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Investors had better reasons to buy IBM (NYSE: IBM ) than Microsoft on Friday, yet more chose Mr. Softy than Big Blue. Shares of IBM closed up 4.4% versus a 5.7% rally for the PC software king.
Why the disparity? Investors were apparently expecting less from Mr. Softy, even if IBM delivered more. Non-GAAP net income rose 11% to $4.71 per share, $0.09 better than the consensus estimate tracked by S&P Capital IQ that Microsoft beat by just $0.03 a share.
Microsoft also lagged IBM where it counts most: looking ahead. Mr. Softy forecast slightly lower fiscal 2012 operating expenses while IBM projected $14.85 a share in current-year earnings, $0.07 ahead of the consensus. All signs point to another in-the-black year for Big Blue.
To be fair, both companies suffered mixed results last quarter. At Microsoft, Windows division revenue fell 6% even as the Server and Tools division booked an 11% sales increase on the strength of its popular SQL Server database technology. IBM suffered an 8% drop in hardware sales but software revenue climbed 9%.
Zacks Equity Research focused more on Big Blue's hardware numbers, calling its earnings beat "modest" while expressing concern that slower mainframe sales reflected broader weakness in the tech sector and that could weigh on 2012 results.
"IBM's top-line grew a modest 2% in the reported quarter, which primarily reflects a slowing IT spending environment, in our view. Although software continued to grow strongly, sluggish growth in the services segment and decline in hardware make us cautious on the overall IT spending environment. We believe that macroeconomic concerns will continue to hurt IBM's growth in the first half of 2012," the firm said in a note to clients.
Say hello to better economics
Fair enough. According to S&P Capital IQ, you have to go back two years -- to Dec. 2009 -- to find the last time Big Blue saw a year-over-year decline in hardware sales. The stock marginally beat the S&P 500 in the twelve months following, which explains why Zacks remains cautious about IBM's short-term prospects.
Yet Wall Street may be overreacting. Sales of System z mainframe computers fell 31%, leading to a 33% decline in pre-tax income from the unit, but sales of servers and other hardware based on Big Blue's lower-cost Power chip architecture rose 6%.
This isn't surprising. Open source and cloud computing have led a shift to lower-cost computing infrastructures, including cheaper servers. IBM's Power series fits this model. The implication: even if macroeconomic conditions are changing, the shift favors IBM.
Give CEO Sam Palmisano and his team credit for acting before trends became issues. Sharp declines in hardware revenue last quarter didn't equate to sharp declines in computing power shipped. Instead, IBM shipped just 4% less in MIPS -- a measure of mainframe processing capability -- during Q4. System z mainframes are doing more, and in the process giving customers a better deal. Management's response to the resulting income shortfall? Close the gap by acquiring innovative software.
Not surprisingly, their efforts have paid off. Software revenue rose 9% in Q4. Pre-tax income for the segment rose 12% during the same period, reflecting higher margins. Customers seem to appreciate IBM's emphasis on using software not just to connect systems but also to provide analytics and intelligence.
Now contrast this story with the one you heard from Oracle (Nasdaq: ORCL ) in mid-December. New hardware systems sales fell 14% while new software license revenue inched up just 3% in constant currency. Revenue came in about $400 million short of estimates. EPS came in $0.03 light. Quarterly guidance also came in slightly lower than expected. Average software results couldn't overcome a dismal hardware performance. I'm glad I sold Oracle when I did.
Making the call: Buy
As I see it, both Microsoft and Oracle are stuck trying to squeeze as much as they can from lucrative yet aging markets. IBM, on the other hand, is transitioning, forging a path forward that includes a variety of profit-making initiatives that align well with IT priorities. I'm a long-term owner of IBM shares and have been bullish on the stock in CAPS since 2006 and remain as confident as ever. Buy if you don't already own this stock and you need a dividend-paying tech play in your portfolio.
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Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of IBM at the time of publication. Check out Tim's web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.