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IBM Q4 Earnings Revisit A Familiar Theme -- Transformation

CFO Martin Schroeter steered attention toward growth of 'strategic imperatives' as the overall business contracted.

IBM summed up its 2015 financials Tuesday in a Q4 earnings report that, like the several that preceded it, was squarely focused on the theme of transformation.

CFO Martin Schroeter told investors that 2015 was a year in which Big Blue made a good amount of progress toward its goal to "emerge as a cognitive solutions and cloud platform company."

"We manage our business for the long term," Schroeter said after presenting Q4 revenue figures that were down 9 percent year over year, and earnings numbers that were down 17 percent.

[Related: IBM Reduces Guidance In Q3 Financial Report Amid Transformation To Cloud Era]

Despite the reported decline in sales, the tech giant based in Armonk, N.Y., edged above investor expectations by 3 cents a share. The stock nonetheless dipped 1.45 percent in after-hours trading.

Schroeter again made the case for investors to judge IBM not by the annual profit contraction of 13 percent, but on the performance of technologies the company has declared to be "strategic imperatives."

Big data, analytics, cloud, mobile and security -- those are "areas our clients are looking to us to help move them to the future," Schroeter told investors.

The transition to that revamped model is accelerating, he said, with strategic imperatives growing faster than in previous years as IBM chases a goal of 40 percent growth in those businesses.

While IBM's overall revenue growth was a little worse than stagnant in 2015, those cutting-edge sectors did 26 percent more business than in the previous year.

The strategic imperatives now constitute 35 percent of IBM's overall revenue, Schroeter told investors.

"Our clients are investing in growing areas of cloud, of analytics, mobile, social and security," Schroeter said. "Our client discussions today are still built around that shift into those parts of the business."


Those client discussions revolve around what Schroeter described as "two halves" of IBM's business: moving them to the future and helping them drive productivity.

IBM's diverse cloud portfolio now constitutes a $10 billion business. Whether through as-a-service products, or by selling organizations infrastructure to build their own clouds, or via the hybrid model that most companies prefer, "we're leading that move" to cloud, he said.

Total cloud revenue was up 57 percent, and the as-a-service component spiked by 61 percent, to $4.5 billion for the year.

IBM made seven cloud acquisitions in 2015, including Cleversafe, Clearleap and Gravitant. The company also invested $1 billion in capital to scale its SoftLayer footprint to 46 cloud data centers.

IBM's profits and margins reflect that shifting portfolio -- strategic imperatives need time to scale to realize their potential for profitability, Schroeter told investors.

Right now, "the margin profile for the bulk of that business," Schroeter said, "it just looks like our existing margin profile." And margins are even slightly lower than the norm for as-a-service products.

And while Software-as-a-Service revenue was a small percentage of IBM's overall software sales, it's growing fast. The software share of strategic imperatives is twice what it is for IBM's core business, the CFO said.

Analytics was another bright spot for IBM, with almost $18 billion in revenue. That business will grow as the company extends Watson Health and Watson Internet of Things, Schroeter said.

And IBM is actively pursuing new opportunities, he told investors, as illustrated by the year's 14 acquisitions.

Returns on those investments are encouraging, proving the strategy, he said.

PUBLISHED JAN. 19, 2016

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