IBM's Q3 gets boost from z System mainframe; As-a-service annual run rate hits $9.4 billion

IBM's results got a lift from an old standby--the mainframe--with a pervasive security twist.

IBM received a third quarter boost from sales of its new z System mainframe as well as businesses such as cloud and cognitive computing.

The company reported third quarter non-GAAP earnings of $3.30 a share on revenue of $19.2 billion, down 1 percent from a year ago. GAAP earnings for the quarter were $2.92 a share.

Wall Street was expecting IBM to report third quarter non-GAAP earnings of $3.28 a share on revenue of $18.6 billion. Analysts were expected to closely watch IBM's earnings quality.

But perhaps the biggest takeaway is that IBM's stronger-than-expected revenue got a boost from an old standby--the mainframe. IBM's latest z System is designed to bolster security and encrypt data in transit. That message is finding a market given the spate of data breaches. Customers were obviously interested as z System revenue was up 64 percent from a year ago.

CEO Ginny Rometty said z System adoption was "enthusiastic." At the heart of IBM Z is an encryption engine that will encrypt data associated with any application, cloud service or database.

Here's the overview by product line.

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In addition, "strategic imperatives" revenue represented 45 percent of IBM's sales. As-a-service revenue for IBM was on an annual run rate of $9.4 billion.

Patrick Moorhead, principal of Moor Insights and Strategy, said IBM showed improvements in strategic imperatives, but still can't juice revenue growth.

He added:

IBM isn't alone in the challenge of filling declining traditional enterprise revenue with "digital transformation" revenue like cloud, mobile, social, cognitive and security. HPE, Cisco Systems, and Dell EMC are in a very similar position, attacking the problem differently. Two interesting outliers were an only 3% growth in Cognitive and a positive 10% growth in Systems, attributed to new z Systems.

As for the outlook, IBM said it expects non-GAAP earnings of at least $13.80 a share with relatively flat free cash flow.

Martin Schroeter, IBM CFO, outlined the company's global performance:

We had sequential improvement in the year-to-year performance in all three major geographic regions. EMEA revenue performance improved 3 points from last quarter to down 1% in the third. We had year-to-year growth in Germany, France, Italy and Spain, mitigated by declines in the U.K. We recently signed largest services engagements to provide cloud and digital services to clients in the U.K., Germany and Spain. Our Asia Pacific revenue growth improved nearly 4 points and was up 2% year-to-year, with good growth in Japan and China. The Americas year-to-year performance improved nearly a point, driven by the U.S.
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By the numbers:

  • Cognitive solutions had revenue of $4.4 billion, up 4 percent from a year ago.
  • Global business services such as consulting revenue in the third quarter was $4.1 billion, down 2 percent. Consulting revenue related to cloud was up 10 percent.
  • Technology services and cloud platform revenue was down 3 percent from a year ago.
  • Systems revenue was $1.7 billion, up 10 percent. z System drove the growth as did storage. Systems hardware revenue was up 14 percent from a year ago. z System sales were up 64 percent from a year ago.

Schroeter added:

The mainframe is a great example of a core platform that we've continually modernized. And now with new capabilities like machine learning on z and pervasive encryption, it's been reinvented again for the cognitive and cloud era as well as an ideal platform for Blockchain.
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