IBM Falls Short In Q3, Snapping Its Growth Streak

IBM snapped its growth streak in the third fiscal quarter as sales slumped in some key segments, though its all-important cloud business across both products and subscription services continued to expand, according to financials released Tuesday.

After three previous quarters of growth, the technology stalwart fell short of expectations in quarterly revenue, partly due to a disappointing result in its cognitive solutions business.

CFO James Kavanaugh urged investors in an earnings call to take a longer view of the business, and he predicted the fourth fiscal quarter that started two weeks ago would return IBM to modest growth given a strong pipeline.

[Related: IBM Sees Cloud, Security Revenue Soar In Q2]

"We fundamentally have taken the actions to reposition our business," Kavanaugh said. "We've done the tough work to transform our portfolio."

IBM's overall revenue in the quarter that ended Sept. 30 came in at $18.8 billion, down two percent from the previous year, though flat when adjusted for currency fluctuations. The company netted $3.6 billion in operating income, or non-GAAP earnings-per-share of $3.42—beating estimates of $3.39.

Over the last 12 months, IBM's strategic imperatives of cloud, mobile, analytics and social generated $39.5 billion in revenue, contributing roughly 50 percent of the company's total sales. That illustrates a massive transformation over the last few years—in 2015 IBM set a goal of $40 billion in sales for those emerging categories, Kavanaugh said.

Cognitive solutions saw revenue of $4.1 billion—a 6 percent decline from the previous year that was tempered by growth in the Watson health vertical as well as security and some analytics solutions.

The shortfall in Cognitive resulted from disappointments in three applications: talent management, collaboration, and marketing and commerce. While those horizontals depressed revenue, the company saw strength in emerging technologies of security, Watson cognitive platform, and blockchain, the CFO said.

The Technology Services & Cloud Platforms category, Big Blue's largest segment that includes cloud infrastructure as well as technical support services and integration software, was down two percent, with $8.3 billion in revenue.

But Kavanaugh said cloud revenue alone grew in the quarter.

For the previous 12 months, total cloud sales notched $19 billion—20 percent higher than the same period of the previous year. That broke down to $8.1 billion in hardware and software for hybrid cloud environments, and $10.9 billion delivered on a subscription "as-a-service" basis.

Consulting was one area of strength in the quarter, with revenue growth and gross margin expansion in Global Business Services.

Kavanaugh said the company sees strong demand in its high-value segments, driven by IBM's offerings in hybrid cloud, security, digital, analytics and artificial intelligence.

Adoption of those technologies, he cautioned, is still in the early stages.

"Clients are early in their cloud journey and their needs are involving," Kavanaugh said.

Where initial adoption was driven by productivity improvements, enterprises are now shifting mission-critical business processes and apps to the cloud.

"This all needs to be optimized across public, private and on-prem, where many of the workloads will remain," he said.

IBM's approach to cloud, and AI, is summed up by "hybrid, secure and open," he said.

Kavanaugh also noted that IBM Cloud Private, launched one year ago to provide "a starting point for many companies as they embrace hybrid multi cloud strategy," has seen nearly 400 companies embrace that technology.

IBM is still adding cloud capacity as it expands its global data center footprint, go-to-market capabilities and hybrid cloud opportunities. That is evident, he said, by the introduction of IBM Multicloud Manager and AI OpenScale.

Shares of IBM were down roughly five percent in after-hours trading from a market close of $145.12.