Is IBM Still a Solid Tech Play, Despite Slowing Growth?

Another quarter is in the books for IBM (NYSE: IBM  ) , and investors are left wondering if the momentum from long ago will ever return. While it makes little sense to expect IBM to produce the sort of growth seen from (NYSE: CRM  ) , it's been nonetheless disappointing that it has been unable to keep up with Oracle (NYSE: ORCL  ) . However, after a solid fourth-quarter report, it seems Big Blue did all it could to keep investors from feeling blue.

Growth still soft, but much improved
IBM's performance was far from breathtaking. But the report and the ensuing outlook were both solid enough to justify investor optimism. The company reported net income of $5.8 billion, or $5.13 per share -- representing a year-over-year increase of 6%. When excluding one-time items, earnings arrived to $5.39, easily exceeding Street estimates of $5.25 per share.

However, revenue was a bit soft, arriving at $29.30 billion. While this was enough to beat Street estimates of $29.09 billion, it did represent a year-over-year decline of almost 1% -- the third consecutive quarter of deteriorating sales. But on a sequential basis, revenue surged 18%. IBM said the performance was helped by a 3% increase in its software business.

Granted, compared to Salesforce's market domination, 3% increase for IBM is pretty weak. Then again, in a sector ravaged by poor IT spending, IBM investors should find this encouraging. Still, IBM has a long way to go to catch up to Oracle, which is coming off a quarter where it posted an 18% year-over-year increase in net income.

For Oracle, however, the most impressive aspect was the 17% surge in its software licenses and subscriptions business. While that is still 50% slower than Salesforce, it is outpacing IBM's 3% growth in software. Plus, Salesforce's performance was helped by its strong showing in its services business, which grew 35% year over year.

By contrast, IBM just posted a 2% decline in services revenue. This is while Salesforce continues to grow various business segments such as professional services at an annual rate of over 30%, all of which contributed to an 18% jump in its operating income. IBM struggled with sales declines as it was adversely affected by the slowdown in Europe.

Profitability still the sign of strength
Amid the strong competition and the challenging macro environment, that profitability arrived as well as it did certainly proved the brilliance of IBM's management. Margins were impressive, coming in at 48.1% for 2012. Also, that gross margin advanced more than two points year over year was pretty remarkable.

The company said that this was helped by a heavier software mix and stronger-than-expected sales in servers. For that matter, IBM posted a gross margin increase in all of its segments. Likewise, operating income grew 10% year over year, with operating margins showing an improvement of over 2.5 points.

All of this means that although IBM is losing share to Oracle and Salesforce, the company is doing well squeezing every penny out of the customers that it does have. Then again, the 56% revenue jump in mainframes suggests that IBM is holding its own against the likes of Hewlett-Packard and Dell. However, the fact that the storage segment revenue was down 5% means that Big Blue ceded some market share to EMC and NetApp. All in all, this was a solid quarter, for which IBM's CEO Ginni Rometty offered: "Our performance in the fourth quarter and for the full year was driven by our strategic growth initiatives -- growth markets, analytics, cloud computing, Smarter Planet solutions -- which support our continued shift to higher-value businesses."

Rometty touched upon some very important topics, particularly as they relates to "higher value business." Essentially, this was the key to this quarter. Granted, IBM improved sequentially in several areas. However, as I've pointed out, losing market share to rivals was offset by improved margins, which is precisely what Rometty is referring to -- it's brilliant. But can it continue?

Moving forward
Clearly IBM has sound leadership. And without question the company is still a force in technology. Unfortunately, the growth that the Street expects has not been there. However, the company understands this. To that end, IBM has been on an acquisitions spree – spending well above $16 billion over the past five years. While some have worked, several have not.

However, there are still opportunities. And the decline in its storage business is a perfect example. NetApp would make a great acquisition for IBM. As the future of the cloud takes full shape and with IBM's expertise in data analytics, it makes perfect sense to shore up the data storage segment. Besides, IBM has always prided itself on being a one-stop shop.

Plus, this would be one more advantage that it can launch against Oracle and Salesforce. In the meantime, there is plenty to be excited about as the company appears more optimistic about what lies ahead for fiscal 2013. IBM is projecting non-GAAP EPS of at least $16.70, which is above Street estimates of $16.63.

Big Blue's bottom line
IBM is still doing what it has to do to please investors. Even though the growth rate is far from exceptional, the company consistently delivers where it matters the most -- on the bottom line. Since the report, shares have soared as much as 6%. For IBM and its investors, the good news there is still more room for the stock to run, as $225-$230 per share is certainly attainable. IBM would only need to grow cash flow at a 5% rate over the long term. This would represent a gain of almost 20%. At currently levels, patient investors should do well believing in Big Blue.

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