IBM Revenues Up, Profit Margins Down

International Business Machines Corp. posted its second consecutive quarter of higher revenue after nearly six years of declines, a sign that Chief Executive Ginni Rometty’s slow-moving turnaround may be taking hold.

Revenue in the quarter rose in all of the company’s major business units. Still, the results underscored the fragility of IBM’s shift from older businesses supplying on-site technology to faster-growing businesses based on cloud computing. The quarter’s performance was plumped by sales of new hardware that analysts expect to eventually peter out. Profit margins, meanwhile, continued to narrow from a year earlier.

Cantor Fitzgerald analysts led by Joseph Foresi said in a Friday note that they were expecting IBM to report gains from companies upgrading to IBM’s latest mainframe computer, the z14. That product was highlighted as a growth driver for IBM’s Systems business in Tuesday’s statement.

But Systems revenue was pulled down by a decline in storage revenue, IBM chief financial officer James Kavanaugh said on a call with analysts following the earnings report. “It contributed to a modest shortfall to our own expectations of IBM’s revenue growth in the quarter, he said. Looking forward, Kavanaugh said the company has “all the confidence in the world” that it can get the storage business “back to where it needs to be” in the second half of the year.

IBM continues to seek growth from its strategic imperatives, which include social, mobile, analytics and cloud. In the fourth quarter that group contributed 49 percent of all revenue, and the Cantor analysts expected that balance to be unchanged in the first quarter. In fact, strategic imperatives came in below that, representing 47 percent of all IBM revenue. Big Blue had $4.2 billion in cloud revenue, up 20 percent.

Growth from the strategic imperatives category came in at 15 percent year over year, which is down sequentially from 17 percent year-over-year growth in the fourth quarter. “The value is so much about the strategic imperatives area, and that’s why I think this is a disappointment,” Daniel Ives, chief strategy officer of GBH Insights, said on CNBC’s “Closing Bell” on Thursday.

 

Keep those stops tight

Todd “Bubba” Horwitz