(Bloomberg) -- IBM second-quarter revenue beat analysts’ estimates, boosted by the unit that includes its Watson artificial intelligence platform, in an early indication that the company’s transition to cloud-based software and services is beginning to pay off.
Sales were $20.2 billion, compared with the average analyst estimate of $20.1 billion, according to data compiled by Bloomberg. Revenue in cognitive solutions, which includes Watson, increased 3.5 percent to $4.7 billion. This is the first time since IBM reorganized its segments that the cognitive solutions portion has registered growth, after declining the previous five quarters in a row. Adjusted earnings, excluding some items, was $2.95 a share, beating the $2.89 average estimate of 19 analysts. The shares rose 3.2 percent in late trading to $165. They are up 16 percent this year through the end of Monday, compared with a 6 percent gain on the Standard & Poor’s 500 Index.
Chief Executive Officer Ginni Rometty is betting on cognitive solutions to drive Big Blue’s businesses toward cloud-based software and services. The segment includes its analytics and security software, as well as many of the 11 acquisitions IBM made in the past year, such as the Weather Co. and Truven Health Analytics. While the quarter’s results exceeded expectations, revenue in older businesses continued to drag on overall sales, which fell for the 17th quarter in a row.
“IBM may look to reinvest in its new strategic businesses, which we think is the right thing to do at this early stage in the race in order to ensure a better chance at success,” Maynard Um, an analyst at Wells Fargo & Co., wrote in a note before results.
Revenue in the strategic imperatives group -- what IBM calls its new focus on cloud, analytics, social, security and mobile products -- increased 12 percent in constant currency to $8.3 billion. In the second quarter, currency impacted IBM’s sales by 0.2 percentage points, in line with management expectations of 0 to 1 percentage points. Gross profit margin narrowed to 47.9 percent from 49.9 percent. IBM has spent heavily on deals and also boosted research and development expenses this year. “This level of investment has a short-term impact on profit but adds we believe to long-term value,” Chief Financial Officer Martin Schroeter said on a media call before the earnings discussion. Sales from technology services and cloud platforms, which include infrastructure software and networking tools, was $8.9 billion, little changed from the previous year. Global Business Services booked $4.3 billion in revenue, declining 2 percent from the previous year. This sector includes legacy services, such as business process outsourcing. Sales in the systems segment, which includes mainframes and the operating software that helps run them, declined 23.2 percent to $2 billion.
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