OVUM. Ian Wesley, Phil Codling

The Americas led the major geographies with 2% growth in constant currency terms to $9.5bn. EMEA was down 1% at $7.2bn. Asia-Pacific once again disappointed, with a 3% fall in revenues to $4.2bn. As for the business divisions, Software provided the only good news with revenue growth of 5% to $4.2bn. Global Services saw a 1% fall in revenues to $11.9bn, and total signed services contracts hit $9.6bn during the quarter, bringing the backlog to $109bn, similar to a year ago. Hardware revenues decreased 7% to $5.1bn and Global Financing revenues were down 7% to $0.58bn.

In spite of adopting its new "innovation that matters" slogan, IBM is looking more and more like a mature business. The share price was up 56 cents on the day's trading to $74.26, but that's still down 10% on the year.

Comment:

This was another mediocre quarter for IBM in Europe. EMEA revenues decreased 1% to $7.2bn; France and Spain once again showed solid growth but Germany, Italy and the UK declined. This is extremely disappointing as IBM was claiming better execution under its new European management structures in the last quarter.

Results in Japan and therefore Asia-Pacific (as Japan represents 50% of the revenues) were extremely poor once again, and the same old tiresome party line of 'we continue to work through our operating issues' was produced for the fifth quarter in a row. Growth has slowed even in emerging countries, with a 3% decline in China, 19% growth in Russia and 4% in Brazil. The stellar exception was India, where growth was 45%, rewarding IBM for its recent concentration on this country.

Growth in software revenues was led by IBM's branded middleware software (WebSphere, IM, Lotus, Tivoli and Rational), which grew 9% to represent nearly half of IBM's software business. This success was balanced by a decline in operating systems and other middleware, which are being affected by the general decline in mainframe software prices. Software pre-tax margin was up 2 points to 24% as IBM continues to successfully ride the SOA wave.

The real disappointment, as in Q1, is the lack of growth from Global Services. Signings fell 34% compared to Q2 of last year. While it's true that Q2 2005 was a strong period for contract signings, CFO Mark Loughridge had to admit to analysts yesterday that 'the performance fell short of expectations'. With fewer deals than expected in the bag, IBM's previously stated (albeit modest) ambition of 'mid-single-digit' growth from Global Services in H2 2006 now looks unlikely.

It's a familiar story on services profits too. Despite the sluggish topline and disappointing signings, both Global Technology Services and Global Business Services were able to raise pre-tax margins by around 1% year-on-year to 9.4% and 9.5%, respectively, excluding restructuring charges. The fundamental problem now is that the impact of last year's restructuring and its associated cost reductions cannot last forever. And there's also a limit to the margin-enhancing effects of moving work offshore. Global Services must get the topline moving as well if it's to maintain its margins. Unfortunately, nothing in these results suggests that the division has made much progress in the last three months towards executing on this goal.