IBM Reports 20th Straight Quarterly Revenue Drop, While Cloud Computing Grew 33 Percent

IBM reported the 20th straight quarter of year-over-year revenue declines Tuesday as the company said that sales in its first quarter ended March 31 were down 2.8 percent, despite sales gains in the vendor's cloud services and other "strategic imperative" products and services.

The company's stock dropped nearly 5 percent in after-hours trading on the news of the financial results, which significantly missed financial analysts' revenue expectations.

IBM reported total revenue of $18.16 billion for the quarter, down 2.8 percent from $18.68 billion in the first quarter of 2016. That fell short of the $18.39 billion Wall Street analysts had been expecting, according to Thomson Reuters.

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Net income for the quarter was $1.75 billion, down 13 percent from $2.01 billion one year ago. GAAP earnings per share were $1.86 compared to $2.09 one year ago.

IBM emphasized the first-quarter growth in its strategic imperatives including cloud computing (up 33 percent to $3.5 billion), analytics (up 6 percent), mobile (up 20 percent) and security (up 9 percent) product and service offerings.

"In the first quarter, both the IBM Cloud and our cognitive solutions again grew strongly, which fueled robust performance in our strategic imperatives," said President and CEO Ginny Rometty in a statement. "In addition, we are developing and bringing to market emerging technologies such as blockchain and quantum, revolutionizing how enterprises will tackle complex business problems in the years ahead."

Strategic imperatives have generated $33.6 billion in revenue over the last 12 months, according to IBM. In the first quarter, they generated $7.8 billion in sales, representing 42 percent of the company's total revenue.

But IBM's challenge is that revenue from its older legacy businesses and product lines is declining, even as it spends resources to ramp up the new products and services.

Most of the company's business segments recorded revenue declines during the quarter. Global Business Services was down 3 percent to $4.01 billion from $4.13 billion one year before; Technology Services & Cloud Platforms was down 2.5 percent to $8.22 billion from $8.42 billion one year earlier, and Systems was down nearly 17 percent to $1.40 billion from $1.68 billion one year ago.

The Cognitive Solutions segment did see growth in the quarter, up 2 percent to $4.06 billion from $3.98 billion one year earlier.

On an earnings call with analysts, Chief Financial Officer Martin Schroeter said IBM had seen good growth in the company's Watson services for vertical industries, such as financial services, health care and life sciences, as well as Watson in technology areas like security. "We also had good growth in Watson IoT," he said.

But new product and service development have increased IBM's spending, holding down profitability. "We continue to invest in our strategic imperatives and build out our practices around cognitive, cloud, mobile and digital design," Schroeter said. "Over the last year, we've added nearly 8,000 resources to these businesses. There also continue to be accounts where we are investing more to deliver on important client commitment."

IBM is expecting profitability to improve in the second half of 2017, Schroeter said. The CFO cited new systems products the company will bring to market, lower development costs associated with those products, the expected signing of some significant Global Technology Services contracts, and expected growth in Global Business Services revenue.