IBM's Q3 strong but disappointing

Rise in total signings and revenue this quarter, but Big Blue fails to impress by falling short of competitors' earnings and missing analysts' forecasts. Past acquisitions, however, paying off, says analyst.

IBM's third-quarter 2011 sales have missed analysts' estimates due to slowing revenue growth on its software, hardware and service businesses, failing to impress investors. Company executives reveal plans to focus on business analytics, growing markets and cloud computing. 

According to Reuters, Big Blue's revenue and service signing roughly met forecasts, but were disappointing compared to the strong results from Oracle and Accenture in recent weeks. 

The IT giant said total services signings, which are an indicator of future growth, climbed to US$12.3 billion in the third quarter. This was on the low end of expectations which were between US$12 billion and US$13 billion. 

Revenue rose 8 percent to US$26.2 billion, marginally less than the average forecast of US$26.26 billion. 

"We're in the early stages of third-quarter earnings season and everyone's looking at top-line numbers to see any evidence of the economic slowdown working its way into financial results," Keith Wirtz, chief investment officer for Fifth Third Asset Management, said in the Reuters report.  "All the news on macro has been negative. At what point does it creep into the company's numbers? We're still seeing above-average results." 

Hardware sales growth slowed to 4 percent from 17 percent in the second quarter. Sales growth at IBM's services businesses dropped to 8 percent from 10 percent, while revenue expansion at its software unit slowed to 13 percent from 17 percent. 

Analytics, emerging markets, cloud computing
Matthew Casey, software research analyst for Technology Business Research, however, said the IT vendor's double-digit software revenue growth for the second quarter in a row, indicated that its investment in past aquisitions and initiatives including Smarter Planet, business analytics and security, were bearing fruit.

"IBM is able to move the growth needle by identifying billion-dollar opportunities, assessing what they have for assets to address these areas, and filling in portfolio gaps through acquisitions. It proved the reliability of this system with strong growth across its major growth investment areas during third-quarter 2011. Acquisitions play a pivotal role in driving software revenue growth, and those investments were clearly reflected in IBM's software performance during the quarter," Casey said in a statement Tuesday.

According to Bloomberg, CEO Sam Palmisano said he was focusing on areas such as business analytics, emerging markets and cloud computing to improve sales despite the sluggish economic expansion. In the second quarter, the U.S. economy grew 1.3 percent following a 0.4 percent gain in the last three months, which was its weakest performance in two years.  

IBM's project software would make up half of total profits in 2015. Analytics software, which helps businesses predict trends, was expected to bring in US$16 billion in sales by 2015, while cloud computing would draw US$7 billion. Smarter Planet, Palmisano's initiative to digitally monitor anything from roads to hospitals to make them more efficient, would grow to a US$10 billion business.

Revenue from growing markets such as Brazil, India and China rose 19 percent last quarter, and sales from the regions would make up at least 30 percent of revenue by 2015, up from 21 percent in 2010. 

Palmisino also said he planned to spend approximately US$20 billion on acquisitions between 2010 to 2015. So far, IBM spent about US$3 billion in acquisitions related to cloud computing, Steven Tomasco, an IBM spokesperson, said in the Bloomberg report.


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