IBM Sees Q1 Growth in Key Focus Areas, Including Cloud

Despite another quarterly revenue drop, IBM said its transformation continues to pay off with strong growth in "strategic imperatives," including cloud, analytics and more.

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Although making progress in its key focus areas, IBM's first-quarter earnings dropped to $2.01 billion from $2.33 billion for the same period last year while revenues in this interval fell 2 percent from $19.6 billion to $18.7 billion.

The first quarter marks the 16th straight quarter that IBM's revenue has dipped, yet Big Blue remains steadfast in its effort to transform the company around a set of strategic imperatives that include cloud, analytics, security and more.

"We are pleased with the progress we have made helping our clients apply new cognitive solutions and hybrid cloud platforms," Ginni Rometty, IBM chairman, president and CEO, said in a statement. "IBM has established itself as the industry leader in total cloud, analytics and cognitive, all of which helped drive our strategic imperatives revenue growth at a strong double-digit rate, substantially faster than the market."

During a call with analysts to discuss the earnings, Martin Schroeter, senior vice president and chief financial officer, said IBM's first-quarter revenues from its strategic imperatives increased 14 percent year-to-year.

Total cloud revenues for the quarter increased 34 percent and IBM's cloud revenue over the last 12 months was $10.8 billion. The annual exit run rate for cloud delivered as a service—a subset of the total cloud revenue—increased to $5.4 billion from $3.8 billion in the first quarter of 2015, Schroeter said. Meanwhile, revenues from analytics increased 7 percent, revenues from IBM's mobile initiatives increased 88 percent and revenues from security increased 18 percent, he said.

Indeed, over the last 12 months IBM has earned $30 billion from its strategic imperatives, which accounts for 37 percent of IBM's revenue over that period, Schroeter said.

As IBM is emerging as a dominant cognitive solutions and cloud platform company, Big Blue has revised its financial reporting structure to reflect the transformation of the business. IBM's new business segments consist of Cognitive Solutions; Global Business Services; Technology Services; and Cloud Platforms, Systems and Global Financing.

Revenues for IBM Cognitive Solutions, which includes solutions software and transaction processing software, were $4 billion, down 1.7 percent. However, solutions software grew, led by security and analytics solutions, including strong growth in the Watson businesses.

Revenues for IBM Global Business Services, which includes consulting, global process services and application management, were $4.1 billion, down 4.3 percent. However, Schroeter noted that strategic imperatives revenues within the segment rose 19 percent and generated nearly half of this segment's revenue.

Revenues for the IBM Technology Services and Cloud Platforms segment, which includes infrastructure services, technical support services and integration software, were $8.4 billion for the quarter, down 1.5 percent. Yet hybrid cloud infrastructure engagements drove 41 percent growth in strategic imperatives revenues within this segment, Schroeter said.

For the IBM Systems segment, which includes systems hardware and operating systems software, quarterly revenues were $1.7 billion, down 21.8 percent. The results reflect the IBM z Systems mainframe product cycle dynamics, Schroeter said.

And revenues for the IBM Global Financing segment, which includes financing and used equipment sales, were $410 million, down 11.2 percent.

"IBM's transition to higher-value strategic imperatives, i.e., cloud, analytics, mobility, social and security (CAMSS) progressed in 1Q16, as the company continues to shed its traditional IT services baggage in favor of industry-focused, consulting-driven cognitive solutions," said Jennifer Hamel, an analyst with Technology Business Research.

Further, Hamel noted that traditional ERP implementations and IT outsourcing remained albatrosses preventing revenue growth in IBM's Global Business Services (GBS) and Global Technology Services (GTS) units.

"However, total services revenue performance continued to improve in 1Q16, declining only 2.3 percent year-to-year, the smallest year-to-year decline since 2013, signaling growth in strategic imperatives is coming closer to replacing losses in traditional services areas," she said.

Schroeter acknowledges that IBM's transformation will continue to take time.

"As we look forward, we expect much of what we saw in the first quarter to continue," he said during the call with analysts. "We expect to drive strong growth in our strategic imperatives. Our acquisitions are starting to contribute to our top line, and while they are a drag on profit in the first few quarters, they will certainly contribute to the profit base over time."