IBM Earnings: Revenue Decline Translates To High Margins

IBM delivered earnings Monday that pleased investors despite falling revenues by validating the company's new focus on hybrid cloud and other emerging technologies.

While IBM's revenue growth remained flat even after upward adjustments for global currency translation costs and some business divestitures, the company's core IT initiatives, including its commitment to hybrid cloud platforms, showed promising growth, according to CFO Martin Schroeter.

IBM's net income fell 5 percent, to $2.4 billion, but operating profits were up by 4 percent -- more than Wall Street expected. Those financial results were "clearly the result of our long-term relentless shift to higher value," Schroeter told investors.

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As IBM continues "transforming our business to where we see long-term value in enterprise IT," Schroeter said, the technology giant will become a leaner, higher-margin business.

Big Blue increasingly looks like a vendor of software and services, which now represent 90 percent of the overall business. IBM has sold off much of its PC, commodity-server and chip-manufacturing divisions, businesses that "no longer fit our strategic profile," Schroeter said.

IBM has instead been investing in several "strategic imperatives": data, cloud, social, mobile and security solutions. Those "high-value solutions can grow faster than the market" because they represent differentiated offerings, he said.

Year-over-year revenues were up 30 percent among those businesses once Q1 numbers were adjusted to factor out declines because of currency rates and divested businesses.

Over the past five years, those areas have shown roughly 20 percent growth, according to the CFO, who added IBM expects the growth numbers to fall back in line with that long-term pattern.

IBM has developed "a strong point of view" he added, "that the value in cloud is hybrid." For that reason, IBM has been working on solutions that increase data portability across public and private environments to deal with data sprawl.

Cloud revenue, again adjusted, was up 75 percent year to year. That gives the company a run rate -- projecting the quarterly revenue to the full year -- of $3.8 billion for its cloud services business, a gain of $1.5 billion compared with the first quarter of 2014.

The SoftLayer public cloud business grew in "solid double digits" and added three international data centers. IBM's Software-as-a-Service offerings were up nearly 50 percent, and business analytics were up more than 20 percent, the CFO told investors.

Among the "bold moves" IBM has taken in recent months, Schroeter discussed a new hybrid cloud technology revealed in February, an Internet-of-Things initiative, and the recent launch of Watson Health.

IBM's mainframe business also performed well, with a hot rollout of its new z13 line.

Investors responded positively to IBM's earnings, lifting the stock 0.21 percent in after-hours trading to $166.16.

"It's quite a good start to the year, and obviously better than the mid-single-digit growth we discussed" the prior year, the CFO said.

Schroeter closed the call by saying IBM viewed the Q1 results as "another proof point" that it's pursuing the right strategy.