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IBM’s Turnaround Shows Some Promise

Posted on Thursday, Jul 21st 2016


IBM’s (NYSE: IBM) revenues continued to decline for the seventeenth straight quarter, but the general sentiment is that it seems to be making progress in its strategic turnaround and its stock is trading close to its 52-week high. IBM has been moving away from computer hardware sales and reorganizing its portfolio to focus on “strategic imperatives” like the cloud, analytics, and mobile computing.

IBM’s Financials

IBM’s second quarter revenues declined 3% over the year to $20.2 billion, ahead of analyst expectations of $20.03 billion. EPS of $2.95 was also ahead of the estimates of $2.89, but it was down 23% over the year.

By segment, the strongest growth came from cognitive solutions led by its analytics and cognitive capabilities and security with recent acquisitions providing some lift. Revenues from Cognitive Solutions (including Watson) was $4.7 billion, up 3.5%, Global Business Services was down 2% to $4.3 billion, Technology Services & Cloud Platforms declined 0.5% to $8.9 billion, and Global Financing was down 11.3% to $424 million, while Systems revenues reported the biggest decline of 23.2% to $2 billion.

IBM is continuing to see strong traction from its cloud-based investment strategies. During the quarter, strategic imperatives revenue was up 12% to $8.3 billion. Cloud revenues (public, private and hybrid) for the quarter increased 30% and over the trailing 12 months was $11.6 billion. The annual run rate for cloud as-a-service revenue increased to $6.7 billion from $4.5 billion a year ago. Among other strategic investments, revenues from analytics increased 5%, mobile grew 43%, and security increased 18%. Strategic imperatives revenue over the last 12 months was $30.7 billion, accounting for 38% of IBM’s revenues driven by the growth in cloud. IBM is targeting to grow this segment to $40 billion by 2018.

For the current year, IBM had projected an EPS of at least $13.50 while analysts expect earnings of $13.49. Last quarter, CFO Martin Schroeter had said that he expected the company to produce between 38% and 39% of the full-year profit during the first half. IBM has now generated just over 39% of its full-year earnings guidance in the first half, meeting the target set out. As a result, investors seem more optimistic about its turnaround.

IBM Continues Its Watson and Blockchain Push

IBM has been growing and broadening the reach of Watson with new capabilities, partnerships, and engagements to accelerate adoption. During the second quarter, IBM announced Watson for cyber security, a new cloud-based version of its cognitive security solutions. It also introduced Watson Company Analyzer, which helps companies reduce the time and effort required to collect, digest, and synthesize information for building strategic business relationships and understanding competitive market spaces.

In June, IBM introduced Watson Ads, which leverages the weather platform from its recent acquisition of The Weather Company’s Product and Technology Businesses. Consumers will be able to interact with IBM Watson through advertising, by asking questions and receiving relevant product information. Campbell, Unilever, and GSK Consumer Healthcare are among its first clients.

IBM also extended its cloud innovations available on Bluemix, including the first Apache Spark development environment for data scientists to analyze Big Data more quickly and easily. It announced blockchain agreements with banks such as Mizuho and Crédit Mutuel Arkéa and opened a Bluemix garage in New York City to help financial services clients rapidly design, build, and pilot their own blockchain solutions as well as other emerging FinTech applications and services.

IBM’s Recent Acquisitions

In the first half of 2016, IBM closed 11 acquisitions for more than $5 billion. These include Israel-based application discovery company EZSource to speed up cloud deployment, Resilient Systems for its incident response platform to build on IBM Security’s capabilities, digital agency to extend IBM iX’s design experience, Salesforce’s top consulting partner Bluewolf to deliver differentiated, consumer-grade experiences via the cloud, and SaaS systems integrator Optevia to help IBM provide CRM SaaS solutions. Optevia specializes in Microsoft Dynamics CRM solutions for public sector organizations and could probably help in IBM’s new deal with Microsoft.

IBM’s Deal with Microsoft

IBM and Microsoft recently announced a new partnership, wherein IBM will develop new business applications for the Microsoft Surface tablets and Surface Book laptops for its large enterprise customers. The first few Surface solutions will focus on providing apps for financial services and packaged consumer goods. This is similar to the deal IBM had with Apple and is a lucrative win for it.

Its stock is currently trading at $161.43 at a market cap of $155 billion. Its 52-week low was $116.90 and 52-week high was $163.07.


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