The Case for IBM

The Case for IBM

There were a couple items IBM fans could point to as positives following its recent earnings release. For one, IBM handily beat analyst non-GAAP earnings estimates last quarter -- $3.91 a share for Q2 compared to the $3.78-a-share average analysts were expecting. IBM subsequently raised its non-GAAP annual earnings expectations to about $16.90 a share in lieu of the $16.70 forecast earlier this year.

Unfortunately, there were also negatives for IBM bears to sink their teeth into. IBM CEO Ginni Rometty gets it: The future of the IT industry is about utilizing massive amounts of data to make business decisions. The question is, how long should IBM investors wait for its shift to take hold?

The upshot
Even though analysts' earnings expectations were soundly beaten, IBM's division revenue results saw year-over-year declines in most every area in Q2. But after accounting for a $1 billion charge related to thousands of job cuts in Q2 -- over 3,300 employees were let go last quarter alone -- non-GAAP results tell a slightly better story.

The aforementioned non-GAAP EPS of $3.91 was an 8% improvement over last year, and IBM's margin improvement -- up 1.4 percentage points to 49.7% in Q2 -- should get even better as workforce cuts and operating efficiencies start to take hold. Rometty is certainly expecting IBM's relatively positive non-GAAP earnings and margin results to continue, as indicated by IBM's raising annual earnings expectations to "at least $16.90."

Still work to do
The lone revenue bright spot by division for IBM in Q2 was its software unit, which enjoyed a 4% jump in revenue to $6.4 billion. It appears that IBM's efforts to transition from hardware to the services side of the IT industry is working. And IBM competitors are learning that shift in mindset isn't just a good idea -- it's a necessity.

Another longtime IBM competitor, Microsoft , can certainly appreciate the position of IBM. While the 12% decline in IBM's hardware division sales in Q2 hurt, every bit of news detailing the decline of the PC market leaves Microsoft shareholders scrambling. But in the latest earnings release, CFO Amy Hood said, "While our fourth quarter results were affected by the decline in the PC market, we continue to see strong demand for our enterprise and cloud offerings, resulting in a record unearned revenue balance this quarter."

What do Microsoft's challenges in the declining PC market have to do with IBM? Just as Microsoft is showing signs of life in the brave new world of cloud computing and data management, IBM's cloud-related revenues the first half of 2013 jumped more than 70%. IBM is beginning to show its strengths during this business transition, and it's time mid- to long-term investors start taking notice, if they haven't already.

The dynamic nature of the IT industry requires adaptation, and some are more adept than others. IBM certainly wasn't the first to recognize the need to change, but that's water under the bridge now. Rometty has her IBMers moving in the right direction.

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Fool contributor Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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