IBM International Business Machines Corp

By Ted Greenwald 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 18, 2018).

International Business Machines Corp. posted its second consecutive quarter of higher revenue after nearly six years of declines, a sign that Chief Executive Ginni Rometty's slow-moving turnaround may be taking hold.

Revenue in the quarter rose in all of the company's major business units. Still, the results underscored the fragility of IBM's shift from older businesses supplying on-site technology to faster-growing businesses based on cloud computing.

The quarter's performance was plumped by sales of new hardware that analysts expect to eventually peter out. Profit margins, meanwhile, continued to narrow from a year earlier.

Revenue rose 5% to $19.07 billion from a year earlier, its strongest gain for the top line since the third quarter 2011. As in the previous quarter, though, adjusting for currency-exchange rates tells a different story. Stripping out the impact of foreign exchange, IBM said revenue was flat.

Several quarters ago, the company found itself on the other side of the issue, where unfavorable rates made IBM's revenue declines steeper than they appeared when adjusted for currencies.

Profit fell 4% to $1.68 billion. Shares of the tech giant sank 5.7% in after-hours trading, after closing up 1.9% at $160.91. The stock has lost 6% in the past 12 months, even as the S&P 500 index has risen 15%.

The stock market reacted to overoptimism arising from IBM's revenue turnaround in the fourth quarter, said Daniel Ives, an analyst with GBH Insights. "Ultimately you'd call it a good quarter, but the bulls were looking for more," he said.

Ms. Rometty has been working to turn around IBM almost since the moment she took over from Sam Palmisano in 2012, as the emerging industry of cloud computing ate away at IBM's business of managing information technology in customers' facilities.

She has refashioned IBM as a cloud provider, seeking to differentiate the company's offerings from lower-cost competitors through buzzy technologies such as its artificial-intelligence tools and blockchain, a decentralized way to execute and track transactions.

IBM expects these offerings, which it calls strategic imperatives, to grow more rapidly than its legacy businesses are shrinking, propelling IBM to faster revenue growth as they come to constitute a bigger portion of overall sales.

The company said strategic-imperatives revenue reached $37.7 billion, making up 47% of its revenue over the past 12 months, and remains on track to reach $40 billion by the end of the year.

"The overarching message," IBM finance chief James Kavanaugh said, "is that we grew revenue, stabilized our gross margin across all our lines of business and grew operating profit, cash, and earnings per share. So a good start to the year, overall."

However, margins remain an issue. The Systems division, which is responsible for mainframe computers, and the Cognitive Solutions division that includes high-profile offerings such as Watson, both took a hit.

Mr. Kavanaugh attributed the narrowing Cognitive Solutions margin to investments in developing technologies like artificial intelligence.

Although IBM has two quarters of growth behind it, its rebound is still a work in progress. The quarter's results benefited from sales of a refreshed line of computing hardware that may not last.

Revenue in the Systems division grew 7.5%, or 4% when adjusted for currency, reflecting healthy sales of the company's latest mainframes. IBM introduced new hardware last year, helping revenue in the Systems division grow by double digits in the second half of 2017.

But several analysts expect the mainframe cycle to tail off by the end of the year, creating a challenge for IBM to maintain its momentum, especially since hardware sales tend to also have a beneficial effect on revenue in other divisions. Toni Sacconaghi, an analyst at Bernstein Research, estimates that hardware drives sales of related support services, software, storage and financing that historically have made up roughly 40% of IBM's operating profit.

IBM will need to turn around declining revenue in its services businesses to make up the difference, some analysts said. Those businesses grew around 4.5% in the quarter, reversing their declining trajectory in recent quarters. Getting those divisions growing consistently is essential to IBM's long-term health, according to some analysts.

The Armonk, N.Y., company reported $2.45 in per-share earnings on an adjusted basis, which omits such items as acquisition- and retirement-related charges. Analysts had expected $2.42 a share on $18.84 billion in revenue, according to a survey by Thomson Reuters.

Corrections & Amplifications IBM reported a quarterly profit Tuesday. An earlier version of this article incorrectly stated it reported a loss, in the headline.

--Maria Armental contributed to this article.

Write to Ted Greenwald at Ted.Greenwald@wsj.com

(END) Dow Jones Newswires

April 18, 2018 02:47 ET (06:47 GMT)

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