If IBM (NYSE: IBM ) were a basketball team, it'd be the San Antonio Spurs. No disrespect to Spurs fans, but like Big Blue, they're old and boring but are well-managed and execute perfectly. While the basketball purist might get some excitement from a fundamentally sound pick and roll leading to an off-the-glass jump shot, the fans want highlight-reel dunks. So, when IBM easily beat analyst expectations last night, the market saw it as business as usual for IBM and moved along. Deja vu, anyone?
Throwing a BRIC through expectations
IBM posted revenues that were up 3% year over year while expanding the bottom line by 18% year over year. The bottom- line gains once again come thanks to reducing share count and other cost savings. One interesting note: The company's tax rate was 3.2 percentage points below last year's. That comes the same day Apple (Nasdaq: AAPL ) announced a tax rate that was 5 percentage points below its own guidance.
The shifting mix to international sales is pushing down tax rates, but can also lead to tax consequences when bringing cash back to the U.S. In IBM's case, BRIC (Brazil, Russia, India, China) countries brought 29% year-over-year growth.
The biggest concern was services signings. The company's total signings were down 7% year over year to $11 billion. IBM was quick to note it signed a massive deal with ABN AMRO shortly after the quarter ended, so the drop-off might just be part of the lumpiness of large signings. It's also important to note that total backlog is still flat, so I wouldn't put too much weight behind this earnings pothole.
More acquisitions, fewer buybacks?
Looking ahead, an interesting area to watch will be whether IBM lets off the gas on share buybacks. The company still has $2.3 billion left on its buyback authorization, but could focus its spending more on acquisitions, given the consolidation among big data center players. That would hurt earnings per share in the short run, but given that IBM's road map still calls for about $50 billion in repurchases through 2015, it shouldn't affect the company's long-term outlook.
So what might IBM be looking at in coming quarters? Remember that unlike competitors Hewlett-Packard (NYSE: HPQ ) and Oracle (Nasdaq: ORCL ) , IBM's not rushing to reinvent itself. Those companies are furiously acquiring and retooling to become more like IBM. That's an enviable position that allows the company to be more strategic. Also, while IBM hasn't been aggressively expanding its research and development spending, it hasn't been gutting it like HP did in the past couple years[e10] . That's left IBM with internally developed solutions in key areas, so it doesn't need to do things like join the bidding war seen between HP and Dell for niche storage expert 3Par.
One interesting area that keeps getting mentioned is networking. Cisco (Nasdaq: CSCO ) has branched out and gone deeper into the server and services field, which has caused some competitors to fire back by pushing more into networking. Speculation has risen that IBM could snap up networking and storage small fry Brocade (Nasdaq: BRCD ) to package with its own hardware offerings. While Brocade has been struggling to make a go of it on its own, packaged with IBM's significant sales force and contracts, it could expand its footprint in the networking space.
All in all, it's another solid quarter from IBM. The market wasn't impressed, sending the shares down more than 3% today. I recently recommended buying IBM as part of our "11 O'Clock Stock" series and think this quarter continues to validate the buy thesis. IBM is executing well across its business, and has focused on key growth areas like business analytics and being a big-technology first mover in the massive opportunity presented by digitizing the energy grid. Whether or not Mr. Market believes it, IBM's baseline jumper is still the best in the game.