IBM Sales Off Sharply In Third Quarter

IBM on Tuesday reported solid third-quarter profits, but the tech bellwether struggled with top-line growth.

Big Blue announced earnings per share (EPS) of $3.33, short of analysts' expectations. Revenue came in at $24.7 billion, down 5% year-over-year and below Wall Street's prediction of $25.36 billion. Net income was constant from last year, at $3.8 billion.

Still, company officials said they were pleased with the results. "We continued to drive margin, profit, and earnings growth through our focus on higher-value businesses, strategic growth initiatives, and productivity," said IBM CEO Ginni Rometty, in a statement.

"Looking ahead, we see good opportunity with a strong product lineup heading into this quarter and annuity businesses that provide a solid base of revenue, profit, and cash," said Rometty.

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IBM's annuity income derives mainly from its IT outsourcing business. The company is struggling to grow the unit, which it calls Global Technology Services. At $9.9 billion, sales were off 4.4% compared to last year. Global Business Services, which handles back-office functions on behalf of customers, saw its revenue decline 5%.

IBM, however, said its pipeline of outsourcing contracts remains strong. Its services backlog as of Sept. 30 stood at $138 billion, up 1% from a year ago.

Software was also a tough sell for IBM in the third quarter. The unit's revenue was off by 100 basis points.

Sales of what IBM calls "key middleware," traditionally an area of strong performance for the company, fell by a percent, to $3.6 billion. The group includes so-called middleware like Websphere, as well Tivoli and Rational IT management products.

IBM also struggled to sell hardware in the third quarter. Sales were down 13%, to $3.9 billion. Revenue from Power-based servers was off 2%, and sales of industry-standard System x servers were down 5%, Mainframe server sales were off a full 20%.

The global economic malaise also hit IBM. Sales from typically strong growth markets were down by 1%. On the upside, revenue from the BRIC nations (Brazil, Russia, India, and China), grew by 400 basis points. Also helping IBM's top line were sales of Smarter Planet solutions--products that help governments and NGOs operate more efficiently. Those were up 20%.

IBM said it remains on track to meet earlier EPS projections of $15.10 for the year. That did little to reassure investors. IBM shares were off sharply in early trading Wednesday, down 4.48% to $201.54.