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IBM presents the bus "Olli", an autonomous transportation system, at the CeBIT 2017 Technology Trade Fair in Hanover

IBM Beats Sales Estimates, Buoyed by Growth in Software Products

Cloud-based software and services now make up 40 percent of company's total revenue

Jing Cao (Bloomberg) -- IBM sales beat analysts’ estimates, buoyed by growth in the group that houses much of its software products.

Cognitive solutions, a segment that includes Watson analytics and other newer products for IBM, grew 3.9 percent in the third quarter, after a decline during the prior period. Total revenue was $19.15 billion, little changed from a year earlier, but beating the average analyst estimate of $18.6 billion.

Though sales fell for the 22nd quarter in a row, International Business Machines Corp. came the closest to stemming that decline since the third quarter of 2016. Getting back to growth on the top line has been a major goal for Chief Executive Officer Ginny Rometty and a milestone investors are looking for as proof that the company can finally climb out of its rut.

The shares rose as much as 3.2 percent in late trading to $151.17.

“Cognitive solutions has attracted a lot of our investment, and when we look at underlying performance, it captures and reflects a lot of the new strategic imperative areas we’re going into, things like analytics, the security business, Watson Health,” Chief Financial Officer Martin Schroeter said in an interview. “We saw pretty broad-based growth across all cognitive solutions elements.”

Big Blue had a rough first half, missing revenue estimates for the first two quarters. The stock is down more than 11 percent this year, while the broader technology sector has been soaring to records. IBM’s status as a bellwether stock that paid high dividends had kept many investors hopeful that the company could turn things around, but the multi-year revenue declines have eroded confidence. Warren Buffett, once IBM’s most vocal champion and largest shareholder through his Berkshire Hathaway Inc., soured on the company and sold about a third of Berkshire’s investment in IBM earlier this year.

Under Rometty, IBM has been working to add revenue in cloud-based software and services. These newer operations now make up more than 40 percent of IBM’s total sales. But legacy businesses continue to deteriorate. Rometty has also invested more in artificial intelligence technology under the Watson brand, peddling the suite of products as IBM’s future and the driver for long-term growth. But the company doesn’t break out sales for Watson services and folds the group under the cognitive solutions segment -- implying Watson isn’t yet big enough to be material.

Operating profit, excluding some items, was $3.30 a share in the quarter ended Sept. 30, compared with the average analyst estimate of $3.28. IBM improved its gross margins from the previous quarter, in line with Schroeter’s forecast.

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