IBM misses revenue estimates as cloud services unit falters

IBM missed estimates for quarterly revenue, with sales in a key unit declining for the second consecutive period, further extending chief executive officer Ginni Rometty’s turnaround plan into its fifth year without significant progress.

Sales in the company’s technology services and cloud platforms segment dropped 5.1% from the same period a year earlier, even though executives had said in April that they expected key contracts to come through in the quarter.

The unit is a marker for the strength of the company’s push into newer technologies. Total revenue fell to $19.3 billion, IBM said in a statement Tuesday, the 21st straight quarter of year-over-year declines.

International Business Machines Corp. has been working since before Rometty took over in 2012 to steer the company toward services and software, and she has pushed it deeper into businesses such as artificial intelligence and the cloud. Still, legacy products like computers and operating system software have been a drag on overall growth.

Some investors are getting tired of waiting for the turnaround to catch on. Warren Buffett’s Berkshire Hathaway Inc. sold about a third of its investment in IBM during the first half of this year.

Gross margins in the second quarter were 47.2%, slightly beating the average analyst estimate of 47%. That’s better than last quarter, when a surprise miss on margins sent the stock tumbling the most in a year.

“We will continue to see, on a sequential basis, margin improvement from the first half to second half,” chief financial officer Martin Schroeter said in an interview.

Operating profit, excluding some items, was $2.97 a share, compared with the average analyst estimate of $2.74 a share. That measure got a boost from tax benefits, which added 18 cents to the per-share number, IBM said.

The company’s cognitive solutions segment, which houses much of the software and services in the newer businesses and includes the Watson artificial intelligence platform, has shown the most promise in recent periods, growing in each of the previous four quarters. Yet sales in the unit fell 2.5% in the second quarter.

Watson, for which the company doesn’t specifically break out revenue, might never contribute a significant amount to the company, Jefferies analyst James Kisner said in a July 12 note.

Competition in the artificial intelligence market is heating up, with major investments from the world’s biggest technology companies, including Microsoft Corp., Alphabet Inc. and Inc. On top of that, hundreds of startups are jumping in.

“IBM appears outgunned in the ‘war’ for AI talent,” Kisner said. “In our base case, IBM barely re-coups its cost of capital from AI investments.”

The company’s total revenue fell 4.7% from the same period a year ago, and missed analysts’ average estimate for $19.5 billion. The shares, which were down 7.2% this year through Tuesday, fell 3.1% to $149.20 in late trading.

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IBM misses revenue estimates as cloud services unit falters