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IBM Beats Expectations For Q2 As Revenue And Profit Continue Decline

Big Blue remains on pace for epic transformation, according to CFO Schroeter; stock creeps upward

Repeating what has become a familiar refrain in IBM's quarterly financial reports, CFO Martin Schroeter told investors during the vendor's second quarter earnings call Monday that plans for generational transformation of its business remain on track.

IBM reported $20.2 billion in revenue second quarter—or $2.95 per share—beating investor expectations of $20.3 billion, even as earnings dipped almost three percent from Q2 of 2015. That year-over-year decline continued a 17-quarter slide.

’We obviously finished right where we expected to finish,’ Schroeter said during the call.

In response to a question about the effect of the United Kingdom’s vote to leave the European Union, Schroeter said the so-called Brexit vote ’obviously didn’t help.’

[Related: Q&A: IBM's Watson Leader On 'Dark Data' And The Age Of Reason]

IBM shares rose more than 1 percent during $161.55 a share in after-hours trading.

IBM’s core businesses were flat from the previous fiscal quarter, but growth over Q1 came from the company’s often-touted ’strategic imperatives’—spearheaded by a cloud business that grew 30 percent with $3.4 billion in revenue.

Those strategic imperatives, including mobile, social and security in addition to cloud, together expanded by 12 percent year-over-year, and products delivered through an ’as-a-service’ model were up by more than 50 percent, Schroeter said.

A mix of acquisitions and organic growth accounted for those bright spots for the Armonk, N.Y.-based company, which has spent $5 billion so far this year to acquire 11 companies.

"In total, we got done what we set out to do," Schroeter said.

By taking in roughly $31 billion in revenue over the trailing 12 months, IBM’s emerging businesses are ahead of pace to meet a goal IBM set last year of deriving 40 percent of its revenue from strategic imperatives by 2018.

’Thirty-eight percent of our business is already there, and we got two-and-a-half years left to go,’ he said.


Healthy sales of cloud infrastructure and hosted services parallels the continuing decline in IBM’s legacy software business, but that’s to be expected as the market shifts, the CFO said.

The enterprise giant’s consulting and services divisions also have been a mixed bag, partially because of market pressure, partially because of what Schroeter called ’inconsistencies in execution.’

On the services side, through its Global Technology Services division, IBM did well in signing new customers, maintaining its current backlog of engagements.

’That profile is very consistent with what we’ve talked about in past,’ Schroeter said. ’Clients looking to move to hybrid cloud, looking to IBM to help develop and deploy the latest technologies, such as mobile.’

But the Global Business Services consulting division was lagging as customers appeared to be pulling back on enterprise-wide application deployment.

Still, Schroeter said the market is creating consulting opportunities.

As for the executional issues he alluded to, ’we take on some pretty complex projects for our clients, and sometimes we have to spend a bit more money than we thought to make it work as well as we want and make our clients happy,’ Schroeter said.

Margin declines across almost all its divisions were tempered by the strategic imperatives, which are more profitable than the core business, according to the CFO.

’I interpret that as the places we’re moving to, the places we’re building value for our clients, look like a pretty high-value marketplace and its one that we should continue to serve,’ Schroeter said.

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