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IBM Corp. extended its string of revenue declines to 22 consecutive quarters, but just barely, boosting investor sentiment and sending shares up nearly 5 percent in after-hours trading to their highest level in more than a year.

Third-quarter revenues of $19.2 billion were just 0.4 percent lower than a year ago, the smallest quarterly decline in more than five years and even better than the 1 percent drop that analyst Ralph Finos of Wikibon, owned by the same company as SiliconANGLE, declared last week would be “a miracle.” Update: Investors liked what they saw even more by the morning, as shares rose nearly 10 percent by midday.

Equally important was that sales in the “strategic imperatives” that have been the focus in recent years of Chief Executive Ginni Rometty — cloud computing, analytics, mobile and security — grew 10 percent and now comprise 45 percent of the company’s revenues. “IBM this quarter once again showed improvements in their ‘strategic imperatives,’ a positive sign,” said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy.

There were no blockbuster surprises in the quarter, but no big disappointments either. Cloud revenues surged 20 percent, to $4.1 billion. Sales of analytics products grew 5 percent, to $5 billion. And the security business logged nearly 50 percent growth, though off a small base. On the profit front, IBM reported $3.30 a share after adjustments for acquisition- and retirement-related costs, a bit over the $3.28 analysts had projected.

Not surprisingly, IBM got the usual cyclical boost from the introduction of its z14 mainframe in July. That drove revenues in its systems division up 10 percent, led by 14 percent growth in hardware.

Although Big Blue’s cloud computing business continues to lag the growth rates of much larger competitors such as Microsoft Corp. and Amazon Web Services Inc., the company is backing away from positioning itself as a major supplier of public cloud infrastructure. Instead, it’s talking about cloud less as a discrete product and more as a component of everything else it sells.

“Across our business, we’re infusing cloud and artificial intelligence into our products,” said Martin Schroeter, senior vice president and chief financial officer. “We’ve built industry-specific cloud solutions in areas like healthcare and financial services that are opportunities outside of traditional IT.” He cited 35 percent growth in cloud revenue within IBM’s Global Business Services unit as an example of how cloud is being folded into other lines of business.

Whither Watson?

IBM’s earnings call was short on Watson, the foundation of what it calls its “cognitive computing” business. The meager 5 percent growth in revenue from analytics – the strategic imperative category that includes Watson – indicates that the artificial intelligence engine is struggling to meet expectations, said Andrew Bartels, vice president and principal analyst at Forrester Research Inc.

IBM may be realizing that it needs to reposition Watson away from being a product to more of a tool that partners and businesses can use to build their own products, Bartels said. “We think AI and Watson are going to end up being more middleware for clients to use to build their own predictive models, but that’s a slower road to growth,” he said. “That suggests that Watson is not yet a real revenue gainer for them.”

Schroeter stressed that Watson is doing well in vertical markets and that IBM’s cognitive solutions business has been driven by “organic performance,” rather than acquisitions. IBM signed 40 new clients to its Watson-based “internet of things” platform in the quarter, and he said the number of developers building Watson applications grew at a strong rate. “Watson continued to drive double-digit growth, with particular strength in oncology, life sciences and finance,” he said.

IBM’s renewed focus on tools and vertical markets points to a lower growth rate in the future but also a more stable business, Bartels said. Noting that IBM has never been a strong application software vendor, but has historically excelled at middleware and tools, he said he sees signs of the company returning to its roots as a solver of complex problems for large enterprises.

“It’s taking IBM back to being a middleware vendor; that’s where they came from and I think that’s what they’re going,” Bartels said. “Selling applications delivers fast revenue growth. Middleware is slower.” The company’s recent focus on the security business is additional evidence of the return to its roots. “IBM doesn’t do simple,” Bartels said. “There’s a good fit between clients need for solutions to complexity and IBM’s strength.”

Schroeter reserved a few choice words for the success of its latest mainframe, a highly secure platform featuring what it calls “pervasive encryption.” Left for dead by some pundits as much as 30 years ago, the mainframe continues to find relevance for large enterprises, he said.

“The mainframe was reinvented for mobile, cloud, analytics and, before that, for the data center,” Schroeter said. “The mainframe model is as a very stable business with high value. Given the types of problems this mainframe solves, I think there’s opportunity to further expand the market and give it relevance in new environments.”

For the year, IBM reiterated its adjusted forecast of $13.80 a share.

Image: IBM