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The softer side of Big Blue

If the hardware bump gave IBM some of the growth it managed to squeeze out of the IT racket, Software Group continues to be the profit engine. Software Group posted sales of $5.15bn in the third quarter, up a mere seven-tenths of a percent because IBM sold off its PLM software business to Dassault Systemes earlier this year, but up 4 per cent if you exclude that. IBM's WebSphere middleware product line, which has been bolstered by a bunch of acquisitions in the past two years, had a 14 per cent revenue bump, with databases and other information management tools up 5 per cent in the quarter.

Tivoli system management tools had a good quarter, too, with sales up 9 percent, with storage management products growing 20 per cent and security software up in the double digits. Lotus and Rational kind of stumbled along flatly in Q3 as these units have been doing for a while.

IBM's key branded middleware grew at 7 per cent, while the total middleware grew at only 3 per cent, which means that other middleware (predominantly on mainframes) and operating system sales declined.

The Global Services behemoth continues to dominate Big Blue in terms of revenues, with $14.1bn in sales, but up only 2.1 per cent compared to the year-ago quarter. While the Global Business Services unit, which does business process re-engineering and outsourcing, saw 5.4 per cent growth in the quarter, with $4.57bn in sales, the Global Technology Services unit, which does outsourcing, systems integration, and hardware maintenance, only had seven-tenths of a per cent of growth, to $9.5bn.

IBM's services backlog stood at $134bn at the end of the third quarter, up $5bn compared to the second quarter but flat year-on-year. IBM had $5.7bn in outsourcing signings in the quarter (including application outsourcing), down 15 per cent, while the transactional services businesses (systems integration, consulting, and application integration) had $5.4bn in signings, up 4 per cent.

On a geographical basis, IBM's sales in the Americas region rose by 3 per cent to $10.2bn in the third quarter (up only 2 per cent at constant currency, though), while revenues in the EMEA region were $7.4bnm, down 6 per cent as reported but up 1 per cent in local currencies. The Asia/Pacific region was the growth engine for Big Blue in Q3, with sales up 14 per cent (7 per cent in constant currency) to 5.9bn. IBM's OEM technology sales were $806m, up 27 per cent.

Loughridge was happy enough with growth in North America and Europe because they were a point or two better than in the second quarter, and Japan saw the first growth "in a long time" for IBM. But this is anemic compared to the BRIC countries, which had a 29 per cent revenue spike for Big Blue, and 28 other growth companies that IBM is pursuing had a combined double-digit revenue growth. Loughridge said that in 2008 the growth markets had revenue growth rates that were 8 points ahead of these major markets, and as 2010 has gone on, the gap is now 12 points.

"The growth markets are just out of the blocks faster than the majors," Loughridge said.

The fact that companies like IBM are constantly firing people in those major economies and hiring cheaper labor in those growth markets never seems to come up in the conversation. Funny, that. ®

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