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How Did IBM’s 2Q16 Results Stand up to Analyst Expectations?

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Jul. 21 2016, Published 11:41 a.m. ET

Revenue decline, but strong earnings

International Business Machines (IBM) released its fiscal 2Q16 results on July 18, 2016. Although IBM continued its no-growth trend in revenue, its fiscal 2Q16 results beat analyst expectations.

For 2Q16, IBM reported revenues of ~$20.2 billion and non-GAAP (generally accepted accounting principles) EPS (earnings per share) of $2.89. That beat analyst expectations by $210 million and $0.06, respectively.

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17th quarter of no revenue growth

The above graph shows IBM’s quarterly revenues performance in the last couple of years. In 1Q16, IBM reported its lowest revenue in 14 years. In fiscal 2Q16, all of IBM’s operating segments struggled to report growth in revenue.

On a YoY (year-over-year) basis, IBM’s fiscal 2Q16 revenues fell by 2.8%, making it the 17th consecutive quarter of no revenue growth. With its 2Q16 results out, the pressure on IBM to report revenue growth is mounting. Although IBM is aggressively pursuing acquisitions and forging partnerships to post growth in the cloud space, it’s been unable to do so.

The cloud dominates the enterprise software space, and IBM peer Salesforce.com (CRM) continues to post double-digit growth. But IBM and Oracle (ORCL) are both finding it difficult to record growth.

Strategic Imperatives

Amid these consistent revenue declines, however, IBM’s Strategic Imperatives segment continued to post double-digit growth. In 2Q16, Strategic Imperatives revenue grew 12% to $8.3 billion, and its revenue contribution to overall revenue increased to 38%.

Investors who want to gain exposure to IBM can consider investing in the SPDR S&P 500 ETF (SPY). SPY invests ~0.71% of its holdings in IBM. It also has an ~8% exposure to application software.

Now let’s look at the Cognitive Solutions segment performance in fiscal 2Q16.

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