IBM Delivers, Then Drops Like A Rock

If investors love predictability so much, you’d think they would have come to love IBM’s (NYSE: IBM) earnings reports by now. It’s always the same, predictable story: soft revenue and good earnings on the bottom line. However, when IBM’s earnings last quarter told the usual tale, the company’s stock was punished. Will people ever learn?

The headline number for Big Blue was revenue of $23.7 billion, up only 2% from last year. IBM blamed $500 million of the revenue shortfall on currency effects. Predictably, the bottom line surged far ahead, moving net income 9% higher than last year. Once again, the company saw exceptional growth in BRIC markets, up 16% this quarter when eliminating currency effects.

All right, so the bad news is that, once again, revenues fell short. IBM’s made a living off producing outstanding profits while the top line moved at a slower pace. That’s been achieved by moving into higher-margin areas like services and software that can provide great profits on fewer sales.

In the software arena, IBM saw some key gains. Its middleware, which is basically plumbing software that connects different programs, saw solid growth. IBM claims to have taken market share in the segment, where its key rival is Oracle (Nasdaq: ORCL), although Oracle’s overall software sales appear to have grown faster than IBM’s during the period.

In services, investors latched on to a 12% decline in services signings. Worrying? Perhaps, service rival Infosys (Nasdaq: INFY) recently reported a 21% jump over last year’s revenues. Then again, the company couldn’t keep it together like IBM did on the bottom line. IBM claims the situation is temporary, but investors would be well-advised to watch future quarters. The services aspect of IBM underpins its core strength of integrating hardware and software to consumers. If services revenue slips, other segments would soon follow.

I can understand investors’ trepidations over IBM’s quarterly report. After Oracle’s earnings, Intel (Nasdaq: INTC) followed up by delivering blowout earnings thanks to increasing server sales. The bar was set pretty high for IBM. However, I’m more concerned about long-term threats to the company.

Shifting alliances in IT are putting the company on a collision course with former partners. In networking, IBM’s having to move closer to Brocade (Nasdaq: BRCD) as Cisco (Nasdaq: CSCO) branches out to offer a server system that’ll compete directly with IBM. Likewise, in the post-Sun acquisition era, Oracle can compete more directly for end-to-end deals against IBM. The landscape’s shifting in IT, and that’s always a threat to the incumbent.

In the end, despite the threats, I still see IBM’s position as extremely safe and fortified. As no company can match the full breadth of IBM’s offerings, don’t look for IBM to be displaced too quickly. At the same time, don’t expect the lumbering giant to post blow-out revenue growth any time soon. Earnings growth on the other hand, that’s a completely different story.