IBM Earnings: Revenues Stabilize As Strategic Imperatives Gain Traction

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IBM (NYSE:IBM) posted its Q3 results on October 18. For the first time in several quarters, IBM’s revenues stabilized as the shift to cloud computing continued. During the quarter, the company’s revenues stabilized at $19.2 billion while its consolidated gross margin declined by 100 basis points to 45.9% for Q3. Furthermore, income from continuing operations declined by 6% to $3.07 billion. Net income from continuing operations declined by 4% to $2.72 billion in Q3. The highlights of the results are as follows:

  • Revenues for Cognitive Solutions, which includes Solutions Software and Transaction Processing Software, grew by 4% to $4.4 billion. The growth in Cognitive Solutions was largely organic. Both the annuity and transactional subsegments reported growth. Additionally, the SaaS business saw double-digit growth in signings and revenue during the quarter.
  • Global Business Services, which includes consulting, global process services and application management, reported a 2% decline in revenues to $4.1 billion. The company reported growth in new signings, which should boost revenues in the ensuing quarters.
  • Revenues for Technology Services & Cloud Platforms, which include infrastructure services, technical support services, and integration software, declined by 4% y-o-y to $8.5 billion. The margin profile for infrastructure services improved, which should bode well for the company in the future. Furthermore, the company reported 25% growth in signings as momentum in its cloud services continued.
  • Systems revenues, which includes systems hardware and operating systems software, grew by 10% to $1.7 billion. Furthermore, margins for the division improved as its newly refreshed Z-systems witnessed strong adoption. However, Power servers continued to report a decline, and a product refresh (next-gen POWER9) in Q4 is expected to reverse the trend in the following quarters. Storage hardware reported 4% growth in revenues driven by double-digit growth in high-end product lines and all-flash array offerings.

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Strategic Imperatives, Cloud Services Continue To Boost Revenues

Strategic Imperatives revenues make up 45% of IBM’s total revenues. In the trailing twelve-month (TTM) period, revenues from these verticals grew to $35 billion. 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.

IBM continues to build its portfolio (of products and services) around these services, 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 TTM basis is now close to $16 billion.

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