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Morningstar Reaffirms Rating on In-Transition IBM

While the wide-moat firm's core/legacy businesses remained under significant pressure, its strategic imperatives again outperformed expectations this past quarter.

Our overarching thesis on

Second-quarter revenue from continuing operations slid 13% year over year (down 1% when adjusted for currency moves and the 2014 divestitures) to $20.8 billion. Management was quick to tout the solid top-line performance across cloud (up 70% as adjusted) and analytics (up 20% as adjusted) and, rather than be critical in our assessment, we're quite pleased with this trajectory. These are $8.8 billion and $17 billion revenue businesses for IBM--significant, in our view. The continued weakness in core software and services has been disappointing though not surprising, and as we wrote last year, management has admitted it has a problem in these areas and is working to address outstanding issues. The recovery can't come fast enough, as pressure materialized on the adjusted pretax line (margins were down 130 basis points in the quarter, though still healthy at 22%). All in, IBM reported non-GAAP diluted earnings per share of $3.84, down 13% from the prior-year period.

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About the Author

Peter Wahlstrom

Sector Director

Peter Wahlstrom, CFA, is director of technology, media, and telecom equity research and a senior software analyst for Morningstar. In addition to leading Morningstar’s technology, media, and telecom sector team, he is also a member of the firm’s Economic Moat committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat and Moat Trend ratings issued by Morningstar. He joined Morningstar in 2010 as an equity analyst and served as director of equity research for the consumer team before assuming his current role.

Before joining Morningstar, Wahlstrom worked in the investment research divisions of Goldman Sachs and RiverSource Investments (Ameriprise Financial).

Wahlstrom holds a bachelor’s degree in economics from the University of Illinois and a master’s degree in business administration from Indiana University’s Kelley School of Business. He also holds the Chartered Financial Analyst® designation. In 2012, Wahlstrom ranked third in the Specialty Retail industry in the StarMine Analyst Awards, presented by the Financial Times.

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