Gross profit margins expanded to 47.4%, IBM said, a result of the company’s focus on exiting less-
attractive businesses. Mr. Kavanaugh said IBM made $575 million from long-planned asset sales in the
quarter, within the range of $500 million to $700 million the company earlier projected. But costs
including a legal ruling against IBM and payouts associated with a round of layoffs mostly outside the
U.S. at the end of June ate up most of those gains, he said.
By: Asa Fitch
Updated July 17, 2019 5:03 pm ET
International Business Machines Corp. {IBM -0.32%} reported another drop in quarterly revenue Wednesday, although the company’s rising profit exceeded Wall Street estimates and lifted its shares.
Profit rose 3.9% to $2.5 billion as margins expanded, IBM said, pushing its stock up more than 2% in after-hours trading. Revenue, however, fell 4.2% from a year earlier to $19.16 billion, the fourth consecutive quarterly revenue decline.
IBM has trailed Microsoft Corp. and Amazon.com Inc. as customers race to do more of their computing in the cloud—online services that free companies from the need to buy and maintain their own computers. As competitors report consistently strong revenue growth, buoyed by sales of their cloud services, IBM has absorbed a string of declines.
While IBM says its cloud business is growing—cloud revenue climbed by 5% in the second quarter—it is far behind the 41% annual cloud revenue growth Microsoft saw in its latest quarter.
Meanwhile, other parts of IBM’s business are in a gradual decline. Revenue in the company’s IT services division fell by 6.7% year-over-year in the second quarter as the company lost sales from lower-margin equipment it is transitioning away from.
The division that houses IBM’s mainframe business also fell almost 20%, although it faced a tough comparison to last year, when the release of a new generation of those computers buoyed sales.
Chief Executive Ginni Rometty is now betting on IBM’s $34 billion acquisition of open-source software giant Red Hat Inc. to seed a revenue rebound after earlier cloud deals like the $2 billion acquisition of Dallas-based SoftLayer failed to vault the company over the competition. The Red Hat deal, the biggest in IBM’s history, closed earlier this month.
“That Red Hat acquisition will change the dynamics of our growth profile, and it will change the dynamics of our cloud growth profile overall,” Chief Financial Officer James Kavanaugh said. The deal would boost revenues by two percentage points a year over the next five years, he said.
But on Wednesday, IBM said revenue fell, to a level in line with analysts’ expectations. Profit rose to $2.81 a share. On an adjusted basis, earnings were $3.17 a share, which beat Wall Street projections.
Gross profit margins expanded to 47.4%, IBM said, a result of the company’s focus on exiting less-attractive businesses. Mr. Kavanaugh said IBM made $575 million from long-planned asset sales in the quarter, within the range of $500 million to $700 million the company earlier projected. But costs including a legal ruling against IBM and payouts associated with a round of layoffs mostly outside the U.S. at the end of June ate up most of those gains, he said.
IBM executives point to bright spots in the growth of cloud services and tout the future of its artificial intelligence business. The company wants to be at the center of companies increasingly using AI to run their operations.
Ms. Rometty took the helm in early 2012, when IBM was under pressure to meet a tough earnings-per-share target set by her predecessor, Sam Palmisano. The company bought back billions of dollars worth of shares and sold off underperforming assets in its bid to meet that goal, but Ms. Rometty ultimately sc-apped the program in 2014 as it became clearer that the company needed to invest in a more radical transition to stay competitive.
IBM had raked in cash from long-term deals with big companies to supply them with hulking mainframe computers, plus IT support and consulting to go along with them. The transition to cloud computing meant companies needed less hardware and would pay for only the computing power they needed.
IBM’s revenue started declining from almost the start of Ms. Rometty’s tenure at the helm, and fell year-over-year for 22 straight quarters. The company appeared to have turned a corner when it posted growing revenue for three quarters starting in late 2017, but that rise was due largely to sales of a new generation of mainframes, and it proved temporary. The revenue declines started again in 2018 and have persisted since.
The company is now trying to revive revenues and distinguish itself from the competition by focusing on what it calls the hybrid cloud, a model where companies do some of their computing in the cloud but keep their most sensitive data in-house.
The hope is that the acquisition of Red Hat, which sells support for a version of the open-source Linux operating system, will boost IBM in the hybrid cloud arena because Red Hat software is at the core of many customers’ IT infrastructure. IBM and AT&T Inc. announced a multibillion-dollar alliance this week in which Red Hat featured prominently, the first such deal since the Red Hat acquisition closed.