IBM: Strong Q2 results – but cognitive and business services flat

IBM: Strong Q2 results – but cognitive and business services flat

Internet of Business says

IBM has revealed a stronger than predicted performance in its Q2 financials, which have been presented as a return to form after a slow start to the year, poor growth, and declining operating profit.

Overall, IBM reported growth of two percent in constant currency, with revenues up four percent year on year at $20 billion – ahead of analyst expectations – with a 1.1 percent improvement in net profit margins.

IBM’s strategic imperatives, such as cloud, mobile, and security, generated nearly half (48 percent) of those revenues, and were 12 percent up in constant currency.

Small print: not so good

However, the detailed results present a more complex and, in some ways, troubling story behind the headline figures. While quarterly systems revenue (systems hardware and OS software) soared by 23 percent year on year to £2.2 billion, the performance in other areas of IBM’s core business continued to be flat.

Global Business Services revenues – once the heart of the reinvented IBM – were flat at $4.2 billion, while technology services and cloud platform revenues were also flat, at $8.6 billion.

Significantly, cognitive services showed a one percent year-on-year revenue decline in constant currency, to $4.6 billion for the quarter, revealing that while IBM’s AI and transactions processing portfolio is now bringing in more money than Global Business Services, there is little evidence of stellar growth in this critical sector for IBM.

Under Virginia Rometty’s leadership, IBM has repositioned itself as an enterprise cognitive services provider, with Watson at the core of a range of vertical and horizontal offerings in the cloud.

Chief flag-waving officer

Despite this, IBM CFO Jim Kavanugh hailed the results, saying, “Overall, it was a good quarter. We grew revenue, operating gross profit, pretax income, and earnings per share with strong pretax margin performance.

“Revenue performance this quarter was led by security and cloud. Security was up about 80 percent this quarter, driven by strong demand for the pervasive encryption of IBM Z and growth in our integrated software and services business.

“Cloud revenue was up 20 percent – or 18 percent at constant currency – driven by our as-a-service offerings.

“We’re exiting the second quarter within ‘as-a-service’ with an annual run-rate of over $11 billion, which is up about 25 percent. This reflects our success in helping enterprise clients with their journey to the cloud, and we’re becoming the destination for mission-critical workloads in hybrid environments.”

AI, IoT, and blockchain

IBM continues to invest in AI, said Kavanaugh. For example, clients already using the new Watson Assistant offering include Bradesco, Orange Bank, Autodesk, Royal Bank of Scotland, Vodafone and LivePerson, he said.

“Watson is both a platform on its own and a driver of growth in differentiation in several of our industry verticals,” he explained. “Our industry verticals continue to scale, led by the IoT and Watson for financial services.

“In Watson Health, we had good performance in areas like payer and life sciences. And in emerging areas like blockchain, we’ve now seeded the market with over 60 active blockchain networks.”

This quarter, IBM launched the platform with nine banks, including Deutsche Bank, HSBC, KBC and Natixis. This was the first live blockchain-based bank-to-bank trading platform.

Meanwhile, IBM Digital and Mediaocean co-launched a blockchain consortium of advertisers and publishers, including Kellogg’s, Unilever, Kimberly-Clark, and Pfizer, with the aim of setting a new industry standard for digital ad-buying.

In May, IBM co-founded the MOBI blockchain consortium in the transport sector, alongside Ford, Renault, BMW, and GM. In the same month, it launched a blockchain system for trading carbon credits, with Veridium and Stellar.

“Growth in these areas is offset by a transition in some areas I talked about in April, specifically, talent, collaboration and commerce, which today are a combination of on-premises and SaaS offerings,” continued Kavanaugh.

“We are modernising our offerings and making investments to address the secular shifts in the market. Keep in mind, the time-to-value of these investments is longer in SaaS.”

Finally, IoT growth was driven by asset management solution Maximo, and facilities management system, Tririga, he said.

• IBM announced today that several new European clients have selected technologies from IBM Watson’s Internet of Things (IoT) portfolio. These include: Spanish electricity grid operator Red Eléctrica de España, for an intelligent asset management initiative; Italian elderly care provider Cooperativa Sole, for analysing data from wearable sensors; Dutch telecommunications operator Tele2, for a customer self-service app; and Israeli manufacturer Electra Group, for its smart air conditioning products.