IBM Earnings: Profits Soar, Revenue Not So Much, but the Future Looks Bright

Last Updated Oct 18, 2010 5:16 PM EDT

IBM announced its third quarter earnings and leaned heavily on its 31 consecutive quarters (1 quarter shy of 8 years) of earnings per share growth, as year-over-year diluted EPS was up 18 percent and $3.6 billion in net income was up 12 percent. However, the company's revenue was up 3 percent (4 percent adjusted for currency). Even given its size, IBM is trailing competitors like Hewlett-Packard (HPQ), which, in August, announced quarterly revenue up 11 percent year-over-year.

This suggests that IBM again relies on aggressive fiscal discipline to keep investors happy, but that the company is getting beaten in the market by its major rivals. The good news for IBM is that it grew somewhat faster in services than competitors, a major point of distinction in a world where hardware prices continue to withstand significant downward pressure and sales are no longer reliable engines of corporate growth.

For example, IBM's systems and technology segment saw a 10 percent year-over-year growth, compared to the 19 percent jump HP had in enterprise storage and servers. Even at that, IBM depended overly on the 15 percent increase in revenue from mainframe sales -- an area gaining increasing examination by regulators for potential anticompetitive behavior. The company's proprietary Power Systems that run Unix or Linux were actually down by 13 percent. Revenue was up 30 percent for x-86 servers, but that falls thoroughly into the commodity zone.

Software was up only 1 percent overall, and IBM's all important middleware productions, which connects computers and users, grew by 7 percent due to a couple of the product lines. Others were flat.

IBM's technology services saw a 2.7 percent growth in revenue and business services were up 3 percent. HP's service revenue, which at $8.6 billion for the quarter was roughly only 60 percent of IBM's $14 billion, had grown by less than half that rate. In addition, HP saw 28 percent of total revenue from services. IBM made 57.9 percent of its revenue from services.

The combination of services strength, middleware expertise, and experience in delivering huge mainframe timesharing systems combine with IBM's strategy of acquiring business analytic services to position the company strongly for the coming cloud centric approach to computing. Although it does focus heavily on pleasing investors in the short run, IBM management has positioned the company smartly for the future. Some product lines will die out over time, but likely replacing them will be growing revenue from where corporation computing is heading.

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Image: courtesy, IBM.
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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.