IBM's Q2 Results Show Growth in Cloud, Cognitive

IBM sees yet another quarterly decline in the second quarter of 2016, but the company's cloud and cognitive computing efforts seem to be paying off.

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IBM has announced second-quarter 2016 earnings results, showing another quarterly revenue decline as the company continues to transform itself around strategic imperatives including cloud and cognitive computing.

For the second quarter, IBM generated $20.2 billion in revenue, down 2.6 percent from the same period a year ago. However, revenues from the company's strategic imperatives—cloud, analytics and engagement—increased 12 percent year to year, said Martin Schroeter, IBM senior vice president and chief financial officer, during IBM's earnings call with analysts.

Over the last 12 months IBM's strategic imperatives delivered $31 billion in revenue, and now represent 38 percent of the company. Growth was led by cloud. Cloud revenues—public, private and hybrid—for the quarter increased 30 percent. And cloud revenue over the last 12 months was $11.6 billion. Meanwhile, revenues from analytics increased 5 percent, revenues from mobile increased 43 percent and revenues from security increased 18 percent.

"IBM continues to establish itself as the leading cognitive solutions and cloud platform company, said Ginni Rometty, IBM's chairman, president and CEO, in a statement. "In doing so, IBM is pioneering new business opportunities beyond the traditional IT marketplace."

Rometty noted that IBM's second-quarter double-digit revenue growth in its strategic imperatives was driven by innovations in areas such as analytics, security, cloud video services and Watson Health—all powered by the IBM Cloud and differentiated by industry.

"And we continue to invest for growth with recent breakthroughs in quantum computing, Internet of things and blockchain solutions for the IBM Cloud," she said.

Schroeter said IBM is growing in the places where it is investing.

"In the first half of 2016, we grew our R&D investment, closed 11 acquisitions for more than $5 billion and invested nearly $2 billion in capital expenditures, while returning more than $4 billion to shareholders through dividends and gross share repurchases," Schroeter said in a statement.

Schroeter said looking at revenue from a segment perspective, the strongest growth came from IBM's Cognitive Solutions segment, led by the company's analytics and cognitive capabilities, and security. He noted that as IBM shifts its business overall, it's important to understand that the company is not simply moving into new spaces, but creating entirely new markets.

IBM is working to become a cognitive solutions and cloud platform company. IBM customers are looking to become digital businesses, and the company's cognitive solutions bring together digital business with digital intelligence to improve decision-making and add intelligence into all products and processes, he said.

"Like most other traditional IT vendors, IBM is attempting to transform itself to cope with fundamental shifts in its core businesses and markets," said Charles King, principal analyst at Pund-IT. "The process is not without pain but unlike many competitors, the company seems to be succeeding in its evolutionary effort."

King noted that, despite 17 consecutive quarters of decline, IBM's transformation is beginning to take hold.

"This is the third quarter in a row in which IBM's revenues and EPS (earnings per share) have beat analysts' estimates," he said. "Revenues from continuing operations were $20.24 billion versus street estimates of $20.03 billion, and EPS were $2.95 versus street estimates of $2.89 per share."

For its specific segments, IBM Cognitive Solutions generated revenues of $4.7 billion, up 3.5 percent. Cognitive Solutions includes solutions software and transaction processing software. Cloud revenue within the segment grew 54 percent.

IBM Global Business Services, which includes consulting, global process services and application management, saw revenues of $4.3 billion, down 2 percent. Yet, strategic imperatives revenue within the segment was up 14 percent.