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Tickers in this Article: IBM, DELL, HPQ, ORCL, EMC, MSFT, VMW, CRM
For better or worse, IBM (NYSE:IBM) basically tracks the market for tech spending. That makes it a fine one-decision option for investors wanting general tech exposure, but it also means that investors should not expect leading-edge growth. IBM's results suggest that the tech market is still fairly healthy, and the valuation suggests investors still do not fully appreciate the company's virtues.

TUTORIAL: How To Analyze Earnings

Services Rebound in Q2
IBM posted an all-around solid performance in the second quarter, as revenue exceeded even the high end of the analyst range. Reported revenue rose 12% for the quarter on an annual basis and 8% sequentially. Foreign currency was a powerful factor this quarter, as constant currency growth was 5% on an annual basis.

Looking at some of the key segments, systems and technology saw 12% constant currency growth, fueled by 53% growth in System z mainframe sales. Software rose 10% (also on a constant currency basis), as IBM's WebSphere saw 47% growth and Netezza transaction volume rose 70%. Services were surprisingly strong as well, as reported revenue rose 10% and constant currency revenue grew 2%. Better still, signings were strong and suggest improved growth in the near future.

Profitability remained solid again. Gross margin climbed nearly one point on a sequential basis and almost two points on an annual comparison. There are admittedly more than a couple of ways to calculate operating income for IBM, but one methodology turns up about 11% growth and very slight erosion in operating margin from last year, mostly on the back of higher sales spending - a fairly common phenomenon in tech these days.

A Broad Range of Look-Throughs
With IBM touching so many markets, there is a lot of information on the tech sector in an IBM earnings release. Some of the takeways look fairly straightforward; a healthy mainframe market is broadly positive for BMC (NYSE:BMC) and CA (NYSE:CA), though no guarantee that those companies are gaining or keeping share. Likewise, while IBM seems to be gaining share at Oracle's (Nasdaq:ORCL) expense in UNIX hardware, Dell (Nasdaq:DELL) and Hewlett-Packard (NYSE:HPQ) are still problematic in the x86 server business.

IBM's software performance should be broadly and generally positive for others like Microsoft (Nasdaq:MSFT) and Oracle. On the hardware side, this should likewise be broadly positive for the likes of Dell, Hewlett-Packard and EMC (NYSE:EMC). It is also worth noting that the uptick in services bookings should be encouraging for those hardware-service hybrids like Hewlett-Packard, Dell and Xerox (NYSE:XRX).

What's Next For IBM?
IBM has done quite well with its acquisitions in the software space, and it's unclear why they would foreswear further deals. IBM has a lot of big plans in cloud computing, but that is not to say that there are not deals out there that could boost the business. VMware (NYSE:VMW) would be an incredibly expensive deal and neither Citrix (Nasdaq:CTXS) nor Red Hat (NYSE:RHT) are cheap. The same problem appears in a lot of application companies - (NYSE:CRM), Rightnow (Nasdaq:RNOW) and Concur (Nasdaq:CNQR) are pricey, but JDA (Nasdaq:JDAS) could be workable. The bottom line, though, is that no matter what IBM buys, investors are going to fret that the company paid too much when it could have just sent that cash back to shareholders.

The Bottom Line
IBM has been a fairly strong stock this year and no longer sports those valuation multiples that look strikingly cheap. That said, on a cash flow basis the stock still looks like it has some room to run. New money should probably hold off in the hope of a pullback, but current shareholders could do well by sitting tight. (For related reading, take a look at A Primer On Investing In The Tech Industry.)

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