IBM International Business Machines Corp

By Ted Greenwald 

International Business Machines Corp. recorded its 19th consecutive quarter of declining revenue, as it continued to try to offset declines in older businesses with sales in newer ones that are growing rapidly.

Fourth-quarter revenue at the Armonk, N.Y., computing giant slid 1% from the year-earlier period to $21.8 billion. Net profit edged up nearly 1% to $4.5 billion, though that still left profit 11% lower for the full year, at $11.9 billion.

Chief Financial Officer Martin Schroeter emphasized that annual revenue in IBM's newer, faster-growing businesses rose 14% and now makes up 41% of total sales -- ahead of the company's earlier forecast that nascent businesses would contribute 40% by 2018.

"We feel pretty good about how we're entering 2017 stronger than we entered 2016," he said in an interview.

Like other older companies that sell information technology to corporate buyers, IBM is struggling to cope with the move to cloud computing. That trend shifts customer spending from vendors who equip private corporate facilities to those who offer subscriptions to services delivered through the internet, such as Amazon.com Inc.'s Amazon Web Services for computing power and Salesforce.com Inc. for business apps.

Big Blue's chief executive, Ginni Rometty, has responded by jettisoning low-growth, low-margin businesses and revamping its remaining core assets to emphasize ones that she calls strategic imperatives. Foremost among these are IBM's own cloud-computing operations and Watson, its artificial-intelligence platform.

The transition has yet to rekindle growth for the company overall, however. IBM's full-year revenue has declined for five years, its pretax income has fallen for four, and its non-adjusted earnings per share has slid for three.

IBM has said its strategic-imperative businesses have been growing at double-digit percentages, while older, slower businesses have been declining annually by percentages in the low teens, according to analysts.

Investors recently have shown optimism that IBM's transition is on track. The share price suffered in the years between 2013 and 2016, but during the past year rebounded more than 20%. Its share price rose to 11.8 times expected earnings per share from 9.1 during the period, exceeding that of Hewlett Packard Enterprise Co. and approaching that of Oracle Corp., two other big, mature IT companies.

IBM "took their medicine upfront by divesting of the right things and investing in the right things," said Patrick Moorhead, an analyst with Moor Insights & Strategy.

Still, IBM shares slid about 2% in after-hours trading on Thursday following the earnings release, after ending roughly flat in 4 p.m. trading on the New York Stock Exchange. That occurred even though IBM's adjusted quarterly earnings of $5.01 per share exceeded its own and analysts' forecasts.

Some analysts expect the contribution of strategic initiatives to total revenue to reach 50% in the second half of this year, which would mark a milestone in the turnaround Ms. Rometty has sought since taking her post in late 2012.

IBM has been working feverishly to build these new businesses, especially Watson, which offers of commands and functions that software developers can use to stitch artificial intelligence into their programs.

Watson, led the way to the current era of artificial-intelligence in which it is a focus of many big tech companies. IBM has built out its platform to include AI as a service, tools for build-it-yourself intelligent apps, and specialized AI applications in industries including health care, finance, insurance, and automotive.

IBM doesn't disclose revenue from Watson-branded operations, but Ms. Rometty has forecast that the multifaceted artificial-intelligence technology would have 1 billion users by the end of 2017.

Even if revenue from new businesses overtakes that from the old, core revenue, profit growth might remain elusive. Some analysts are concerned that the new businesses are cannibalizing older businesses, accelerating their decline.

Credit Suisse analysts in a recent research note wrote, "The concern we have is the faster [revenue from strategic initiatives] grows, the quicker Core declines."

Write to Ted Greenwald at Ted.Greenwald@wsj.com

(END) Dow Jones Newswires

January 20, 2017 02:48 ET (07:48 GMT)

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