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Dow 30 component and global computer systems, software, and services provider International Business Machines (IBM - Free IBM Stock Report) made a little progress in the September quarter, but its reported results still disappointed investors. The stock pulled back following the mostly weak September-quarter earnings report.

The company earned $2.98 a share in the September term, better than our estimate of $2.85, but below the $3.02 logged in the comparable period of 2015. Reported results included $0.31 a share of intangibles, acquisitions, and retirement expenses.

On an encouraging note, revenues, which have declined since 2011, fell only slightly short of the year-earlier tally. Growth in Cognitive Solutions (software) and Technology Services & Cloud Platforms revenues nearly offset a modest decline in Global Business Services and a 21% plunge in Systems revenues. Seven quarters after its zSystems product was introduced, the product's revenues have moderated. Systems revenues were also hurt by the shift from the Unix operating system to Linux. Moreover, computer software is increasingly doing much of the work previously performed by storage systems.

On the other hand, revenues from strategic markets (cloud computing, analytics, mobility, and security) increased 16% and accounted for about 40% of the total. Cloud computing revenues rose 44% and analytics increased 15%. Via internal investment and acquisitions, IBM is slowly shifting its business mix to these more promising markets.

Meanwhile, gross margins in all of IBM's business segments contracted. Acquisitions and a shift to software as a service hurt Cognitive Solutions margins. Investment spending pressured Business Solutions profitability. Technology Services margins only narrowed slightly, but are expected to benefit from productivity initiatives. In Systems, the improvement in zSystems margins was offset by pressure on mid- and low-end Power systems profitability. Higher research spending also compressed margins companywide. But net income benefited from a lower tax rate. And stock repurchases enhanced earnings per share.

Looking ahead, IBM still expects to earn at least $12.23 a share in 2016, including $1.27 of intangibles, acquisitions, and retirement costs. Accordingly, we are holding our full-year earnings call at $12.25 a share, but lowering our December-quarter earnings estimate from $4.70 to $4.57. We have also reduced our share-net estimate for 2017, from $12.75 to $12.50.

We continue to believe that a meaningful turnaround in IBM's fortunes will take at least another year or two. The stock's dividend yield is attractive, but IBM shares, even after the recent weakness, have less than average total return potential to 2019-2021. Even very patient investors may want to wait for a better entry point.

About The Company:International Business Machines is a worldwide supplier of computer systems, services, and software. Revenues in 2015 can be broken down as follows: Global Technology Services, 39%; Global Business Services, 21%; Systems Hardware, 9%; Software, 28%; Global Financing, 3%. Foreign business accounted for 53% of 2015 revenues. 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.