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Parsing IBM’s Evolution

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Revenue disappoints

IBM’s (IBM) 1Q17 earnings report, which showed a revenue miss for the quarter, sparked panic among investors, quickly sending its shares on a downward spiral. However, a closer look at IBM’s results speaks to an interesting development no investor should miss.

While the company’s 1Q17 report saw it post its 20th quarter of consecutive top line fall, its Strategic Imperatives segment remains a bright spot. Strategic Imperatives is the term IBM uses to describe its newer businesses built around cloud computing, enterprise mobility, and security. They represent hope for IBM and its investors as the company evolves away from relying on legacy hardware and software sales.

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IBM’s Strategic Imperatives produced $7.8 billion in revenue, a rise of 13% from a comparable quarter a year earlier. Furthermore, newer businesses made up 42% of IBM’s overall revenue in its latest quarter, implying a fairly strong improvement compared to a year earlier, when the segment made up 37% of its revenue.

IBM makes progress in the cloud

Of IBM’s Strategic Imperatives, its Cloud business registered the strongest growth of 35% in the quarter, compared to 7% for Analytics, 10% for Security, and 20% for Mobile. IBM’s cloud progress is being watched closely because it’s one area in which the company is facing perhaps the fiercest opposition and has a long way to catch up.

Amazon (AMZN) and Microsoft (MSFT) rule the cloud computing space. IBM is also under pressure to stay ahead of Oracle (ORCL) and Google, an Alphabet (GOOGL) company, in the race to the top of the cloud computing market.

Cause for concern in the IBM evolution

If Strategic Imperatives generated revenue of $7.8 billion out of IBM’s total revenue of $18.2 billion for the quarter, it implies that newer businesses make up only a small fraction of IBM’s overall business, even if they are growing. This situation is a cause for concern.

The contribution from IBM’s Strategic Imperatives segment and the shrinking contributions from its legacy operations imply that IBM could face a difficult time growing its newer operations because as they stand, they’re being funded by its older ones.

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