International Business Machines (NYSE:IBM) reported revenues of $25.8 billion in Q2 which is about 3% lower y-o-y. Free cash flows were up 9% y-o-y at $3.7 billion and net income was up 6% y-o-y at $3.9 billion. As expected, Smarter Planet, Cloud Revenue and Business Analytics outperformed. Smarter planet revenue was up 20% q-o-q, Cloud revenue nearly doubled and Business analytics grew by 13% q-o-q. Software and services did better than hardware which is on the decline. The Europe, Middle East and Africa division revenues was down 9 percent y-o-y at $7.9 billion. 
Outlook For 2012 Raised
- IBM Earnings: Revenue Decline Continues Even As Shift To Cloud And Strategic Imperatives Gains Momentum
- IBM Earnings Preview: Marginal Decline In Revenues As Shift To Cloud Services Gains Traction
- IBM’s Strategic Initiatives, Part 2: How Much Value Can Be Added To IBM’s Stock Due To strategic Initiatives?
- IBM’s Strategic Initiatives, Part 1: How Much Value Can Be Added To IBM’s Revenue And EBITDA To strategic Initiatives?
- IBM Earnings: Revenue Beats Expectation As Shift To Cloud Takes Center Stage
- IBM Earnings Preview: Revenue Decline To Continue As Shift To Cloud Takes Center Stage
Despite a slow quarter in terms of revenues, IBM has shown a significant increase in free cash flows that we expect it will invest back into highly profitable, high margin businesses such as Big Data Analytics and Cloud Services. It has raised its 2012 expectations by increasing EPS to at least $15.10 which is 10 cents more than the previous guidance of $15.
Geographically, the Americas’ Q2 revenues were $11.1 billion down 1% y-o-y. Revenues from Europe/Middle East/Africa were $7.9 billion, down 9 percent y-o-y and Asia-Pacific revenues increased 2 percent to $6.3 billion.
Focus On Cloud and Analytics To Help Revenues
The company’s focus on cloud computing and analytics is already paying off as these divisions have witnessed the highest revenue growth in Q2. Wins from the world’s fastest super computer Sequoia and the Big Data analytics project with Santam, a leading insurance company in South Africa will further drive business in Q3 and Q4. We expect these businesses to drive growth in the second half of 2012 and have a direct impact on IBM’s Technology Services division, which constitutes ~23% of the company’s stock, by our analysis.
We currently have a $229 Trefis price estimate for IBM which is about 20% higher than the current market price.Notes: