY IS CHINA SLOWING? BECAUSE OTHER COMPANIES AREN'T NECESSARILY SEEING THAT SAME KIND OF SLOWDOWN THERE OR SOME OF THESE OTHER GROWTH MARKETS YOU REFER TO DON'T SEEM TO BE GROWING. IS THAT A CONCERN?

ROMETTY: WELL, TWO THINGS. FIRST OFF,I SHOULD SAY THE GROWTH MARKETS MY VIEW FOR THE LONG RUN THEY ARE ABSOLUTELY THE RIGHT INVESTMENT. NOW YOU HAVE SOME DIFFERENCES. IN SOME OF OUR GROWTH MARKETS – MIDDLE EAST AND AFRICA, LATIN AMERICA – STRONG, STRONG GROWTH. NOW CHINA I WOULD PUT IN TWO WORDS, REFORM AND I WOULD PUT – IT'S REALLY THE INTERSECTION WITH OUR HARDWARE BUSINESS. SO SOME OF THE CHALLENGES WE TALKED ABOUT IN HARDWARE OF WHICH SOME ARE CYCLICAL AND SOME ARE SECULAR, BUT IF YOU LOOK AT CHINA, TWO THINGS. CHINA DOESN'T RESEMBLE OUR PROFILE THERE. DOESN'T LOOK LIKE THE REST OF IBM. AS I SAID LESS THAN 15%. CHINA'S MAJORITY HARDWARE. WHICH IS NOT ATYPICAL FOR A MARKET THAT'S REALLY DEVELOPING AND AS YOU PUT IN BIG INFRASTRUCTURE TO RUN BANKS, TELCOS, THAT'S WHAT A FOCUS IS. BUT ON THE OTHER HAND, AS YOU KNOW, AS THEY ROLL OUT SOME OF THEIR NEW REFORMS, WE'RE VERY CONCENTRATED IN THOSE BIG STATE OWNED ENTERPRISES. SO OUR JOB MOVE OUT INTO OTHER INDUSTRIES AS WELL.

FABER: RIGHT. SOFTWARE SALES. AN IMPORTANT PART OF THIS COMPANY. $29.1 BILLION. BUT AGAIN, TO THIS QUESTION OF GROWTH, WHICH IS A KEY ONE CERTAINLY FOR SO MANY PEOPLE, I BELIEVE THE SOFTWARE BUSINESS GREW 1.4% IN 2013. SLOWER THAN WORLDWIDE SOFTWARE SALES, SLOWER THAN SOME OF YOUR KEY COMPETITORS AS WELL. DO YOU BELIEVE THAT THAT IS CYCLICAL OR IS THAT SOMETHING THAT WE CAN EXPECT TO ONLY BE A SLOW GROWTH BUSINESS?

ROMETTY: OH, NO, NO. LOOK, YOU HAVE TO -- WHEN YOU LOOK AT OUR SOFTWARE BUSINESS JUST LIKE ALL OF THESE BIG BUSINESSES, THEY CONTAIN TWO PIECES OF THEM. THEY HAVE A PIECE THAT IS VERY HIGH GROWTH INTO THESE GROWTH INITIATIVES, AND THEN THE PART WHERE WE DO MISSION CRITICAL WORK FOR CLIENTS. THESE CORE FRANCHISES WHICH ARE REINVENTED, THEY ARE A WONDERFUL SOURCE OF VALUE TO CLIENTS. PROFIT FOR INVESTOR, PROFIT FOR US, RIGHT? IN ORDER TO REINVEST IN THE BUSINESS. AND IN SOFTWARE, YOU TAKE A LOOK, HIGH, HIGH DOUBLE DIGIT GROWTH IN SOME OF THESE KEY GROWTH AREAS BETWEEN SECURITY, WHAT WE'RE DOING WITH CLOUD, AND MANY OF -- WE OFTEN CALL IT KIND OF CODE WORD, IT'S CALLED BRANDED MIDDLE WARE. IT WAS 5% GROWTH AS AN EXAMPLE LAST QUARTER. AND THAT SHOWS YOU THAT IS, IN FACT, EVERYTHING BUT OPERATING SYSTEMS. SO VERY HIGH GROWTH, THINGS LIKE OUR SOFTWARE AS A SERVICE, SO IT'S A BLEND. THE MISSION CRITICAL AND THE NEW. AND THAT IS WHAT HAPPENS IN ALL OF OUR BUSINESSES. THAT'S HOW THIS IDEA OF CONTINUOUS TRANSFORMATION, THAT'S HOW THIS COMPANY IS GOING TO REINVENT – IT'S HOW IT'S ALWAYS REINVENTED ITSELF, HOW IT'S DONE IT THE PAST TWO DECADES AND HOW WE'LL DO IT AGAIN.

FABER: And when you talk about reinveNTION, YOU'VE BEEN RUNNING THE COMPANY NOW SINCE JANUARY OF 2012.

ROMETTY: YEAH.

FABER: IBM has successfully reinvented itself any number of times. Even, in fact, 100 years ago, when Watson Sr. took over, I think REINVENTION BEGAN.

ROMETTY: YES. Our founder, yeah.

FABER: It's an enormous organization.

ROMETTY: IT IS.

FABER: there're 430,000, 440,000 employees. What gives you the confidence that you can actually do what you need to do, in terms of, TO USE YOUR WORD, reinvent?

ROMETTY: I have unwavering confidence. it is, to me, IT IS very clear. And part of iT Is a very clear strategy. And I have got a world of confidence in the people in this company. I mean, this is-- at its heart, it's an innovation company. It's not a product company, it's an innovation company. They have reinvented before.We've moved the talent, we've moved the investment. And they reinvented again. And so I am very clear about that. Absolute, complete confidence. and you see it. And there's evidence, like I said. We were talking about the Cloud growth, we talked about BIG data analytics all around mobile social security. All those are there, plus the reinvention of those core franchises. And at the same time, we've placed some long term bets. Africa, as an example, and Watson for the long term.

FABER: Yeah, I wanT TO talk about both of those. We're goING TO take a break in a minute. But just on Africa. Africa?

ROMETTY: Yeah.

FABER: I mean, political instability and Africa go together. why do you believe that's a prudent investment for IBM?

ROMETTY: Well, oh boy. this is a great show in and of itself on Africa. But, remember, Africa's not one place. It's 54 countries.

FABER: OF COURSE.

ROMETTY: First mistake people make on Africa. We've been there since the '30s. But I really believe this is the next decADE – This decade approaching us is goING TO be the time that you're goING TO see Africa as the next frontier.

FABER: Why do you believe that?

ROMETTY: Well, just look at some of the fundamentals. You've got, believe it or not, over 400 companies, over $1 billion in size. You've got a workforce that, in the next 15 years, will exceed China's. If you take it middle class, bigger than India's already. And to your point, I mean, Africa will be a place and countries, two steps forward, one step back. But you do see government changes without political instability. So it is-- you see A various -- you know, in different degrees. You'll always still have issues. But boy, I am very bullish on the long term. and today, we now sit in almost 24 -- not almost. We sit in 24 countries. Started in four, went to eight, and all the way up to 24 countries we are across Africa today. And high growth.

FABER: High growth in that REGION. THAT PART OF THE WORLD.

ROMETTY: High growth. MIDDLE EAST AND Africa HIGH GROWTH.

FABER: Lots more to talk about, Ginni. So stay right there. Don't go anywhere.

ROMETTY: OK.

FABER: Ginni Rometty is, of course, our guest, chairman and CEO of IBM. We're gonna take a break here on "Squawk On the Street," AND continue our conversation.

ROMETTY: Great.

FABER: Welcome back to "Squawk on the Street." I'm David Faber here at Midtown Manhattan's the Digital Experience Lab, one of many actually that IBM has aroundthe world and we're joined again by the chairman and CEO of the company, Ginni Rometty. Nice to WELL, I DON'T NEED TO SAY NICE TO see you.

ROMETTY: YEAH. GLAD YOU ARE HERE.

FABER: Let's continue to have our conversation. I'd love to get sort of an investor focus on IBM because that's much of what our audience certainly focuses on. A CAPITAL allocation. For example, since I believe it's 2000, the company's generated or used $170 billion in cash. I mean, YOUR free cash flow generation is quite significant. But $108 billion of that was on net share repurchases. That's net, so not including what you issued for compensation and the like. $59 billion on CAPEX. I'm sure you've heard this criticism, Ginni, which is this company manufactures its earnings per share growth largely by significant buybacks of stock, not through actual growth.

ROMETTY: Listen, David, I think it's important-- this is actually an important topic to talk about because our earnings per share TO ME, they reflect the strength OF THE BUSINESs model we have. And I think the one number that's even more important is in that same decade, we spent $133 billion on R&D, on acquisitions and on capital together. So we're able-- I mean, when we look at what to do and in fact, I think that's what my job is, capital allocation, right, to the high value areas. I'm able to do R&D. We have not cut it back. I mean, my predecessors, myself, everybody has maintained BEcause we're at your heart, an innovation company, you don't cut it back. So through good and bad times. R&D, capital, acquisitions, $133 billion. And then we do dividends and we do share repurchase. and I tell you, our investors, I mean, of course, any individual one might have a debate of which one dividend share repurchase, right? But as we return value to them, those are important mechanisms. And we've got a lot of long term shareholders. And that's what they look for us to do, continue to move, manage it right for the long term. Keep moving it to higher value BEcause that's really what it is we're doing with all that investment. And we're also able, as you've said a second ago, I mean, I look at even-- and you look at last year, net income, operating net income, $18 billion, free cash flow $15 billion. We're able to do that. We're able to do the investments for today, for the long run, the future, and able to return VALUE TO SHAREHOLDERS.

FABER: Right. Well, last year as well, $13.9 billion in stock repurchases. To those who would say, "Well, why not invest more? Why not do a bigger acquisition? Why not spend even more on R&D, to make sure that that free cash flow generation that you're relying on in the future, to continue to fuel that repurchase is actually there?"

ROMETTY: If we needed more, we would invest more in other areas. So I FEEL very good that we've allocated a capital to where it returns, right? And so, big acquisitions that don't return, big acquisitions that fail, that's not a good thing to do. And so, I feel—WE'RE INTRUSTED.

FABER: YOU Don't DO big acquisitions. YOU DO SMALLER ACQUISTIONS.

ROMETTY: Yeah, several billion, billions IS A BIG SIZE FOR US.

FABER: It adds up, BUT YOU DON'T -- IBM does not do the big acquisitions. Why IS THAT?

ROMETTY: by design, actually. I mean we have done – BOY IN THE LAST DECADE, 150 acquisitions. So we are very much a serial acquirer. But very clear about do THem in strategic areas, intellectual property goes into our global distribution system, so it's very efficient. And we alWAYS do them around a core of a strategy. I think you'll find many companies fail when they try to acquire outside their core, take them into an entirely different space. That's not what we do. We pick the spaces we're going to be in. We invest in THem. And then we, in many – YOU KNOW, YOU fill in things around them with acquisitions. and that's what we did as an example with Cloud. And you and I were briefly talking earlier about Cloud. I feel very good about what we've done. And one of the acquisitions we made there, one of the big ones last year, was something called SoftLayer, that's right. And, you know, that is to me very wise. They were built bottom up, public cloud, for the enterprise. Enterprises have different requirements. Security, privacy, be able to audit, place THem in the data. I mean, the biggest things big companies care about on Cloud, big and any serious enterprise cares about where the data is. And then you have to be able to connect the new data out in the Cloud with data you already have, this world of hybrids. So we made an investment there, back to your question on capital. Big investment to buy SoftLayer, and it's been an outstanding success, married with the investment we'd already made in Cloud.

FABER: Right. Well, let's talk a bit more about Cloud because I think there is a perception out there. people think of for example Amazon Web Services. Somewhat of a commodity business. They're constantly lowering price. So how is IBM differentiated from that kind of a business that does not deliver, it would seem, the margin that you're talking about your Cloud business being --

ROMETTY: Yeah. Yeah, no listen, we've got again, very clear view of what Cloud for the enterprise is. And in fact, I think as you and I are speaking or announcing a big cloud-- another big cloud engagement with a company called NiSource. Big energy provider-- Midwest of this country. $600 million and it's a Cloud that is both their private cloud and our public Cloud. SoftLayer, working together and they're regulated. Yet, we understand how to operate in that environment. So Cloud for us and the difference between everyone out there-- and look, if we were a standalone company, we would be a big company at over $4.4 billion last year. But its infrastructure is a service, a platform is a service, software is a service, process is a service. And there's value at every one of those and good margin at every one of those, when those are all at steady state.

FABER: Back to the idea, overall, of sort of a capital allocation and where you are, you know, at this point. you're going to continue to buyback a lot of stock, it would seem. $8.2 billion in the first quarter of this year, in fact. And that may have been front end loaded. But we can expect that to be the case. And the roadmap, the 2015 roadmap. You know, I guess some wonder why are you sticking with those long term targets? Why the need to do that in such a dynamic world?

rometty: It's important. I mean, I think of that-- because what it is, that roadmap, it is a capital allocation plan. And our investors, they appreciate the transparency. They appreciate we manage it for the long term. And a part we didn't talk about, I'm equally diligent about our divestitures. You know, just in my time as CEO, I'll have divested $6 billion. So if it was a maniacal focus on just revenue growth, you wouldn't do that. But this is all about making the right portfolio changes. So remember, I do all those things. And then we talked about our dividend and our share repurchase. So you do the right R&D, you do the right acquisitions, make the right portfolio changes, the right divestitures. In fact, after I think over the last decade, by the time we finish up with the divestiture of our industry standard server business to Lenovo, over the last decade we'll have divested $18 billion of business.

FABER: Right. And you've obviously made a lot of acquisitions as well.

ROMETTY: And then we've made some as well, that's right. But that's all the go the future for higher values.

FABER: And what is-- well, then what is more important, revenue growth or margin growth?

ROMETTY: It's growth in the right places. And in margin -- margin improvements, always-- I define myself by my clients. What margin improvement is all about, it says you're taking the portfolio to a higher value over time. t's not about margin to take the same thing and just take profit out of it. This is because we're constantly reinventing it. And that is a really important part of our core franchises. And when I say to people, while there may be slower, in some cases declining growth, don't be confused. That doesn't mean they're not doing both mission critical and increasingly valuable work as-- within those, they get changed for this new world. So that's why growth in the right places, margin improvement moved to high value in the current core franchises.

FABER: Are you done sort of with the portfolio after the divestiture is completed of the low end server business to Lenovo, still waiting for regulatory approval but not far off, is that sort of-- is the portfolio where you want it to be?

ROMETTY: I would say-- I would always answer never, I mean, because it's continuous transformation. If I have learned anything in my decades with this company, it's constantly changing this company for the future. That's what I'm here for.

FABER: Finally, in the last minute we have, we can talk a little Wats.

ROMETTY: About Watson, yeah.

FABER: We were talking earlier. I don't think I could take Watson in Jeopardy. You know, I did win at Jeopardy, just so you know. But you are commercializing that?

ROMETTY: Yes.

FABER: In fact, you're opening a lab here in New York in the not too distant future, employing I think a couple thousand people.

ROMETTY: Couple thousand. Yes. Another $1 billion, yup.

FABER: you're investing a lot. Why?

ROMETTY: I mean, because we've made some big investments this year. Another $1 billion in Cloud data centers, $1 billion of a platform in Cloud, another $1 billion in Watson. Watson is the foundation for this next era because all this big data, you need systems that learn that you don't have to program. And there is no doubt in my mind, Watson will transform industries. We will contribute to transforming the face of health care.

FABER: What does that mean? Tell me what that means

ROMETTY: We will change the way health care is done, the way you do diagnosis and treatment of cancer. One of the big things we have been working on, in fact here in the city, Memorial Sloan Kettering, work we've done with MD Anderson, the work we've done with the Cleveland Clinic-- just to name a few in the health care area. But we are really, really making progress. And this is rolling out. So Watson, again, it's going to help diagnosis, pick the treatments. Think of it as an ability in natural language for any problem. Form a hypothesis and then test it and look for all the evidence in the world to prove it right or wrong. And that's an effect – now take that idea and apply it to lots of industries. That will change industry. And health care is one of the toughest ones we've picked on first to start with. I always say, "Well, we're only trying to solve cancer." I mean, we are contributing to many great professionals in the world who are trying to do this. And we are making some great progress. In fact, not too far from here the New York Genome Center, we also just did a partnership with them. Watson Genetics to cure brain cancer. So much more to come. The right long term bet.

FABER: And finally, tomorrow you'll be in front of investors and analysts. You know, I wonder, we've talked a good deal about your different constituencies. You've mentioned clients. Some would say, "Well, IBM seems to be focused so much more on pleasing their shareholders."

ROMETTY: oh no.

FABER: where do you put it? Which is it?

ROMETTY: No. I mean, look the ability to please your shareholders comes because of what you do for clients. Above and beyond, not only are we an innovation company, we are in service of our clients. As I tell all our folks, the only reason we exist, make no mistake, is our clients. And as a result of that and moving them to higher value over time, we are able to satisfy our shareholders. And so, two very, very important constituents Both of which i spend a lot of time with.

FABER: Well, we appreciate you spending time with us today. Thank you.

ROMETTY: Thanks.

FABER: Ginni Rometty, the chairman and CEO of IBM. Send it back to you, Simon.

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