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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.
IBM’s Q2 Results Show Growth in Cloud, Cognitive
IBM’s Technology Services & Cloud Platforms segment, which includes infrastructure services, technical support services and integration software, saw revenues of $8.9 billion, down 0.5 percent. However, growth of 35 percent in strategic imperatives revenue within the segment was driven by strong hybrid cloud infrastructure services performance.
The IBM Systems segment, which includes systems hardware and operating systems software, saw revenues of $2 billion, down 23.2 percent. And revenues from the IBM z Systems mainframes was down 40 percent, in line with the IBM mainframe product cycle, Schroeter said. Indeed, the Systems segment revenue always reflects z Systems product cycle dynamics. Moreover, gross profit margin improved in both z Systems and IBM Power systems.
And, finally, IBM’s global financing segment saw revenues of $424 million, down 11.3 percent.
Large companies are really hard to pivot, but if they weren’t pivoting they’d be in crisis, said Rob Enderle, founder of the Enderle Group and longtime IBM watcher.
“It takes some time for the new revenues to catch up with the losses from the old, but as time goes on the disparity between the base numbers balances out and we call the pivot done,” he said. “Right now IBM is effectively two companies—one growing and one in decline. And in IBM’s century of existence that has been the case a number of times. Such is the nature of long-term firms.”
Chris O’Malley, CEO of Compuware, which sells software to support IBM mainframe users and developers, said the good news about IBM’s earnings is that there was no real news on the mainframe.
“The mainframe continues to be a backbone of the worldwide economy and customers that have been historically dependent on the platform continue to be. Today their numbers for the IBM z were down some 40 percent, which was in line for this point in the cycle. But our new bookings for this quarter were up 20 percent,” he said, noting that the mainframe continues to be vibrant and that Compuware’s business follows behind IBM’s product cycle.
Meanwhile, despite a series of layoffs this year, IBM also added 30,000 new jobs during the first half of this year. In an email to IBM employees obtained by eWEEK, Rometty wrote:
“In the second quarter we also continued to make meaningful progress in how IBMers work and contribute to this success. With Checkpoint, all IBMers are getting and giving faster and more frequent feedback. 130,000 IBMers have been trained in agile, 70,000 IBMers have chosen to work with Mac products, and more than 250,000 IBMers are using Box. Almost all IBMers participated in Cognitive Build, helping 20,000 colleagues collaborate on nearly 3,000 cognitive start-up projects. And we continue to invest in our people, with IBMers benefitting from nine million hours of learning in the first half, and with more than 30,000 new IBMers joining the company.”
King said he believes IBM appears to be dealing effectively with the critical challenges coming from technological, economic and demographic shifts in its core businesses and markets.
For his part, IBM’s Schroeter said IBM’s “workforce rebalancing,” which is how IBM describes its layoffs, is about “rebalancing skills more than capacity reduction.”
IBM continues to overhaul its workforce to address the emerging demands of its customers as both IBM and its customer base transforms.
“They’re trying to change a tire in a moving car; it’s a hard effort that they’re trying to do,” O’Malley said.