On Wednesday, IBM (click ticker for report: ) reported second quarter results that were roughly in line with our expectations. Operating non-GAAP diluted earnings per share (excluding workforce rebalancing charges) advanced 8%, to $3.91, despite revenue declines of 3%, which were led by a 12% drop in ‘Systems and Technology’ sales and a 4% fall off in ‘Services’ revenue. Adjusting for currency, key branded middleware (WebSphere, Tivoli, Social Workforce Solutions—Lotus), z mainframe revenue, business analytics, ‘Smarter Planet’, and cloud revenue were up 10%, 11%, 11%, 25% (during the first half of the year), and 70% (during the first half of the year), respectively. The firm’s operating non-GAAP gross margin advanced 110 basis points in the period, to 48.7%. On a year-over-year basis, services backlog jumped 7%, to $141 billion (after adjusting for currency), a key indication of underlying strength. Free cash flow during the period was $2.7 billion (excluding Global Financing receivables), coming in just under 11% of revenue (but down roughly $1 billion from the year-ago period).
Looking ahead, the firm raised its 2013 operating earnings per share expectation by $0.20 to at least $16.90, excluding $1 billion in workforce rebalancing charges in the second quarter. We fully expect that share buybacks and the firm’s underlying shift toward higher-margin software revenue will be key drivers behind IBM meeting this expectation. We also believe the company remains on track to achieve $20 in adjusted operating earnings per share by 2015, though divestitures may impact the trajectory a bit. Still, our fair value estimate (at the time of this writing) largely reflects such improved performance and indicates very little upside from today’s price levels. Even IBM’s isn’t quite large enough to turn our heads.