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The turnaround story for International Business Machines (NYSE: IBM) hinges on the company's growth businesses becoming big enough to push both revenue and profits higher. The market has been hesitant to buy into this narrative -- shares of the century-old tech giant trade close to their 52-week low.
That skepticism will be a little harder to maintain after IBM's second-quarter report. The company beat analyst estimates across the board, grew revenue adjusted for currency, and produced double-digit pre-tax income growth. IBM's strategic imperative growth businesses accelerated compared to the first quarter, and the cloud business continued to boom.
The IBM Cloud logo. Image source: IBM.
Growing revenue
IBM's second-quarter revenue jumped 4% year over year to $20 billion, beating the average analyst estimate by $120 million. Backing out the impact of currency, revenue still grew by 2%. That's a lot better than the flat currency-adjusted revenue IBM reported for the first quarter.
IBM's strategic imperatives revenue rose 15% on a reported basis, and it grew 13% adjusted for currency. That's better than the 10% adjusted growth rate in the first quarter. Analytics revenue jumped 5% to $5.4 billion, while cloud revenue rose 18% to $4.7 billion. Trailing-12-month cloud revenue has now reached $18.5 billion, with the as-a-service portion currently at an $11.1 billion revenue run rate.
The hardware business also helped revenue. Sales of IBM's mainframe systems more than doubled compared to the same period last year, and both the Power and storage businesses produced growth as well. IBM's latest mainframe system began shipping in the third quarter of last year, so the company is still enjoying a spike in sales triggered by upgrading customers.
Security was a standout during the second quarter, with IBM reporting $1.0 billion of revenue, up 79% year-over-year. Strong sales of the mainframe, which features advanced encryption capabilities, contributed to that growth.
Margins on the rise
While IBM's adjusted gross margin declined by 0.6 percentage points compared to the second quarter of last year, the company's pre-tax margin moved in the opposite direction. IBM converted 16.9% of revenue into pre-tax profit, a 1.1-percentage-point increase year over year.
This margin expansion was driven by operational efficiencies in the cognitive solutions segment, revenue mix and productivity gains in the global business services segment, and strong sales of mainframe systems.
IBM's adjusted earnings per share came in at $3.08, up 5% year over year and $0.04 ahead of analyst expectations. Revenue and pre-tax margin growth drove the increase, partially offset by a tax headwind related to a discrete tax benefit in the second-quarter of last year. Share buybacks also helped the cause.