IBM results underline shift to cognitive services – and falling profits

IBM results underline shift to cognitive services – and falling profits

IBM’s Q1 2018 results reveal that cognitive and cloud services are leading overall revenue increases at the enterprise services giant. This is Big Blue’s second successive quarter of revenue growth after five years of declining sales.

IBM’s results beat earnings per share and revenue estimates, with its Cognitive Solutions division (including solutions and transaction processing software) bringing in $4.3 billion, a two percent year-on-year increase in constant currency terms.

Systems hardware and OS software also saw an uptick in revenues to $1.5 billion, an increase of four percent against the same quarter last year. However, cloud was the big winner, with total cloud services revenue up 20 percent year on year, at $17.7 billion.

IBM’s Strategic Imperatives division, which includes cloud, mobile and big data, saw $9 billion in revenues for the quarter, up 15 percent on the year, accounting for nearly half of all sales. However, with currency fluctuations, the underlying figure is closer to 10 percent revenue growth.

Strategic shift

IBM chair and CEO, Virginia Rometty

The change in IBM’s core business under Virginia Rometty’s leadership is clear: IBM has shifted its emphasis away from traditional services and infrastructure deployments and towards cognitive and cloud solutions.

To underline the point, Global Business Services revenue, including consulting, global process services, and application management, stood at $4.2 billion, representing a decline of one percent. Technology services and cloud platform revenue, including infrastructure/tech support services and integration hardware, also declined by one percent, to $8.6 billion.

“In the first quarter we maintained momentum in our business, with reported revenue growth in total and across our major segments,” said Rometty. “These results reinforce that our clients value our innovative technologies, our industry expertise, and our commitment and actions for the responsible stewardship of their privacy and data. This is also reflected in our leadership positions in enterprise cloud, AI, and security.”

Despite the overall good news and the move towards cognitive and cloud services, via offerings such as Watson and Watson Assistant, IBM’s profits are down, margins are slim, and Wall Street hammered the company in after-hours trading. Shares were down 7.8 percent on the day.

Overall, Big Blue pulled in $19.1 billion in Q1 sales, up five per cent on the same quarter last year, but significantly down on the $22.54 billion it brought in over the previous quarter. Currency fluctuations cancel much of that year-on-year growth, meaning that the underlying trend is flat.

In total, IBM made a Q1 profit of $1.7 billion, down four percent on the same quarter last year. Without a big tax benefit, the company might have missed estimates, according to one Wall Street analyst.

Earnings call

In an earnings call to analysts, Jim Kavanaugh, IBM’s SVP and CFO, said, “Our first quarter results reflect much of the work we’ve done to reposition our portfolio and our skills to address the secular trends in the market, led by the phenomenon of data.

“We’ve been building new platforms and solutions, while modernising existing ones, embedding cloud and AI into more of what we offer. And so, IBM is now a cognitive solutions and cloud platform company, focused on the high-value areas of IT. Our strategic imperatives revenue is an indication of our success in addressing these secular trends.”

Internet of Business says

While the revenue figures point to a modest success in cognitive services, and more notable successes in cloud, mobile, and big data, Wall Street remains unconvinced by IBM’s recent performance – partly because key metrics in its core business are down, while traditional bankers such as storage also saw a drop off in financial performance.

This is the challenge for any company that, like Microsoft and Dell, is repositioning its business for a fast-changing world of AI and IoT services. Without stellar numbers to back up that vision, investors will always be left clutching their wallets if traditional areas of the business are underperforming.