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IBM stock tumbles as year-over-year revenue declines for 20th consecutive quarter

Anita Balakrishnan

IBM reported quarterly earnings that beat expectations on Tuesday as the cloud business soared. But sales fell short as the company capped five straight years of declining year-over-year quarterly revenues.

The company's shares dropped more than 5 percent after hours.

Earnings

  • EPS: $2.38 a share vs. $2.35 a share expected by Thomson Reuters
  • Revenue: $18.16 billion vs. $18.39 billion expected by Thomson Reuters

That's a 1 percent gain in earnings per share, and a 3 percent decline in revenue from a year ago, the company said.

  • Full-year 2017 EPS guidance: $13.80 per share, vs. $13.78 per share expected by Thomson Reuters

Big Blue bets on cloud, A.I.

IBM (IBM) is in the midst of an uneasy transition from its traditional business model to newer bets, like cloud computing and artificial intelligence.

Still, New York–based company has seen a five-year stretch of year-over-year revenue declines going back to April 2012, when sales were nearly flat from the year-ago period, according to FactSet.

"The portfolio will grow. I am confident that the IBM company will grow again," chief financial officer Martin Schroeter told CNBC . "We're taking time to make sure we invest in the right places and make sure we get the kind of margin high-value profile we're looking for."

In a statement, Schroeter said the company had ramped up research and development spending during the quarter. R&D expenditures did edge higher, to $1.53 billion during the quarter, up from $1.46 billion a year ago.

The legacy enterprise technology company, founded over 100 years ago, has reorganized around "strategic imperatives," which include businesses like cloud , analytics, mobility and security. In 2016, those strategic imperatives grew to represent more than 40 percent of total revenue , CEO Ginni Rometty said earlier this year.

"For us what it's always been about for us is a shift as much as it is adding to that pie," Schroeter said in the conference call. "So I think the adding to the pie now is behind us and the shift will continue. So we'll continue to invest heavily in the strategic imperatives, but it won't represent the same growth that we've seen in the past."

In the first quarter, strategic imperatives revenue grew 12 percent to $7.8 billion, not adjusted for currency, while cloud revenue grew 33 percent to $3.5 billion. Net income was $2.3 billion.

Still, business is likely to pick up in the second half of this year, as the company wraps up last year's acquisitions, releases new products, closes on large contracts, and moves toward business with better profit margins, executives said on a conference call.

"From my perspective, the quarter played out pretty much how I expected, other than we thought we had a couple more signings relationships in Services that we could have gotten done," Schroeter said in the conference call. "You have to ramp investment ahead of the revenue in order to get that system ready, and that's the period we're in now, and we'll be in through the first half....we also have a lot of opportunities to realize efficiencies in how we run."

IBM's cognitive computing technology, Watson, continued to gain ground over the quarter, with new features for marketing. The company also implemented machine learning into pharmaceutical research, and its property, The Weather Company, announced a new collaboration with Samsung and Lyft.

"The legacy core is a business that we're constantly reinventing," Schroeter said in the conference call.

During the quarter, "cognitive solutions" revenue grew more than 2 percent to $4.1 billion, not adjusted for currency, slightly above the $4 billion predicted by StreetAccount. Revenue from business services and consulting fell slightly, in line with StreetAccount estimates, while sales from items like infrastructure, hardware and operating systems fell slightly short of expectations.

Big Blue has also shifted its hiring focus, amid pressure from the new U.S. presidential administration to hire more Americans. Under Rometty, IBM has pledged to hire about 25,000 U.S. workers in the next four years, including 6,000 in 2017. Many of those are expected to be "new collar" jobs, or jobs that focus on qualifications like apprenticeships rather than traditional higher education.

At least one big investor has pledged his loyalty to the brand: Berkshire Hathaway's Warren Buffett, who has praised IBM's dividends . Berkshire paid an average price of $170.43 per share of Big Blue, as of January. IBM briefly traded above $171 on Tuesday during the regular session, but fell below $164 a share after hours.

IBM said it returned $2.6 billion to shareholders through dividends and share repurchases in the first quarter.

"Now the timing is right, is to get the returns for our investments. If you were to poll 100 IBM executives, it's something that they'd all say, now it's time to get the returns," Schroeter said in the conference call. "We have driven very heavy investment. That has impacted our margins... So yes, it is time for us to get the returns. We have invested quite heavily. The strategy is right. We hear it from our clients every day. The places that we are moving them to and the work we do in the core is highly , highly valuable to them. So I think now, to shorthand that, is yes. Now it's time."

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