IBM revenue worse than expected as artificial intelligence fails to make up for slowdown in hardware and software

IBM's aggressive investments in areas such as artificial intelligence offering Watson have done little to boost revenue overall, some analysts say

IBM reported a lower-than-expected quarterly revenue on Tuesday, as growth in its higher-margin businesses that include cloud and artificial intelligence services failed to make up for declines across legacy business segments.

IBM's shares fell 3 per cent to $149.15 (£114.41) in after-market trading.

New York-based IBM has in recent years shifted focus to pockets of growth across its business — high-margin areas such as cloud, cybersecurity and data analytics — to counter a slowdown in its hardware and software businesses.

Revenue from these initiatives, which IBM calls “strategic imperatives,” rose 5 per cent in the second quarter ended 30 June.

However, some analysts have expressed concern that IBM's aggressive investments in areas such as artificial intelligence offering Watson have done little to boost revenue overall.

Revenue in IBM's technology services and cloud platforms business — its largest — fell 5.1 per cent to $8.41bn. Analysts on average had expected $8.58bn, according to financial data and analytics firm FactSet.

Revenue in other units including software, hardware and consulting services also declined.

Still, IBM backed its forecast for 2017 adjusted earnings of at least $13.80 per share, an expectation some analysts have called too high. Analysts on average expect earnings of $13.68 per share, according to Reuters.

IBM will benefit from the launch of its new mainframe server — seen as key to its cybersecurity initiatives — as well as new contracts in the second half of 2017, Chief Financial Officer Martin Schroeter said on a conference call.

Schroeter, in an interview, said growth in IBM's “strategic imperatives” would be back at a 10 per cent to 11 per cent range by the end of the year.

IBM's total revenue dipped 4.7 per cent to $19.29bn, marking the steepest fall in five quarters. Analysts on average had expected revenue of $19.46bn, according to Thomson Reuters I/B/E/S.

IBM's net income fell nearly 7 per cent to $2.33bn, or $2.48 per share in the second quarter ended June 30.

Excluding items, IBM earned $2.97 per share. Analysts on average had expected adjusted earnings of $2.74 per share. The profit was helped by a discrete tax benefit of 18 cents.

IBM reported adjusted earnings of $2.97 per share.“Selling pressure [in IBM's stock] seems to be based off of earnings quality and that they had another discrete tax benefit,” said CFRA analyst David Holt.

IBM's shares had fallen 7.8 per cent this year through Tuesday, compared to the S&P 500's 9.9 per cent increase.

Reuters