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International Business Machines Corp. in Q1: The Makeover Continues

By Anders Bylund - Apr 19, 2016 at 9:47AM

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Big Blue squeezed strong cash flows out of softer earnings and revenues in the first quarter. The strategy overhaul remains on track, but it's been a long and bumpy road.


IBM (IBM 2.14%) reported Q1 2016 results on the evening of Monday, April 19. Here's what Big Blue had to say about this reporting period.

IBM's Q1 results: The raw numbers


Q1 2016 Actuals

Q1 2015 Actuals

Change (YOY)


$18.7 billion

$19.6 billion


Net Income From Continuing Operations

$2.0 billion

$2.4 billion






Free Cash Flow

$2.3 billion

$2.0 billion


Data source: IBM.

What happened with IBM this quarter?
The company is largely on track to meet its existing targets for fiscal year 2016, and management claimed that the strategic makeover made a lot of progress during the quarter.

  • IBM's sales increased slightly in the Asia-Pacific market, while shrinking in the larger American and EMEA segments. The domestic business is stabilizing, but that progress was undone by weak orders from the volatile Brazilian market.
  • From a product point of view, IBM's strongest cards were found in cognitive solutions and infrastructure technology services. All other product segments reported lower sales year over year, led by a 42% decline in System Z mainframe sales and 14% fewer orders for Power-based mid-tier systems.
  • IBM reports internal revenues for services used by other parts of the sprawling company. The largest internal revenue collector this quarter was the cognitive solutions segment at $668 million, ahead of $486 million flowing to the global financing department. Cognitive solutions is where IBM bundles its data analysis tools, often designed around the Watson artificial intelligence system.
  • Free cash flows more than doubled year over year, thanks to better control over working capital and a larger contribution from the global financing division's accounts receivable.

Management held on to full-year guidance issued three months ago, refining the free cash flow target to the high end of the $11 billion to $12 billion range. Operating earnings should still land near $13.50 per share for the full year. IBM should reach nearly 39% of that target by the end of the first half, which puts the second-quarter operating profit target at approximately $2.85 per share.

What management had to say
In a press statement, IBM CEO Ginny Rometty highlighted the progress within her company's so-called strategic imperatives: "IBM has established itself as the industry leader in total cloud, analytics and cognitive, all of which helped drive our strategic imperatives revenue growth at a strong double-digit rate, substantially faster than the market."

These operations have accounted for 37% of IBM's total revenue over the last four quarters. That's a 14% increase year over year, or 17% when adjusted for currency exchange headwinds.

Looking ahead
The long-running business transformation is still chugging along, with no promises of an end in sight. That being said, IBM is running out of hardware segments to sell and the strategic imperatives have indeed become central to the company's overall operations.

Internally, it is shifting resources out of disfavored businesses and into the core strategic imperatives. For example, some 6,000 jobs were added to the Watson Health operation over the last year, including more than 1,000 security specialists. About 90% of the new hires are taking place outside the U.S.

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