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IBM Revenue Lags as a cloud pivot remains a challenge




IBM -0.32%

International Business Machines
Corp.

Revenues declined for the fourth quarter in a row as the company struggled to shift its business to the modern computer age, even though Big Blue's profit grew faster than Wall Street predicted.

Revenues decreased 4.2% year-on-year to $ 19.16 billion. Earnings increased 3.9% to $ 2.5 billion as the company worked to reduce its exposure to lower-margin businesses.

IBM has shrunk

Microsoft
Corp.

and

Amazon.com
Inc.

When customers are in the race for more computing in the cloud ̵

1; online services that free businesses from the need to buy and maintain their own systems. With competitors experiencing consistently strong sales growth fueled by the sale of their cloud services, IBM has suffered a series of declines.

IBM, led by CEO Ginni Rometty, reports that its cloud business is growing – cloud revenue grew 5% in the second quarter – well below the 41% annual cloud revenue growth seen by Microsoft in the last quarter Has.

Meanwhile, other parts of the IBM business are gradually declining. The company's IT services revenue declined 6.7% year-on-year in the second quarter as the company lost revenues from lower-margin devices, which differed from it.

The area where IBM's mainframe business is also down nearly 20%%, despite a harsh year-over-year comparison as the release of a new generation of these computers boosted sales.

Dr. med. Rometty is now banking on $ 34 billion acquisition of IBM's open source software giant Red Hat Inc. to grow revenue after earlier cloud deals such as SoftLayer's $ 2 billion acquisition Based in Dallas the company did not have the competition. The Red Hat deal, the largest in the history of IBM, was completed earlier this month.

"This acquisition of Red Hat will change the dynamics of our growth profile and the dynamics of our overall cloud growth profile," said CFO James Kavanaugh in an interview. The deal would boost sales by two percentage points annually over the next five years, he said.

IBM expects to update its financial projections related to the Red Hat deal on August 2. The acquired company's performance was not included in IBM's second quarter figures.

While analysts' second-quarter revenue was in line with analyst expectations, adjusted earnings of $ 3.17 per share outperformed analysts surveyed by FactSet.

] Mr. Kavanaugh said IBM earned $ 575 million in the quarter with its long-planned sales of assets. The costs, including a court order against IBM and disbursements related to a layoff, most of which took place outside the US at the end of June, have eroded most of these gains.

Shares fell by about 1% to $ 143 after hours. The share initially posted gains after the release of the earnings.

IBM executives point to bright spots in the growth of cloud services and praise the future of their artificial intelligence business. The company wants to be at the center of companies that use AI increasingly for their business. [Tb] On Tuesday, IBM announced that a multi-billion dollar deal had been made

AT & T
Inc.

where it would help the telco giant to move business services applications to the IBM cloud.

But Red Hat was already an AT & T partner, and it was not clear whether the acquisition of IBM would play a role in this deal, said Toni Sacconaghi, an analyst at Bernstein Research.

Has and Aggressively Agrees with It, "IBM said, helping IBM sign more contracts to provide business services or help them transition to the hybrid cloud. "That's the theory of the deal. The proof will be in the execution. "

wife. Rometty took the helm in early 2012, at a time when IBM was under pressure to set a stringent earnings per share target set by its predecessor, Sam Palmisano. To achieve this goal, the company repurchased shares worth billions of dollars and sold assets that fell short of expectations. However, Ms. Rometty scrapped the program in 2014 when it became clear that the company needed to invest in a more radical transition to stay competitive.

IBM raised money from long-term deals with large corporations to provide them with massive mainframes, IT support, and consulting. The transition to cloud computing meant that businesses needed less hardware and could only pay for the computing power they needed.

IBM's revenue has been at the peak since the inception of Ms. Rometty's term, falling to 22 straight quarters year-over-year. The company seemed to have turned around when it saw sales increase for three quarters from the end of 2017. However, this increase was mainly due to the sale of a new generation of mainframes and proved to be temporary. The decline in sales continued in 2018 and has continued since then.

The company is now trying to revive sales and stand out from the competition by focusing on the so-called hybrid cloud, a model in which companies conduct part of their computing. The hope is that the acquisition of Red Hat, the Offering support for a version of the open source Linux operating system will strengthen IBM's hybrid cloud arena because Red Hat software is the core of many customers' IT infrastructure.

Write to Asa Fitch at asa.fitch@wsj.com

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