International Business Machines Corp (LON:IBM) earnings fell less than expected for the second quarter but its increased focus on cloud computing is paying off.
Group revenue of US$18.1bn for the three months to June 30 was down 5.4% on the same period last year, or 1.9% lower on an underlying basis if adjusting for divested businesses and currency swings.
Cloud revenue of US$6.3bn for the quarter was up 30%, with sales from its Red Hat acquisition up 17%.
Net income and earnings per share were down 46% year on year to US$1.4bn and $1.52, respectively. Underlying EPS of US$2.18 per share, above Wall Street consensus forecasts of US$2.07.
“From a market perspective, while the current environment poses certain short-term challenges, it also presents long-term opportunities that IBM will seize, as our clients accelerate their shift to hybrid cloud and AI,” said new chief executive Arvind Krishna in prepared statements.
He added: “The trend we see in the market is clear. Clients want to modernize apps, move more workloads to the cloud and automate IT tasks.
“They want to infuse AI into their workflows and secure their IT infrastructure to fend off growing cybersecurity threats. As a result, we are seeing an increased opportunity for large, transformational projects. These are projects where IBM has a unique value proposition.”
Analysts at Wedbush maintained their 'neutral' rating on IBM but said the results were stronger than expected “due to combination of margin and Cloud-based strength/upside”.
But they noted that bookings were down 20% year-on-year and Red Hat's growth decelerated compared to the first quarter.
“From a big picture perspective, COVID-19 related challenges are presenting IBM both headwinds and tailwinds, accelerating the cannibalization of the company's legacy-based software and services businesses (roughly 70% of run rate), while also boosting demand for its Cloud-based offerings,” the analysts said.
“In our view, a potential acceleration/expansion in IBM's digital-based revenue base (accounting for a larger portion of annual run rate) could provide a significant catalyst for IBM's re-rating. At this point, we don't believe IBM has reached this inflection point.”
IBM shares were up more than 4% in pre-market trading on Tuesday.