IBM (NYSE:IBM) beat forecasts and increased its earnings per share outlook for 2011 in its Q3 11 earnings released on Monday. However, the company’s stock dropped by ~5% as the results left some investors wanting given its string of blow out numbers. As Reuters pointed out, IBM’s revenue and service signing roughly met forecasts, but were disappointing in the face of strong comparative results from competitors Oracle (NASDAQ:ORCL) and Accenture (NYSE:CAN) in recent weeks.
Below we take a look at key takeaways from the Big Blue’s earning which indicate the strength of the firm’s software business.
New Initiatives Boost Software Revenues
IBM’s software revenue jumped 13% in the quarter driven by branded middleware growth. This is good news for IBM investors given that the firm now reigns the largest enterprise software globally. (See IBM – the “True” #1 Global Enterprise Software Vendor)
In our earnings preview for IBM, we mentioned IBM’s strong push into its Smarter Planet initiatives. (See IBM Q3’11 Earnings Preview: What We’re Watching on Monday) It was assuring to see that the initiatives are getting a good response and the firm is already seeing measurable results from some of the initiatives. For example, revenue from Smarter Commerce offerings more than doubled year-to-year driving the revenue growth for WebSphere – a core offering of IBM’s Key Branded Middleware which is the firm’s biggest source of value.
As Smarter Planet initiative continue to roll out to good response from clients, IBM middleware software licenses will continue to grow.
More New Offerings to Come
IBM also announced plans to expand its high margin software business both organically and through acquisitions with a focus on higher growth segments such as Smarter Commerce, business analytics and security. The company closed acquisition of i2 earlier this month (See IBM Sees Big Market in Making Cities Safer with i2 Acquisition) and expects to close on the acquisition of Algorithmics and of Q1 Labs later this year. We believe IBM will soon be launching new products based around the newly acquired capabilities and IBM’s middleware software which will further boost the middleware software license revenues.
With what seems like an ever expanding universe of software offerings, we believe that IBM is executing well on its strategic vision and creating an exemplary model which only more competitors will look to replicate.
We have a $187 Trefis price estimate for IBM, which is close to the current market price.
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