Editor’s note: IBM’s latest earnings report demonstrates that vertical-specific cloud solutions enhanced with Watson capabilities help IBM weather software license declines, says Technology Business Research Analyst Molly Gallaher Boddy. The earnings report, however, showed a 21st consecutive drop in year-on-year revenue.

HAMPTON, N.H. – During IBM’s 2Q17 earnings call on Tuesday, the company cited a quarterly revenue of $19.3 billion. Cloud revenue reached $3.9 billion for the quarter, with an “as a Service” run rate of $8.8 billion. Though IBM’s software revenue of just over $6 billion declined slightly from 2Q16, we believe cloud and SaaS had positive effects.

TBR estimates that IBM bolstered its software performance with SaaS growth of 24% year-to-year in 2Q17. Running across IBM’s cloud and software portfolios are its Watson cognitive capabilities, which allow IBM to build analytics into its offerings. The company noted that the growth of Watson capabilities resulted in enterprise-centric hybrid IT offerings that store, protect and move customer data between on-premises and cloud locations.

(See the graphic with this post spelling out revenues produced by IBM’s Watson, cognitive and other what it calls “strategic imperatives.”)

In fact, IBM’s newest automation and hybrid IT offerings hinge on Watson’s cognitive capabilities, allowing customers to more easily construct and manage hybrid IT infrastructures and applications.

IBM also continues to verticalize its Watson integrated solutions and launched a new suite of cognitive-based solutions as part of Watson Financial Services to help customers in the financial industry manage their regulatory and fiduciary responsibilities.

However, IBM’s ability to differentiate Watson is challenged by the growing ubiquity of cognitive platforms; cloud competitor Microsoft (Nasdaq: MSFT), for example, builds elements from its artificial intelligence platform into numerous offerings. Additionally, despite IBM’s focus on Watson in its product announcements as well as during its earnings calls, IBM recently received criticism from the investor community over its decision to not break Watson revenue out in its financial results.

Though IBM is able to build cognitive capabilities into its cloud products to deliver more functionality to the customer, it is still unclear how much revenue Watson contributes to IBM’s overall performance.

In coming quarters IBM will be challenged to more clearly display how Watson helps drive the company’s cloud performance. In the meantime, a continued vertical go-to-market strategy will help the company win additional cloud and software engagements with Watson, while ongoing partnerships will make Watson smarter as new data is brought into the IBM ecosystem.