Is IBM Finally Poised to Turn the Corner?

For the first time in six quarters, International Business Machines Corp. (NYSE: IBM  ) finally exceeded Wall Street's quarterly revenue expectations. But does that mean the tech giant is finally ready to turn the corner?

I think so. But before I get to that, I'll admit IBM's results don't seem particularly impressive on the surface.

IBM stock, Apple stock, Lenovo stock

Credit: IBM

Quarterly revenue fell around 2% year-over-year to $24.4 billion -- or down 1% if you adjust for IBM's divested customer care outsourcing business -- which translated to 34% growth in adjusted earnings to $4.32 per share. However, both figures beat analysts' estimates, which called for earnings of $4.29 per share on sales of $24.12 billion.

IBM also reiterated its full-year outlook for adjusted earnings of "at least" $18 per share. Analysts, for their part, were slightly less optimistic in modeling 2014 earnings of $17.87 per share. Meanwhile, the market continues to question just how much longer IBM can keep milking higher earnings from non-operational items in lieu of top-line growth.

Stifle your yawns and read this ...
Sounds boring, right? But amid IBM's stagnant top-line growth are a few silver linings worth considering.

First, on the subsequent earnings conference call last week, IBM CFO Martin Schroeter insisted that the performance of its software segment -- which was relatively flat at $6.5 billion adjusting for currency in its most recent quarter -- is still expected to accelerate in the second half of this year "back to mid-single digit growth." Next, though IBM's core services revenue continued their years-long decline in Q2 -- decreasing 1% this time to $13.9 billion -- note that services actually increased 1% year over year after adjusting for the aforementioned divestiture of its customer-care outsourcing business. 

This in mind, remember that IBM's divestitures are part of its crucial long-term approach of shedding businesses that don't line up with its promising strategic growth initiatives. Most recently, that also includes IBM's $2.3 billion deal to unload its low-end server business to Lenovo (NASDAQOTH: LNVGY  ) , the completion for which management continues to express optimism as it faces regulatory scrutiny. And while Lenovo will be happy to represent the only game in town in the low-end server biz, IBM has worked hard to redirect its resources in what should ultimately prove greener (i.e., higher-margin) pastures.

To be sure, cloud revenue has risen more than 50% year to date. This includes nearly 100% year-over-year growth in annual run rate revenue in Q2 to $2.8 billion for cloud delivered as a service, up from $2.3 billion in the first quarter. In addition, IBM's revenues from business analytics, security, and mobile have each increased 7%, 20%, and more than 100%, respectively, year-to-date.

And don't forget IBM's recently announced partnership with Apple (NASDAQ: AAPL  ) . Through that partnership, IBM will deliver a new class of dozens of enterprise mobile business applications for Apple's iOS, encompassing everything from cloud storage to data security. In return, IBM will also sell Apple's iPhones and iPads preloaded with select applications to its huge global enterprise client base. In the end, this move should not only unleash the enormous potential of the yet-untapped enterprise market for Apple but should also serve to further bolster IBM's mobile and software aspirations.

Challenges remain
But don't get me wrong: IBM is still "only" targeting $7 billion in revenue by next year from cloud-related sales of hardware, software, and services, which is relatively minuscule in the grand scheme of things.

In the near term, at least, that means IBM will need to continue to stem the bleeding with its current core segments. But if the aforementioned comments and expectations outlined by management are any indication, it appears the worst may finally be over for Big Blue. Over the long term, and with shares of IBM currently trading under 10 times next year's estimated earnings, I suspect patient investors will be more than pleased they held on today.

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