IBM's CFO: Big Blue Accomplished What It Intended In Q1 By Maintaining Aggressive Investment Posture

IBM accomplished what it hoped to in the first quarter of 2016 -- maintaining an aggressive pace of investment in the technologies and talent the company needs to drive a generational business transformation, CFO Martin Schroeter told investors on Monday's Q1 earnings call.

IBM capped the first fiscal quarter with $18.7 billion in revenue, down 4.6 percent year over year, but beating guidance presented in January by $400 million, with $2.3 billion in net income. Shares fell by roughly 5 percent to around $145 in after-hours trading.

As has become the pattern, Big Blue's financial disclosures served as a forum for a status update on the continuing shift to a business model focused on cognitive technologies delivered on hybrid cloud platforms.

[Related: IBM Q4 Earnings Revisit A Familiar Theme -- Transformation]

Through an unprecedented string of acquisitions, novel partnerships with companies like VMware and GitHub, and aggressive hiring for specific skill sets (while laying off many other parts of its workforce), the Armonk, N.Y.-based technology stalwart is following all avenues that can accelerate the transformation process.

The end goal isn't just to cater to existing customers and markets.

"Part of this transformation is about moving into businesses that don't yet exist," Schroeter told investors.

Those emerging businesses will deliver a new generation of products -- such as technologies for video streaming or tackling data challenges in the health-care industry -- almost exclusively as services, he said, "so we expect them to take a while to ramp."

IBM's transformation is focused around a set of "strategic imperatives" that have become the central talking point of every discussion about the company's financial outlook: big data, analytics, cloud, mobile and security.

By investing in those categories, Big Blue will meet the needs of digital enterprises looking to differentiate themselves with cognitive solutions, Schroeter said. What's required to execute that strategy is a solution focus, industry expertise and leading-edge technology.

And customers especially want hybrid environments to leverage investments they've already made in existing infrastructure, he said.

The strategic imperatives were again the highlight of the company's overall financials, with growth of 17 percent in constant currency, beating the market as a whole, Schroeter told investors.

Those businesses took in almost $30 billion over the past 12 months, delivering 37 percent of the company's total revenue.

In the first quarter, IBM's cloud business saw $2.6 billion in revenue, representing 36 percent growth. But cloud technologies delivered "as-a-service" grew at an even faster clip of 46 percent year over year in constant currency, and are positioned for a $5.4 billion annual run rate.

In the past year, IBM has spent about $9 billion on acquisitions to develop new businesses, more than any other period in the company's history. Ten acquisitions were announced or closed since January at a cost of $2.5 billion -- IBM completed its deal for The Weather Co.'s digital assets and Truven Health Analytics in Q1.

The latest acquisition of Bluewolf, a Salesforce-aligned systems integrator, demonstrates IBM has realized it needs to catch up in offering broader implementation services -- an increasingly important component of the new IT landscape, Schroeter said.

"The shift to cloud creates consulting opportunities because companies have to fundamentally change workflows," he said.

Through its Global Business Services division IBM is also building "big transformative" relationships with customers that are "trusting us to run their most-critical systems," he said.

The quarter also saw almost $1 billion in capital investments, mostly to build out cloud capacity. And IBM is hiring new workers as aggressively as it's investing in acquisitions and infrastructure, the CFO said.

"If the world created 5,000 cognitive experts, we would hire 5,000 cognitive experts," he said.

If IBM was able to fill every position it wanted to, the company could conceivably end the year with the same staffing level at which it started, compensating for layoffs driven by workforce restructuring, according to the CFO.

But the global search for talent isn't a problem that can entirely be solved by spending more money, he added.

Schroeter reported that IBM's software division has partially merged with its cloud business, and the company recently completed translating its legacy software into Software-as-a-Service offerings.

"All of IBM's relevant software is now in the cloud," he said.

The company is gauging its transformation, Schroeter said, by the success in pushing up margins.

"Are the spaces we're going to generating higher value than the spaces we're moving from?" is the question IBM leaders continually ask themselves.

They continue thinking hard about where to deploy capital, Schroeter said, "having active discussions on what else they should acquire to extend leads in certain businesses."