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IBM Breaks Revenue Slump With Growth In Cloud Services, New Mainframes And Power Architecture Systems

After 22 quarters of uninterrupted decline, IBM's fourth quarter finally delivered growth. Cloud and security were strong performers among the company's "strategic imperatives."

After more than five years of uninterrupted business contraction, IBM on Thursday reported a quarter of growth spurred by its cloud portfolio and new mainframes and processors.

Jim Kavanaugh, a 21-year IBM veteran who took the position of CFO last week, in the Q4 earnings call told investors Big Blue was becoming more efficient with scale, which in turn yielded greater profitability.

"We've been doing a lot of work to reposition our business, to move our customers to the future," Kavanaugh said. "Our results for 2017 reflect that with an improvement in our revenue and our gross profit trajectory in the second half."

[Related: Report: IBM Considering 30 Percent Reductions In Global Technology Services Staff, Redeploying Thousands Of Services Professionals]

Not all divisions performed as well as the tech stalwart had hoped, with its analytics portfolio notably delivering disappointing numbers. But the first mainframe to offer pervasive encryption, the z14, and a line of servers running the new Power9 microprocessors, lifted IBM revenues to $22.5 billion, up roughly 4 percent year-over-year, or 1 percent when adjusted for currency fluctuations.

While IBM, based in Armonk, N.Y., broke a streak that had long caused anxiety among its shareholders, trading of its stock didn't reflect that development. Shares fell after hours, from $169.12 at market close to below $164 at the time of this publication.

Martin Schroeter, the previous CFO who has since been named senior vice president of IBM Global Markets, said on the earnings call that IBM delivered on a pledge made back in July to improve its trajectory in the second half of the year.

That improvement, both in revenue and gross margins, came by ramping the cloud and services businesses, reinventing systems brands, and improving the performance of consulting divisions, Schroeter said.

IBM's overall revenue for 2017 was $79 billion. Non-GAAP earnings per share were $5.18 for the quarter ending on Dec. 31, beating analyst expectations by a penny, according to Thomson Reuters.

While analytics were a disappointment, other products constituting the "strategic imperatives" by which IBM is transforming the company delivered strong results.

The cloud business alone grew by 24 percent from 2016, accounting for $17 billion of IBM's 2017 revenue.

Security was another big contributor in Q4, largely due to the z14 mainframe, which is the first computing system ever on the market capable of encrypting all data all the time. That dynamic demonstrates how the success of the systems business—particularly the z14, Power9 architectures and storage solutions—is closely linked to the demand for the strategic imperative products, Schroeter said.

Over the full year, those product categories—cloud, analytics, mobile, social and security—delivered $36.5 billion in sales, or 46 percent of IBM's annual revenue.

The strategic imperatives will continue to grow "as we embed cognitive and cloud in more of what we offer," Schroeter said.

Software-as-a-Service was another area that performed well in Q4, and with scale will continue to improve its margins.

"We're moving our whole services platform onto the IBM cloud and that's going to deliver us the scale we need to deliver SaaS as efficiently as possible," he said.

Growth in the quarter was largely organic, Schroeter said, adding "in 2018, we'll maintain a high level of investment."

IBM is pouring money into developing technologies, especially artificial intelligence for its Watson platform, cloud, security and blockchain, he said.

"We will continue to invest at a high level to drive the strategic growth initiatives," Kavanaugh, the new CFO, pledged.

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