IBM Continues A Slow Climb

Summary
IBM is slowly heading in the right direction as it continues to focus on the strategic imperatives segment.

But it may need to accelerate these investments before the market loses its patients.

The stock has recorded a decline of 3% so far this year and has underperformed the S&P 500 by about 20% in the last 12 months.

IBM's (NYSE: IBM) long turnaround appeared to slow down during the recently reported quarterly results. While the company did manage to surpass market expectations, the slowing growth rates left the market wants.

IBM's Financials
Revenues for the second quarter grew 4% to $20 billion, ahead of the Street's forecast of $19.62 billion. Adjusted earnings of $2.8 billion or $3.05 per share for the quarter also were better than the Street's estimates of $3.03.
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By segment, revenues from Cognitive Solutions, which includes solutions software and transaction processing software, was flat over the year at $4.6 billion. Global Business Services revenues grew 2% to $4.2 billion. Technology Services & Cloud Platforms revenues of $8.6 billion were up 2% over the year driven by hybrid cloud services, security, and mobile divisions. Systems revenues grew 25% to $2.2 billion driven by growth in IBM Z, Power Systems, and Storage. Global Financing revenues were down 5% to $394 million.

This was the first quarter that IBM derived more than half of its revenues from strategic imperatives areas. During the quarter, strategic imperatives revenue for the last 12 months grew 15% to $39 billion and accounted for 48% of the company's revenues. Cloud revenues for the trailing 12 months grew 23% to $18.5 billion.

IBM ended the quarter with $10.7 billion in cash and cash equivalents. It returned $2.4 billion to shareholders through $1.4 billion in dividends and $1 billion in gross share repurchases during the quarter.

IBM expects to end the current year with an EPS of $13.80, which was short of the market's forecast earnings of $13.78 per share.
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IBM's Cognitive Solutions Slow Down
Overall, IBM's numbers looked impressive. But the market was worried about the slowing growth rates of the Cognitive Solutions segment. IBM reported flat revenues for the segment at $4.6 billion. But the market was looking for revenues of $4.76 billion. This segment drives the highest margins for the company, and with flat quarterly revenues, it resulted in declining gross margins for IBM. IBM reported gross margins of 46.5% against 47.1% a year ago and 47% as expected by the market.