IBM Revenue Lags as Cloud Pivot Remains a Challenge

By Asa Fitch 

International Business Machines Corp. reported another drop in quarterly revenue Wednesday as Chief Executive Ginni Rometty struggles to remake Big Blue for the modern computing age after more than seven years of leading the company.

Profit rose 3.9% to $2.5 billion as margins expanded, IBM said. Revenue, however, fell 4.2% from a year earlier to $19.16 billion, the fourth consecutive quarterly revenue decline.

IBM has trailed Microsoft Corp. and Amazon.com Inc. as customers race to do more of their computing in the cloud -- online services that free companies from the need to buy and maintain their own computers. As competitors report consistently strong revenue growth, buoyed by sales of their cloud services, IBM has absorbed a string of declines.

While IBM says its cloud business is growing -- cloud revenue climbed by 5% in the second quarter -- it is far behind the 41% annual cloud revenue growth Microsoft saw in its latest quarter.

Meanwhile, other parts of IBM's business are in a gradual decline. Revenue in the company's IT services division fell by 6.7% year-over-year in the second quarter as the company lost sales from lower-margin equipment it is transitioning away from.

The division that houses IBM's mainframe business also fell almost 20%, although it faced a tough comparison to last year, when the release of a new generation of those computers buoyed sales.

Ms. Rometty is now betting on IBM's $34 billion acquisition of open-source software giant Red Hat Inc. to seed a revenue rebound after earlier cloud deals like the $2 billion acquisition of Dallas-based SoftLayer failed to vault the company over the competition. The Red Hat deal, the biggest in IBM's history, closed earlier this month.

"That Red Hat acquisition will change the dynamics of our growth profile, and it will change the dynamics of our cloud growth profile overall," Chief Financial Officer James Kavanaugh said. The deal would boost revenues by two percentage points a year over the next five years, he said.

But on Wednesday, IBM said revenue fell, to a level in line with analysts' expectations. Profit rose to $2.81 a share. On an adjusted basis, earnings were $3.17 a share, which beat Wall Street projections.

Write to Asa Fitch at [e-mail]

(END) Dow Jones Newswires

July 17, 2019 16:38 ET (20:38 GMT)

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