IBM reported mixed third-quarter results Monday that showed strong earnings expansion but relatively weak top line growth. We had been expecting such performance and are maintaining our fair value estimate.
IBM’s revenue nudged up 3% (8% including currency) thanks to growth in cloud-revenue (which has doubled year-to-date from last year’s levels), software (up 8% constant currency), and in regions it considers to be growth markets (up 13% constant currency). Software revenue was aided by strength in the firm’s middleware products—WebSphere (up over 50%), Information Management (up 12%), and Tivoli (up 8%).
Sales in BRIC countries—Brazil, Russia, India, China—increased 13%, matching aggregrate growth-market expansion. Services revenue, adjusted for currency, nudged higher 2%, and backlog related to the segment improved $2.4 billion, to $137 billion. Though services backlog declined sequentially, we think year-over-year performance is a better assessment of the underlying growth of the business (as it corrects for seasonality). On a geographic basis, strength was hit-or-miss, with revenue—adjusted for currency—increasing 6% in the Americas, but staying roughly flat in Europe/Middle East/Africa and in the Asia-Pacific (up about 1%).
Non-GAAP net operating earnings advanced 9% from the same period a year-ago as the firm benefited mainly from higher gross margins (up 1.5 percentage points). On a non-GAAP operating EPS basis, the firm benefited significantly from share buybacks during the period. All told, we were less impressed with this quarter than we were with the firm’s second-quarter performance, but we maintain the firm’s earnings growth was solid. IBM also raised its operating earnings-per-share guidance for 2011 to at least $13.35 from $13.25 previously, signaling continued momentum.
We’d be looking to pick up shares of IBM in our Best Ideas Newsletter on a pullback to below the low end of our fair value range (or under $150 per share).