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International Business Machines Corp. Q2 Earnings: What You Need to Know

By Anders Bylund – Jul 19, 2016 at 1:46PM

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Big Blue performed as expected this time, edging deeper into growth markets such as cloud computing and artificial intelligence.

Cloud computing and mobile devices, two of IBM's core markets nowadays. Image source: IBM.

IBM (IBM -0.26%) reported second-quarter results after the closing bell on Monday, July 18. The numbers were close enough to management's internal forecasts that there was no need to adjust full-year guidance targets.

IBM's Q2 results: The raw numbers

Metric 

Q 2 2016 Actuals

Q 2 2015 Actuals

Growth (YOY)

Revenue

$20.2 billion

$20.8 billion

(2.9%)

Net income from continuing operations

$2.8 billion

$3.8 billion

(25%)

Operating earnings per share

$2.95

$3.84

(23%)

Data source: IBM.

What happened with IBM this quarter?

The cyclical nature of big-iron systems sales cut into IBM's revenue in the second quarter. The remaining business segments held steady, albeit with unstable gross margins in some cases.

  • Sales in the cognitive solutions division rose 3.5% year over year to $4.7 billion, but gross margin fell 3.5 percentage points to 82.2%.
  • Businesses under the strategic imperatives banner saw sales rising 12% to $8.3 billion, led by a 43% surge in mobile products revenue and 30% higher cloud sales. This is not a reportable segment of its own, but baked into three of IBM's traditional divisions and IBM provides a line item in its report for strategic imperatives.
  • Systems sales decreased 23% to $2.0 billion, as interest in the next-generation IBM Enterprise Cloud System product line cooled down. Introduced in the spring of 2014, these systems drove IBM's mainframe server sales 9% higher in the year-ago quarter, making for a difficult annual comparison.

Looking ahead, IBM's management reiterated full-year guidance for operating earnings of at least $13.50 per share. This figure backs out acquisition-related costs and retirement charges. Without these adjustments, GAAP earnings should exceed $12.23 per diluted share in 2016.

What management had to say

"IBM continues to establish itself as the leading cognitive solutions and cloud platform company," said IBM CEO Ginni Rometty in a prepared statement. "In the second quarter we delivered double-digit revenue growth in our strategic imperatives, driven by innovations in areas such as analytics, security, cloud video services and Watson Health, all powered by the IBM Cloud and differentiated by industry."

Looking ahead

As IBM reshapes itself into the cloud and artificial intelligence leader that Rometty outlined, the company absolutely needs its strategic imperatives businesses to shine. They are doing that so far, with the exception of modest growth in the included data analytics operations.

Those crucial operations accounted for 41% of IBM's total revenues in the second quarter, up from 36% in the year-ago period.

Anders Bylund owns shares of IBM. The Motley Fool has no position in any of the stocks mentioned.

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