IBM posts disappointing revenue results for Q2

The company's critical "strategic imperatives" investments brought in $8.8 billion in revenue for Q2, representing 7 percent year-over-year growth.

IBM's mainframe: A long-evolving system

IBM reported its second quarter financial results Tuesday, with earnings that beat market expectations and revenues that fell short.

The tech giant's non-GAAP net income came to $2.8 billion (down 2 percent year-over-year), or non-GAAP earnings of $2.97 per share. A year prior, earnings came to $2.95 per share. Revenues for Q2 2017 were $19.29 billion, compared with revenues last year of $20.2 billion.

Wall Street was expecting earnings of $2.75 per share on revenue of $19.5 billion.

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IBM senior vice president and chief financial officer Martin Schroeter noted in a statement that strong free cash flow generation allowed the company to continue strong R&D investment levels. Additionally, the company returned more than $5 billion to shareholders through dividends and gross share repurchases during the first half.

IBM's critical "strategic imperatives" investments across business segments, which include areas such as AI and cloud computing, brought in $8.8 billion in revenue, representing just 7 percent year-over-year growth adjusting for currency.

The company noted that strategic imperatives revenue comes to $34.1 billion over the trailing 12 months, up 11 percent (up 12 percent adjusting for currency), now representing 43 percent of overall IBM revenue.

Investors have been waiting to see "strategic imperatives" start paying off with growth in the high teens, in order to make up for IBM's weakening legacy businesses.

IBM's cloud revenue came to $3.9 billion for Q2, up 17 percent year-over-year adjusting for currency.

CEO Ginni Rometty stayed upbeat about IBM's continued growth in cloud and its investments in other strategic imperatives.

"In the second quarter, we strengthened our position as the enterprise cloud leader and added more of the world's leading companies to the IBM Cloud," she said in a statement. "We continue to innovate, adding regtech capabilities to our portfolio of Watson offerings; developing solutions based on emerging technologies such as Blockchain; and reinventing the IBM mainframe by enabling clients to encrypt all data, all the time."

On a conference call Tuesday, Schroeter cited some of IBM's recent wins in the cloud market, such as the 10-year agreement it signed with Lloyd's Banking Group, one of IBM's largest cloud agreement ever.

Schroeter said its cloud business will benefit from Watson services that enable businesses to exploit and search through the vast majority of data that's enterprise-owned. "Enterprises will move to cognitive on the cloud with someone they trust," he said.

He added that IBM's strategic imperatives revenue should accelerate in the second half of 2017, thanks to IBM's new mainframe and new service contracts that are largely cloud contracts.

IBM's earnings land as the James Kisner, an analyst at Jefferies, questioned whether the company can genarate shareholder value with Watson. Kisner's argument was based on IBM's need for consulting to implement Watson. He also noted that IBM is hiring less AI talent and enterprises increasingly have options to connect to the likes of Amazon Web Services, Microsoft Azure and Google Cloud Platform.

In a 53-page research report, Kisner said:

Our checks suggest that while IBM offers one of the more mature cognitive computing platforms today, the hefty services component of many AI deployments will be a hindrance to adoption. We also believe IBM appears outgunned in the war for AI talent and will likely see increasing competition. Finally, our analysis suggests that the returns on IBM's investments aren't likely to be above the cost of capital.

Breaking down segment results for Q2:

  • Cognitive Solutions (includes solutions software and transaction processing software) brught in revenues of $4.6 billion, down 1.4 percent adjusting for currency.
  • Global Business Services (includes consulting, global process services and application management) posted revenues of $4.1 billion, down 1.7 percent adjusting for currency.
  • Technology Services & Cloud Platforms (includes infrastructure services, technical support services and integration software) had revenues of $8.4 billion, down 3.6 percent adjusting for currency.
  • Systems (includes systems hardware and operating systems software) brought in revenues of $1.7 billion, down 9.6 percent adjusting for currenc).
  • Global Financing (includes financing and used equipment sales) had revenues of $415 million, down 1.7 percent adjusting for currency.

While quarterly revenues were down compared to last year, IBM maintained its full-year non-GAAP earnings forecast of at least $13.80 per share.

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