IBM's New z14 Almost Halted Big Blue's Revenue Slump

IBM saw a turbo-boost in sales from the introduction of its new mainframe near the end of a third quarter marked by solid growth of its cloud business, CFO Martin Schroeter told investors during the company's earnings call Tuesday.

The z14 mainframe, the first computing platform offering pervasive encryption, just fell short of preventing a 22-quarter revenue slump for Big Blue, which saw $19.2 billion in Q3 sales – slightly less than the same quarter of the previous year.

Software and systems gains, as well as continued growth of the strategic imperatives of cloud, analytics, mobile, social and security, all contributed to financials that sent IBM up $7.81 (5.33%) to 154.35 in after-hours trading.

[Related: IBM Reports Storage Revenue Growth In Q3]

Cloud and cognitive solutions are acting "as a signpost of the progress we're making in helping enterprise clients extract value from data and transform to digital businesses," Schroeter said.

Embedding cognitive offerings across IBM's product portfolio is fueling the shift to the strategic imperatives, he added.

The company's earnings-per-share of $3.30 and revenue both beat analyst expectations, which had come in at $3.28 and $18.6 billion respectively.

IBM notched strong performance in its systems business, powered by storage and the z14, which became available for the last two weeks of the quarter ending in September.

But it's the diverse set of cloud offerings that are increasingly driving IBM's transformation beyond its slumping legacy businesses.

Revenue in that segment was up 20 percent, to $4.1 billion for the third quarter and $15.8 billion over the trailing 12 months.

The strength of IBM's cloud is the integration of public, private, multi-cloud and traditional data centers through a single architecture, Schroeter noted.

IBM's margins were impacted by the massive and continuing investments IBM is making to expand its cloud infrastructure, now hosted in 60 global data centers, he added.

The entirety of strategic imperatives took in $34.9 billion over the last 12 months, constituting 45 percent of IBM's total revenue during that period. Those businesses grew 11 percent in the quarter, and 10 percent over the last four quarters.

IBM's "as-a-service" business also "continues to grow quite well," he said, ending the quarter with a $9.4 billion run rate.

When reporting second quarter financials in July, Schroeter talked about improving IBM's trajectory in the second half of the year.

That's bearing out in the market, he said, offering a reaffirmation of the wisdom of IBM's strategy. IBM's on the right course, but there's more to get done in the fourth quarter, he said.

Between Q3 and Q4 of the previous fiscal year, IBM ramped sales by $2.5 billion. That sequential growth should repeat this fiscal year, and be further bolstered by $300 million to $400 million in revenue from the mainframe cycle.

Given the problems IBM's new mainframe solves, there's an opportunity to further expand the market, he said.