IBM's 'Strategic Imperatives' Drive Transformation in Q3

IBM said its Strategic Imperatives—cloud, Watson and analytics, security, social and mobile technologies—drew $8 billion in Q3 of 2016, yet revenues were flat.

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Although IBM's third-quarter 2016 revenue was basically flat when compared with the same period a year ago, Big Blue saw significant improvement in its "strategic imperatives" plays.

In addition, IBM exceeded analyst estimates for both its earnings per share (EPS) and revenues. Wall Street analysts projected EPS of $3.23 and IBM delivered $3.29. Likewise, analysts projected revenue of $19 billion and IBM produced revenue of $19.23 billion for the quarter.

Moreover, IBM's revenues of $19.23 billion in the latest quarter fell from $19.28 billion in the third quarter of 2015. Net income in this interval fell to $9.01 billion from $9.4 billion.

However, revenue from IBM's "strategic imperatives"—cloud, Watson and analytics, security, social and mobile technologies—rose 16 percent to $8 billion in the recent quarter and amounted to $31.8 billion over the last 12 months. Those strategic imperatives now represent 40 percent of IBM's business, said Martin Schroeter, IBM's chief financial officer, during the company's earnings call with analysts.

IBM previously had predicted the company would cross the 40 percent threshold for its strategic imperatives by 2018.

"IBM's third-quarter performance, led by continued double-digit growth in our strategic imperatives, is a testament to our leadership in cognitive solutions and cloud," Ginni Rometty, IBM chairman, president and CEO, said in a statement. "Our ability to apply deep expertise and breakthrough technology, led by Watson and the IBM Cloud, to massive amounts of data is enabling us to build new markets and transform industries. Whether it is banks implementing IBM blockchain solutions, hospitals leveraging Watson to fight cancer, or retailers using cognitive apps built on the IBM Cloud to transform the customer experience, clients across all industries are tapping into a new kind of innovation value from IBM."

The big IBM transition continues as the company moves to higher-value business opportunities and manages to assist its customers in their own digital transformations. "Our clients are focused on becoming digital businesses, and our strong growth in cloud, security, mobile and across our analytics portfolio reflects this," Schroeter noted.

"The company enjoyed another solid quarter of earnings growth, beating the street for the fourth straight quarter and seeing continuing solid growth in its strategic imperatives," said Charles King, principal analyst at Pund-IT. "IBM Cloud was the star of the group with business growth of 44 percent and revenues over the trailing 12 months of $12.7 billion."

IBM's cloud "as-a-service" revenue annual run rate was $7.5 billion through the end of the third quarter, up from $4.5 billion through the third quarter of last year. Also during the recent quarter, IBM mobile revenues grew 19 percent; analytics revenues, including Watson, grew 15 percent to $4.7 billion; and security revenues grew 11 percent.

"Those successes reflect CEO Ginni Rometty's long-term strategic vision for the company, and also underscore the $12 billion in CapEx, R&D and acquisition investments the company made in the first three quarters of this fiscal year—which is more than it invested in all of 2015," King said. "Overall, IBM continues to grow and to be exceptionally profitable, along with being dedicated to returning profits to its investors. That's starkly different from what we're seeing at some of the company's competitors, notably HPE, which continues to shed business units and just announced another substantial round of layoffs."

Regarding the various business segments, IBM's Cognitive Solutions segment, which includes solutions software and transaction processing software, had revenues of $4.2 billion, up 4.5 percent over the third quarter of 2015. Cloud revenue within the segment grew 74 percent and Solutions Software grew 8 percent.

IBM Global Business Services had revenues of $4.2 billion, down 0.4 percent from the third quarter of 2015. Strategic imperatives revenue within the segment was up 13 percent. The company's Technology Services & Cloud Platforms, which includes infrastructure services, technical support services and integration software, had third-quarter revenues of $8.7 billion, up 2.4 percent from the third quarter of 2015.