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How Has IBM’s Cognitive Solutions Segment Been Performing?

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IBM’s strategic imperatives in operating segments

On April 21, 2016, IBM (IBM) announced its fiscal 1Q16 results. We looked into several factors, namely currency fluctuations—particularly the US dollar (UUP)—and uncertainties spanning geographies that led to IBM’s revenue decline.

Fiscal 1Q16 marked the 16th consecutive quarter of no revenue growth. For more information on why IBM is struggling with no revenue growth, please read Key Factors that Weighed IBM Down in Fiscal 3Q15. Fiscal 1Q16 is also the first quarter in which IBM reported its reclassified operating segments.

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Analysts’ reactions

IBM’s fiscal 1Q16 results disappointed analysts and the Market. However, some analysts are still hopeful about IBM’s transformation. Krista Macomber and Stephanie Long, senior analysts with Technology Business Research, believe that IBM’s fiscal 1Q16 results show the company’s commitment toward its transformation.

Fiscal 1Q16 also marked the first quarter in which IBM classified the new segments’ financial performance and provided a peek into its rapidly growing strategic imperatives.

Cognitive Solutions and Services segment

Let’s take a look at the fiscal 1Q16 performance of IBM’s Cognitive Solutions and Services segment. Cognitive Solutions comprises the software solutions intended to address strategic areas like analytics, security, and social media.

It also includes transaction processing software, which is utilized by banks and airline reservation systems. In fiscal 1Q16, the Cognitive Solutions and Services segment’s revenues fell 1.7% on a YoY (year-over-year) basis to $4 billion, as shown in the above chart. Revenues from transaction processing services fell by 5% on a YoY basis in fiscal 1Q16.

Strategic Imperatives boosted Morgan Stanley’s rating

Revenue from the Strategic Imperatives segment within the Cognitive Solutions and Services segment grew by 4% to $2.5 billion. Cloud revenue grew by 34% to $400 million on a constant currency basis.

Apart from being IBM’s most profitable segment, Cognitive Solutions’ performance holds a special importance to the company. IBM’s competitive edge and lead in Strategic Imperatives—especially its cognitive technology, Watson—was the basis for Morgan Stanley’s (MS) Katy L. Huberty improved rating for IBM’s stock.

IBM’s focus on and investments in Watson are evident in its February 2016 acquisition of Truven Health Analytics for $2.6 billion. Prior to acquiring Truven, IBM acquired Merge, Phytel, and Explorys to boost Watson Health.

At the Consumer Electronics Show in 2016, IBM’s CEO, Ginni Rometty, stated that Medtronic (MDT), Under Armour (UA), and SoftBank Robotics are already using Watson in various ways. IBM previously entered into healthcare-related partnerships with Medtronic, Apple (AAPL), and Johnson & Johnson (JNJ).

Morgan Stanley believes that with $5 billion in data acquisitions in less than a year, IBM is well on its way to generating revenue from Watson. For more information on Watson, please read IBM’s Focus on Watson Could Be Its Highlight of 2016.

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