IBM Turns Corner With Newer Businesses -- WSJ

More than half of sales in latest quarter came from initiatives like cloud computing

By Micah Maidenberg 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 19, 2018).

International Business Machines Corp. said it generated more than half of its quarterly revenue from newer services such as cloud and artificial intelligence, a first for the venerable tech giant as it shifts away from equipment sales and other legacy businesses.

It was the third consecutive quarter in which IBM's revenue rose from the previous year, a feat that gives Chief Executive Ginny Rometty breathing room to execute a turnaround after a nearly six-year stretch of shrinking quarterly sales under her leadership.

Revenue in the second quarter rose 3.7% from a year earlier to $20 billion. Analysts polled by FactSet had expected $19.9 billion in revenue.

Ms. Rometty is trying to turn IBM around by pinning its future on a series of fast-growing businesses lumped under what the company calls strategic imperatives, including cloud computing, security and data analytics. Revenue from those offerings totaled $10.1 billion in the quarter, up 15% from a year ago.

"We've done the work to reposition our company," IBM finance chief James Kavanaugh said about its strategic-imperatives initiative. "We are seeing our investments in these high-value segments of the IT industry now paying off."

The Armonk, N.Y., company's profit rose 3.1% to $2.4 billion. Excluding special items, IBM had a profit of $3.08 a share. Analysts polled by FactSet were expecting an adjusted profit of $3.04 a share.

IBM shares, down 6% over the past year, rose 2.8% to $148.50 in after-hours trading on Wednesday.

Despite reporting higher revenue and profit in the latest quarter, IBM still faces challenges on several fronts. In its Cognitive Solutions segment, which includes services tied to the Watson supercomputer, sales fell 1% after adjusting for currency moves to $4.6 billion.

Mr. Kavanaugh told analysts during a conference call that the segment includes a transaction-processing software business tethered to mainframe products, and that its decline "wasn't unexpected."

Sales in Systems, a segment that includes the company's mainframe business, shot up 25% to $2.2 billion. Some observers believe the company will likely find it difficult to maintain that pace when a purchasing cycle for its mainframe products starts to wind down.

IBM's margins, another concern for shareholders, fell in the latest quarter. The gross profit margin of 46% compared with 46.5% in the year-earlier period.

The company said its pretax profit margin, a different profit measurement, widened in the period. During the conference call, Mr. Kavanaugh added that IBM expects to expand gross margins in its services businesses in the second half of the year.

IBM said it expects full-year earnings per share of at least $11.60, up 2 cents from its prior forecast. The company maintained its forecast for adjusted earnings of at least $13.80.

--Jay Greene contributed to this article.

Write to Micah Maidenberg at [e-mail]

(END) Dow Jones Newswires

July 19, 2018 02:47 ET (06:47 GMT)

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