IBM stock rises after earnings beat

Key Points
  • IBM beat expectations for revenue and earnings.
  • The company's strategic imperatives areas have become a bigger part of the overall business.
IBM CEO Ginni Rometty
Andrew Harrer | Bloomberg | Getty Images

IBM stock fluctuated and then rose to more than 2.5 percent above the $144.52 closing price after the company reported better-than-expected second-quarter earnings results on Wednesday.

Here's how the company did:

  • Earnings: $3.08 per share, excluding certain items, vs. $3.04 per share expected by analysts, according to Thomson Reuters
  • Revenue: $20 billion, vs. $19.85 billion as expected by analysts, according to Thomson Reuters

This marks IBM's third consecutive quarter of revenue growth, following five years of year-over-year revenue declines. In the quarter revenue rose 4 percent.

In the quarter IBM had a 46.5 percent gross margin, according to a statement. The figure is just below the FactSet analyst estimate of 47 percent.

IBM earnings on target
IBM earnings on target

In a Tuesday note, Cantor Fitzgerald analysts led by Joseph Foresi said they were expecting a decrease in margins in the quarter. They thought second-quarter numbers would get a boost thanks to recent currency trends.

For the first time IBM derived more than half of its revenue from its strategic imperatives areas — social, mobile, analytics and cloud — with $10.1 billion there. That category saw 26 percent revenue growth in the quarter; the growth rate was up sequentially from 15 percent growth. In the previous quarter those categories gave IBM 47 percent of its revenue.

IBM said in the second quarter its cloud revenue grew 20 percent, coming in at $4.7 billion. For the annual revenue run rate for cloud delivered as a service was $11.1 billion, up 26 percent year over year. The company's capital expenditures for the quarter came in just above $1 billion.

The company's biggest business segment, Technology Services and Cloud Platforms, met the FactSet analyst consensus with $8.62 billion in revenue.

The Cognitive Solutions segment had $4.58 billion in revenue, just under the FactSet consensus of $4.76 billion. The Global Business Services segment produced revenue of $4.19 billion, slightly beating the FactSet estimate of $4.16 billion.

The Systems business segment came in ahead of estimates, too, with $2.18 billion in revenue, while analysts polled by FactSet were expecting $1.85 billion.

The business saw strength even without factoring in IBM's latest mainframe computer, which was introduced a few quarters ago and has provided revenue growth, chief financial officer James Kavanaugh said on the company's conference call with analysts on Wednesday. Still, Kavanaugh said, "with regard to mainframe, I am not going to apologize -- this is the most enduring platform that you've seen out there."

Kavanaugh said on the call that IBM continues to expect to close out the year with at least $13.80 in earnings per share, excluding certain items. In the second quarter the company saw scale efficiencies as it increasingly focuses on cloud services, and in the second half of the year the company will see more benefits from "workforce optimization," Kavanaugh said. Before the second-quarter earnings results, analysts had expected $13.78 in full-year earnings per share, excluding certain items, according to Thomson Reuters.

In the second quarter, the company acquired Oniqua, and IBM CEO Ginni Rometty said it had designed the world's fastest supercomputer. The company also confirmed that layoffs impacted its Watson Health group.

"While this may be anecdotal, we attended a major healthcare IT conference this spring, and informal conversations with Watson Health employees suggested that the business is beginning to feel a lot more cohesive and integrated than previously," Stifel analysts led by David Grossman wrote in a July 12 note.

And in late June, Nomura Instinet analysts led by Jeffrey Kvaal began coverage of IBM, with an initial rating of buy and a target price of $160.

"After years of revenue declines, IBM is poised to return to sustainable, if modest, revenue growth and mid-single-digit EPS growth," the analysts wrote.

IBM stock is down 6 percent since the beginning of the year.

Programming Note: For more on IBM, watch “Mad Money” host Jim Cramer’s interview with IBM senior vice president of global markets Martin Schroeter tonight at 6 p.m. Eastern time.

IBM CEO: World's fastest, smartest supercomputer one of our greatest achievements
IBM CEO: World's fastest, smartest supercomputer one of our greatest achievements