IBM Reports Modest But Organic Gains Across Cloud And Other 'Strategic Imperatives' As Revenue Again Declines

Cloud and other "strategic imperatives" became an even bigger component of IBM's overall business in the second quarter of 2017, but declining legacy products slumped sales for the 21st straight quarter, the company reported Tuesday.

CFO Martin Schroeter told shareholders during IBM's second-quarter earnings call that gains across cloud, analytics, mobile, social and security, while more modest than in recent quarters, were entirely organic, with a spate of recent acquisitions now fully absorbed by the company.

But IBM, based in Armonk, N.Y., is "not out of the acquisition business" and is "still active acquirers," Schroeter said. "We're just getting our feet under us for everything we've done in the last 18 months."

[Related: IBM Reports 20th Straight Quarterly Revenue Drop, While Cloud Computing Grew 33 Percent]

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Big Blue recently entered a definitive agreement "with a large telco" to acquire that company's cloud and hosting capabilities, he said.

IBM's total second-quarter revenue came in at $19.3 billion, down 5 percent year over year without adjustments for currency fluctuations. But while sales fell short of expectations of $19.46 billion, the company at the same time proved more profitable than investors expected.

Earnings per share of $2.97 beat the $2.74 predicted by analysts, according to Thomson Reuters.

The strategic imperatives of cloud, analytics, mobile, social and security accounted for 43 percent of all IBM revenue in the quarter that closed at the end of June, growing year over year by 7 percent.

Those next-generation technologies should be thought of not as "separate businesses" but "signposts" that cross all IBM product lines, Schroeter told investors.

Schroeter said he expects the year to end, just as last year did, with double-digit growth in those services.

The new Z14 mainframe that delivers a "breakthrough in pervasive encryption" was introduced after the quarter closed. That product, coupled with signings ramping over the last two quarters, should give a boost to strategic imperative sales in the second half of the year, he said.

Over the last 12 months, IBM has sold more than $34 billion across the strategic imperatives it views as the company's future. And 30 percent of those next-generation technologies are delivered as a service, contributing to an $8.8 billion run rate in that category at the end of the quarter.

The overall cloud business, hosted and on-premises, delivered $15.1 billion in revenue over the last 12 months, Schroeter said, a 15 percent jump over the same quarter of the previous year.

And cognitive solutions delivered as part of the Watson platform took in $4.6 billion in revenue, 80 percent of which came from subscriptions. That was a tick down from the same quarter of the previous year.

IBM stock closed Tuesday at $154 per share, but fell more than 3 percent in after-hours trading after the financials were made public.