IBM projects first growth in sales in five years

After more than five years of declining sales, IBM says it will finally show investors it can grow again. Wall Street cheered, sending the shares up the most in more than eight years.

Some of that sales boost will come from one of the company’s legacy hardware businesses, rather than the new services such as cloud and data analytics on which IBM has been pinning its prospects for growth.

Fourth-quarter revenue is projected to be $22bn (€18.7bn) to $22.1bn, which will represent as much as a 1.5% bump from the same period in 2016. It also tops analysts’ average estimate of $21.8bn.

In the last quarter of the year — historically IBM’s strongest— revenue will improve by as much as $2.9bn sequentially, boosted in part by sales of its new mainframe server, chief financial officer Martin Schroeter said on a call to discuss earnings.

“The mainframe is going to drive a lot of the positive growth in the fourth quarter,” said Josh Olson, an analyst at Edward Jones.

“When you’re selling mainframes, you’re also selling a lot of software and services with that,” he said.

If IBM achieves its outlook, it will end a 22-quarter streak of shrinking sales. During the third quarter, IBM came the closest to stemming that decline since the same period in 2016.

Getting back to growth on the top line has been a major goal for CEO 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 8.2%, the most since January 2009, and the top gainer in the Dow Jones Industrial Average and the Standard & Poor’s 500 Index.

But the mainframe business is cyclical, and analysts aren’t convinced that IBM can sustain growth after server sales start tapering off. To prove it has reached the inflection point, IBM will need to show that its other categories — in particular its newer businesses including cloud software and services — can pick up the slack, Mr Olson said.

Analysts see positive signs in some of those areas, but are looking for continued growth before saying IBM’s turnaround is successful. “They definitely have some potential going into 2018 in certain parts of the business, and you couldn’t say that a few years ago,” said Daniel Ives, head of technology research at GBH Insights.

“It’s an execution story and 2018 will be a huge proving year for Rometty and IBM,” Mr Ives said.

Total revenue in the third quarter was $19.15bn, a decrease of less than 1% from a year earlier, but higher than the analyst average estimate of $18.6bn. Growth came from hardware, as well as 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%, after a decline during the prior period.

The systems unit also reported a gain, helped by improved sales in data storage products and the new mainframe server, which became available late in the third quarter, Mr Schroeter said.

“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,” Mr Schroeter said. These “strategic imperatives” include analytics, security and Watson-branded products and are a key indicator for IBM’s future success.