IBM shares shoot up as revenues beat market expectations
IBM has officially posted three consecutive quarters of sales growth. Although it may not seem like an impressive feat, it is for IBM. The IT giant endured 22 quarters of consecutive sales decline until Q4 of last year when it posted its first revenue growth in more than five years.
The vendor logged $20bn (£15.38bn) in revenues in Q2, a four per cent hike year on year, or two per cent in constant currencies. In fact, IBM's CFO Jim Kavanaugh said this quarter was its best constant currency growth in seven years.
Growth in revenues just about beat market estimates of $19.85bn, according to Thomson Reuters.
IBM pointed to revenues derived from its "strategic imperatives" business - which includes sales in analytics, cloud, mobile and security. These leapfrogged by 15 per cent year on year, or 13 per cent in constant currency, accounting for more than half of overall sales for the quarter at $10.1bn.
Security sales broke $1bn in sales, with 79 per cent year-on-year growth, while cloud sales were lifted by its as-a-service business which grew by 24 per cent in constant currencies.
IBM's share price enjoyed a 3.6 per cent lift in after-hours trading on Wednesday night after the financial results were published.
Profits are still under pressure, but IBM gives upbeat outlook for rest of the year
An underwhelming profit performance disappointed investors in IBM's closing quarter of 2017. Margins continued to be a problem for IBM this year. Total gross profit margin tumbled by half a percentage point to 46 per cent in Q2, as four of its five business segments - Cognitive Solutions, Technology Services & Cloud Platforms, Systems and Global Financing - posted profit margin declines in Q2.
Speaking to investors on an earnings call transcribed by Seeking Alpha, Kavanaugh said delivering on profit margins in the second half of the year will be crucial.
Kavanaugh pointed to improvements in IBM's services arms, and rapid growth in its as-a-service business in his attempts to convince analysts that IBM will be able to improve margins in future.
"The way I look at margin expansion centres around three or four major areas. Number one: margin expansion is going to be delivered through us continuing to leverage the momentum in our enterprise cloud and our as-a-service-based business...
"Second, we talk about mix; mix being another lever. So you look at the mix within each of our segments and how we're shifting to higher value, which we're making good progress in," he said.
"The third bucket is around productivity. This is about how you transform the way you work… we talked about the work we're doing around our workforce optimisation, the significant actions we took in the first quarter. I said, predominantly the yield on that is in the second half. And that should accelerate significantly, but we're also transforming the way we actually deliver service, redesigning it, applying agile methodologies, infusing AI and automation, and driving a differentiated value to our clients to improve the quality in addition to the efficiency and margin."
Europe was star performer for IBM
Recovering from declines last year, IBM's European business is back on track, logging $6.4bn in revenues for the quarter, a four per cent lift on the previous year. The region outshone the Americas, which reported one per cent growth, and APAC which posted a flat revenue performance.
IBM claims the UK, Germany, France and Spain led the way in Europe's upbeat performance for the quarter. In previous quarters, the UK and Germany have been blamed for dragging down IBM's EMEA business, blaming the disappointing performance on macro and geopolitical trends.
"We had broad-based geographic and sector growth across our business, probably the best breadth and growth across a number of countries that we've had in quite a period of time," said Kavanaugh.
"Sixty-plus countries grew at constant currency, and that represented over 80 per cent of IBM's revenue."
Hardware sales are soaring for IBM
The company's margin-rich Systems business - which includes hardware and operating systems software - proved one of IBM's best-performing segments in Q2, as sales surged by 25 per cent to $2.2bn.
IBM claims strong growth across its IBM Z mainframes, its Power Systems servers, and its storage products lifted revenues and profitability for the firm.
Kavanaugh said he expects IBM's systems business to continue its growth trajectory in the second half of the year.
"This is the most enduring platform that you've seen out there, and we continue to capitalise on gaining new emerging workloads onto that platform," he told analysts.
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