IBM Earnings Preview

IBM reported strong second-quarter revenues and earnings that surpassed the Zacks Consensus Estimate. Results were positively impacted by IBM’s key initiatives, just as Business Analytics, Smarter Planet and Cloud offerings that reported strong growth in the first half of 2011.

Total revenue increased 12.4% year over year to $26.67 billion, surpassing the Zacks Consensus Estimate of $25.4 billion. The year-over-year growth was driven by strong performances from the transactional businesses in hardware and software.

IBM posted non-GAAP EPS of $3.09 per share in the second quarter, up 18.0% on a year-over-year basis, along these lines representing double-digit growth in 16 of the last 18 quarters. The significant upside was primarily driven by solid revenue growth and share repurchases, which fully offset weak margins in the quarter.

The current quarter

For the current quarter, the Zacks Consensus Estimate for IBM’s revenues is pegged at $3.22, a 4.21% upside from the previous quarter. Total revenue as per the Zacks Consensus Estimate is $26.24 billion, down 1.6% from earnings earned in the prior quarter.

We believe IBM’s growing initiatives in the smarter planet, business analytics and optimization space will drive long-term growth. Aside from this, the ability to generate strong free cash flow, expand margins and improve the already robust balance sheet make the stock attractive over the long term.

Heavyweight in the cloud computing market

IBM remains a heavyweight in the cloud computing market and its strong cash balance enables IBM to acquire companies with high intellectual property, which will drive furthermore growth in the upcoming quarters. We have a long-term Neutral recommendation on IBM and are optimistic about its strong fundamentals and robust growth prospects going forward.

The cloud computing market is expected to grow at a CAGR of 40.0% from 2010 to 2015, crossing $7.0 billion in earnings by 2015. Cloud computing leads to improved services and elevated security requirements for companies that use it and IBM’s product portfolio is so then positioned to benefit. Additionally, by 2015, IBM expects the Smarter Planet initiative to generate earnings of $10 billion.

IBM is experiencing strong revenue growth across all geographical regions, coupled with robust growth in emerging markets worldwide. IBM expects these growing markets to drive earnings and increase growth in 2011 and beyond.

However, the competitive landscape includes innovation giants, just as Oracle Corp., Hewlett-Packard Co., Microsoft Corp. and EMC Corp., so the company is unlikely to have it all smooth-sailing.