Despite Revenue Declines, IBM’s Strategic Initiative Focus To Pay Off

by Trefis Team
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IBM (NYSE:IBM) posted its Q2 results on July 18. In line with our expectations, IBM reported a slowdown in revenues as the shift to cloud computing and currency headwinds continued to plague the company. During the quarter, the company reported (on an adjusted basis) a 3% year-over-year decline in revenues to $19.3 billion (5% decline y-o-y). Furthermore, its consolidated gross margin declined by 230 basis points to 45.6% for Q2. Net income from continuing operations declined by 30 basis points to $2.31 billion in Q2 2017. The highlights of the results are as follows:

  • Revenues for Cognitive Solutions, which includes Solutions Software and Transaction Processing Software, declined by 2.5% (down 1.4% adjusting for currency) to $4.6 billion. The annuity business, which represents 80% of Cognitive solutions, was up 2% y-o-y, driven by 4.5% growth in Solutions Software. SaaS reported double digit growth in signings and revenue grew by 30% during the quarter.
  • Global Business Services, which includes consulting, global process services and application management, reported a 3.7% decline (down 1.7% adjusting for currency) in revenues to $4.1 billion. The company reported growth in new signings, which would boost revenues in the second half.
  • Revenues for Technology Services & Cloud Platforms, which includes infrastructure services, technical support services, and integration software, declined by 5% y-o-y (down 3.6% adjusting for currency) to $8.4 billion. The margin profile for this vertical improved, and the company also signed a number of contracts that will contribute to improved performance in the second half of fiscal 2017.
  • Systems revenues, which includes systems hardware and operating systems software, declined by 10.4% (down 9.6% adjusting for currency) to $1.7 billion. The revenues for this division declined, as its server products are in the last phase of its product cycle. Storage hardware reported 8% growth.

Despite the decline in revenues, the silver lining in the results was the 5% growth (up 7% adjusting for currency) in the strategic imperative. Strategic imperative revenues make up 43% of IBM’s total revenues, and over the trailing 12 months, revenues have grown to over $34 billion. [1] The company announced a host of initiatives that can boost revenues in the second half of 2017. Below are the key takeaways from the earnings announcement.

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Strategic Imperatives, Cloud Services To Boost Revenues

Over the past few years, IBM has been building its portfolio of services around strategic imperatives, which include analytics, cloud and mobile computing, security, and social media. These services are spread across IBM’s verticals, and have been the primary driver for revenue growth across divisions. A large portion of the strategic initiatives revenues stem from cloud services (SaaS), and IBM’s cloud revenue on a trailing twelve-month basis is now over $15 billion. That’s nearly 20% of IBM’s revenue.

The growth in strategic imperatives revenue was driven by increased adoption of new Cognitive Solutions offerings and capabilities related to the Watson platform, in particular Watson Health, Watson Financial Services and Watson IoT. Additionally, expanded partnerships played a role in the growth of these services as well.

 

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Notes:
  1. IBM Second Quarter 2017 Results []
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