IBM's third-quarter growth lighter than expected

IBM's growth slows in major markets, though the company remains enthused on emerging markets

IBM increased both its income and revenue for the third quarter, but the revenue growth came in slightly lower than analysts had predicted, leading to fears that the sluggish economy is hampering IBM's growth.

IBM's net income for the quarter was US$3.8 billion, up 7 percent form the same quarter a year earlier. Revenue was $26.16 billion, an increase of 8 percent, or 3 percent adjusting for currency fluctuations. The figure was below analyst expectations of $26.26 billion, according to a survey by Thomson Reuters. Earnings per share was $3.19 on a GAAP basis, an increase of 13 percent.

IBM CFO Mark Loughridge stressed the importance of emerging markets for the future of the company's growth. "We are leveraging our growth plays while expanding margin," he said in a conference call to discuss the results.

Revenue from growth markets such as China and Brazil was up 19 percent, or 13 percent at constant currency rates, and provided 23 percent of IBM's total revenue.

"Consistent with our model, growth markets, along with our other key growth initiatives, are driving our revenue performance," Loughridge said. During the call, analysts repeatedly asked about sluggish sales growth in the public sector and financial services market, as well as in the major markets overall.

Loughridge urged investors to look at the strong performance in individual units, such as software and service. "I wouldn't look at the overall financial services sector through a major-market lens. Some of the issues we were all reading about, we don't see that in the growth markets," he said.

By sector, IBM's software revenue totalled $5.8 billion, up 13 percent. Total services revenue was $15.1 billion, up by 8 percent. The Systems and Technology group raked in $4.5 billion, or about 4 percent growth. One particularly bright spot was growth in IBM's Power Systems sales, which were up 15 percent.

Other IBM initiatives seem to be bearing fruit. Business analytics revenue is up by 19 percent. Smarter Planet initiatives are up by 50 percent, and cloud revenue year to date is now double what IBM made in that arena for all of fiscal 2010.

Because of this growth, IBM has raised its earnings expectation for fiscal 2011, to at least $13.35 per share from $13.25.

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