IBM Is Nearing the End of the 'Return to Growth' Journey
- By Sangara Narayanan
IBM Corp. (IBM) reported its third-quarter earnings this week, which showed that the company's painful transition period may be coming to an end. IBM's revenues have steadily declined over the years, which resulted in it regularly reporting sales declines quarter after quarter. For the third quarter, Revenues were $19.23 billion, compared to $19.28 billion in the same quarter last year.
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The intrinsic value of IBM
One of the key reasons for IBM's transition was to wean itself away from low-margin legacy business lines. To that end, IBM created a group called strategic imperatives, which included Analytics, Cloud, Mobile, Social and Security. The last segment, clearly a forward-looking one, was growing fast while other parts of the businesses were declining. But until now, the growing parts of IBM were not good enough to compensate for the losing parts of its business, resulting in revenue declines.
Those days might be numbered though. IBM's revenues in the third quarter came very close to its numbers last year. The strategic imperatives group has grown 17% in the first quarter, 12% in the second quarter and 15% in the third quarter compared to prior-year periods. This segment now accounts for 40% of IBM's overall revenue, up from 37% in the first quarter.
As its legacy business units decline and strategic imperatives grow, the contribution of the latter to overall revenues has been growing at a fast rate, and this is finally starting to show in top-line results. The other important takeaway from IBM's results this quarter is that its As-a-Service annual run rate has reached $7.5 billion, from $5.4 billion in the first quarter.
The growth rate is astonishing on the cloud front but sadly, Analytics, which grew sequentially from $4.2 billion in the first quarter to $4.9 billion in the second quarter, fell to $4.8 billion in the third quarter. IBM's fourth quarter numbers for its Analytics unit will be extremely important, as this unit can single-handedly carry its cloud business to a different level.
The market's response to near-flat growth during the third quarter was not great, and the stock declined by a few percentage points after the results came out. But if IBM can repeat its cloud growth for the next few quarters and get Analytics to show sequential growth, then IBM can truly and firmly return to the path of sustainable growth.
Disclosure: I have no position in the stocks mentioned above and no intention to initiate a position in the next 72 hours.
This article first appeared on GuruFocus.
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The intrinsic value of IBM
