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IBM Third-Quarter Revenue Misses Estimates on Slowing Demand

International Business Machines Corp. (IBM), the biggest computer-services company, reported third- quarter sales that missed analysts’ estimates on slowing revenue growth at its software, hardware and services businesses.

Sales climbed 7.8 percent to $26.2 billion, Armonk, New York-based IBM said today in a statement. Analysts predicted $26.3 billion, the average of estimates compiled by Bloomberg.

Chief Executive Officer Sam Palmisano is focusing on areas such as business analytics, emerging markets and cloud computing to boost sales amid sluggish economic expansion. The U.S. economy grew at a 1.3 percent pace in the second quarter following a 0.4 percent gain in the previous three months, the weakest performance in two years.

“Because they didn’t beat, the stock’s going to trade down; the expectation is pretty high for this name,” said Josh Olson, an analyst with Edward Jones & Co. in Des Peres, Missouri, who has a “buy” rating on the stock. A slowdown in hardware revenue growth is occurring “sooner than I expected.”

It was the second time in nine quarters that IBM missed sales estimates. Hardware sales growth slowed to 4 percent from 17 percent in the second quarter. Sales growth at IBM’s services business slowed to 8 percent from 10 percent, while revenue expansion at its software unit decelerated to 13 percent from 17 percent.

Record Last Week

IBM fell as much as 4.1 percent to $179.02 in extended trading after closing at $186.59 in New York today. It has risen 27 percent this year as of the close of regular trading.

The stock reached a record of $190.53 on Oct. 14, and at least three analysts revised their price estimates to $200 a share or higher. In September, IBM passed Microsoft in market value based on closing prices for the first time since 1996 before the companies switched back.

“This is a name that you’re expecting in this environment to perform very strong,” said Brad Zelnick, a Macquarie Capital USA analyst who added coverage of IBM last week. “Any deceleration in signings or any significant drain on backlog is going to send shares down.”

Contract signings for services, which make up about 60 percent of IBM revenue, were $12.3 billion, compared with $14.3 billion in the second quarter.

Projects Software

The company projects software will make up half of total profit in 2015. Analytics software, which helps businesses predict trends, is expected to draw $16 billion in sales by 2015, while cloud computing will draw $7 billion.

Smarter Planet, Palmisano’s initiative to provide digital monitoring of anything from roads to hospitals to make them more efficient, will grow to a $10 billion business, the company has said.

Revenue from growth markets, such as Brazil, India and China, climbed 19 percent last quarter. Sales from the regions will make up at least 30 percent of revenue by 2015, the company has said, up from 21 percent in 2010.

“Growth market performance was terrific across all segments,” Chief Financial Officer Mark Loughridge said on a call with analysts and investors.

It was the fifth consecutive quarter of double-digit growth in these markets, and it led revenue growth in all business segments, Loughridge said. IBM opened up 80 new branches, he said.

‘Footprint’ Important

“They’re very ahead of where the big markets will be in a few years, and it’s very important for them to have a footprint there,” Ed Maguire, an analyst at Credit Agricole Securities USA, said in an interview. He has an “outperform” rating on the shares.

Palmisano has said he plans to spend about $20 billion on acquisitions between 2010 and 2015. So far the company has spent about $3 billion in acquisitions related to cloud computing, said Steven Tomasco, an IBM spokesman.

Because of IBM’s global position and broad set of computer services, it is “about as close as you can get to a technology index fund,” Maguire said. “They’re a bellwether for the rest of the market.”

Accenture Plc and Oracle Corp. (ORCL), which compete with IBM in selling services to technology companies, both benefited from increased spending by business clients in their most recent quarters.

To contact the reporter on this story: Sarah Frier in New York at sfrier1@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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