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10/19/2010
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IBM Q3 Results Marred By Services Concerns

Big Blue posted across-the-board growth in all its business units, but investors see outsourcing slip as a red flag.

IBM shares were off 3.24% in midday trading Tuesday as investors shrugged at the company's solid third-quarter earnings and instead focused on a decline in new services contract signings during the period. Shares of Big Blue were down $4.63, to $138.20 on volume of more than 6 million.

IBM signed new services deals worth a total of $11 billion in the quarter, a 7% decrease from the previous year. Within that segment, outsourcing signings, where enterprises agree to hand off management and maintenance of their IT operations to IBM, fell off the most—down 15% from a year ago to $5.7 billion.

IBM officials said investor concerns about the decline were misplaced, blaming the shortfall on bad timing.

During a call with analysts Monday, CFO Mark Loughridge noted that a $1.7 billion deal with ABN AMRO closed Oct. 8, just eight days after the close of the quarter. Had the deal been included, the company's third-quarter new outsourcing signings would have increased by about 14%.

"It's very difficult to predict when these deals will close," said Loughridge. "Eight days is not going to make any difference in the yield to this contract," he added. IBM's total services revenue for the quarter increased 2%, to $14.1 billion.

Overall, IBM posted solid but not spectacular third quarter results. The company reported an 18% increase in earnings per share, to $2.82. Wall Street analysts, on average, were expecting EPS of $2.71. Revenue rose 3%, to $24.3 billion, above expectations of $24.1 billion.

Leading the way for IBM was its Systems and Technology hardware unit, which houses servers and mainframes. S&T revenue increased 10% year-over-year, to $4.3 billion. Sales of industry standard System x servers increased 30%, fueled in part by the company's introduction earlier this year of its eX5 chipset technology. The technology promises to reduce the number of servers required for a given workload by 50%, cut storage costs by 97%, and lower licensing fees by half, IBM said.

Sales of System z mainframes increased 15%, as IBM added the new zEnterprise system to its heavy metal lineup. The zEnterprise incorporates 96 industry-fastest 5.2 GHz processors, to enable real-time and in-line transaction processing. The system can also support up to 100,000 virtual images.

Software sales rose 1%, to $5.2 billion, on the strength of solid performance from IBM's existing portfolio of middleware products, including Tivoli, Lotus, and Rational brands, as well as revenue from acquired products that came on line during the quarter.

"In the third quarter we grew revenue in our hardware, software, and services businesses, expanded margins, and again increased earnings per share at double digits," said IBM CEO Sam Palmisano, in a statement.

"Looking ahead, we are uniquely positioned in the enterprise, investing in high value segments like business analytics, advanced systems, and smarter planet solutions," he added. Palmisano said IBM is on pace to deliver full-year EPS of at least $11.40.

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