Financial Performance

‘Strategic Imperatives’ Drive IBM’s Q2 Growth

"We've done the work to reposition our company. We are seeing our investments ... now paying off," CFO James Kavanaugh says.
Matthew HellerJuly 19, 2018

IBM’s “strategic imperatives” segment has passed a fiscal milestone, accounting for more than half of quarterly revenue for the first time as the company delivered a third straight quarter of revenue growth.

For the second quarter, IBM rose 4% to $20 billion, topping analysts’ estimates of $19.85 billion. The current growth streak follows five years of year-on-year revenue declines.

Earnings came in at $3.08 per share, excluding certain items, compared with expectations of $3.04 per share.

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Revenue from strategic imperatives — the fast-growing businesses including cloud computing, data analytics, and mobile services on which CEO Ginni Rometty has pinned her hopes for an IBM revival — grew to $10.1 billion, up 15% from a year ago. Over the past 12 months, the segment has accounted for 48% percent of total revenue.

“We’ve done the work to reposition our company,” CFO James Kavanaugh said in an earnings call. “We are seeing our investments in these high-value segments of the IT industry now paying off.”

IBM’s cloud revenue increased 20% for the quarter, coming in at $4.7 billion. The annual revenue run rate for cloud delivered as a service was $11.1 billion, up 26% year over year.

But sales from the Cognitive Solutions segment, which includes services tied to the Watson supercomputer, fell 1% to $4.6 billion after adjusting for currency moves.

Kavanaugh said IBM continues to expect to close out the year with at least $13.80 in adjusted earnings per share, slightly above the $13.78 per share that analysts had been expecting. In the second quarter, the company saw scale efficiencies as it increasingly focuses on cloud services, and in the second half of the year it will see more benefits from “workforce optimization,” the finance chief said.

“While it’s been an arduous, never-ending turnaround story at IBM with patience wearing thin among investors, the combination of massive cost-cutting, a myriad of sales force changes, significant investments in AI, and focus on driving big data, cloud and analytics sales is starting to resonate,” GBH Insights analyst Daniel Ives wrote in a note to clients.