IBM investors cheer first signs of success for big blue strategy

IBM has given its investors a sign that Big Blue may finally be turning things around. Revenue increased for the first time in a key unit -- cognitive solutions, including its Watson artificial intelligence platform -that the company has been touting as crucial to future growth.

The results may signal that Chief Executive Officer Ginni Rometty is making good on her promise to shift IBM's software and services offerings to match customers' increasing appetite for cloud-based solutions.

It's been an uphill battle. Overall, sales have declined for 17 quarters in a row, while margins have also narrowed.

International Business Machines Corp.'s results Monday "underscore that the company is beginning to find an inflection point," said Bill Kreher, an analyst with Edward Jones & Co. "We may begin to see the company grow as a whole as soon as next year."

Second-quarter sales gained 3.5 percent to $4.7 billion in the cognitive solutions group, including analytics and security software products. This is the first time since Armonk, New York-based IBM reorganized its segments that cognitive solutions has registered a revenue increase, after declining the previous five quarters in a row. Chief Financial Officer Martin Schroeter highlighted Cognos and Watson products in the analytics portfolio as the major reasons for the increase. Shares jumped in extended trading in New York, the first positive reaction to an earnings report in four quarters. The stock gained as much as 3.8 percent after closing at $159.86. To keep up the momentum, IBM will have to prove that it can meet expectations for its full-year earnings forecast of at least $13.50 a share. This means that more than 60 percent of its profit will have to come from the latter half of 2016.

In the first half of this year, IBM spent $5.4 billion on deals, closing 11 of them. Acquisitions added a two-percentage-point boost to revenue this quarter and is expected to add more to the top line during the second half of the year, Schroeter said on an earnings call late Monday.

The sales growth in the cognitive solutions unit was also buoyed by the deals, he said. IBM mixes the products from the acquisitions into software and services it sells to its customers, which is why the purchases have helped multiple divisions of the company, Schroeter said in an interview. "IBM has made some prudent investments, and now it appears they're beginning to pay off," Kreher said. "It certainly does ramp up expectations."