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IBM Posts Q3 Gains On Smarter Planet, Analytics Push

Big Blue sees strong growth in strategic segments, but shares slump after sales disappoint.

100 Years Of IBM: 25 Historic Milestones
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Tech bellwether IBM reported Monday solid third-quarter results for its major business lines, but its shares fell sharply after the company's total revenue and profits failed to meet analysts' expectations.

For the three-month period ended Sept. 30, IBM said total sales came in at $26.16 billion, up 7.8% from the same period a year ago. Earnings per share were up 13.1% to $3.19, on net income of $3.84 billion. Analysts surveyed by Thomson Reuters had expected Big Blue to post revenue of $26.25 billion and EPS of $3.22.

IBM appears on track to outpace overall IT industry growth. Gartner on Monday said it expects worldwide tech spending to increase just 3.9%, to $2.7 trillion, in 2012. But the revenue and earnings misses sent IBM shares lower by 3.64%, to $180, at one point during after-hours trading. That was in spite of the fact that the company raised full-year guidance for operating EPS to $13.35 from the previously stated target of $13.25 or more.

[IBM thinks Oracle is misleading potential customers and it's had enough. Find out why IBM Calls Out Oracle On Server And Systems Claims.]

Still, IBM CEO Sam Palmisano said he was pleased with the results, which he said were evidence that his focus on high-margin products and services like Business Analytics software and the Smarter Planet initiative, under which the company is helping public sector organizations build intelligent infrastructure systems, is paying off.

"In the third quarter, we drove revenue growth, margin expansion, and increased earnings as a result of our innovation-based strategy and continued investment in growth initiatives," said Palmisano, in a statement.

Revenue for IBM's key Global Services (IGS) unit, which accounts for more than half of the company's total sales, were up 7% (without adjusting for currency changes), to $15.15 billion. Within the group, technology outsourcing sales were up 9%, while revenue from business consulting grew 6%. The company's services backlog, which measures work that's been contracted but not yet recognized as revenue, stood at $137 billion as of Sept. 30, up $2.4 billion year over year.

"We expect IGS to maintain strong growth in the fourth quarter as the company develops its analytics software and consulting capabilities while benefiting from customer adoption of its recently announced SmartCloud portfolio," said Technology Business Research analyst Cassandra Mooshian, in a research note published after IBM released earnings.

IBM saw the strongest growth in its software group, which posted a 13% revenue increase, to $5.8 billion. Middleware products from the WebSphere, Tivoli, Lotus, and Rational lines, which, along with services, are at the foundation of the Smarter Planet and Analytics pushes, increased 17%.

Over the past five years, Big Blue has spent more than $14 billion acquiring business intelligence and analytics software companies to bolster the software group.

Last week, it said it had reached an agreement to buy cloud infrastructure specialist Platform Computing, of Toronto, for an undisclosed sum.

In September, IBM announced a deal to acquire i2, a Cambridge, U.K.-based company that develops software that helps organizations use data analysis to detect fraud and spot security threats. Also in September, it struck an agreement to buy out risk assessment specialist Algorithmics for $387 million.

IBM's most growth-challenged unit in the third quarter was its systems and technology group, which sells mainframe, Unix, and x86 servers. The group posted a 4% increase in revenue, to $4.5 billion. Sales from Unix and Linux servers were up 15%, System x sales grew 1%, while System z mainframe revenues were off 5% from last year, when the company introduced its new zEnterprise line of high-speed mainframes. IBM in recent years has sold off commodity parts of its hardware business, such as PCs and commercial printers, to focus more on high-end commercial systems.

IBM said it ended the third quarter with $11.3 billion in cash on hand. Free cash flow increased by $300 million year over year, to $3.5 billion.

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