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International Business Machines Corp. (IBM - Analyst Report) is scheduled to announce its fiscal 2012 second quarter results after the closing bell on July 18, 2012. In the run up to the earnings release we noticed some analysts revising their estimates downward. However, we note that IBM has outperformed the Zacks Consensus Estimate in the preceding four quarters by a positive 3.04%. We expect this trend to continue in the current quarter.

Previous Quarter Highlights

IBM’s bottom line of $2.78 in the first quarter of 2012 beat the Zacks Consensus Estimate by 15 cents and increased 15.4% on a year-over-year basis driven by strong margin expansions and share repurchase activity. The top line remained flat year over year at $24.67 billion and it marginally failed to beat the Zacks Consensus Estimate of $24.74 billion. The top line was negatively impacted by lower sales in the hardware segment, which was offset by strong software sales.

For further details, please read: IBM Beats on Strong Margins

Estimate Revision Trend

In the last 30 days, out of the three analysts covering the stock, two analysts revised their estimates downward and only one upward revision was noticed. Thus, the Zacks Consensus Estimate for the second quarter 2012 dropped by a penny in the aforementioned period to $3.42.  For the second quarter, the revenue estimate as per Zacks Consensus is $26.33 billion.

Despite the ongoing macro-economic concerns, analysts expect IBM to report a decent quarter on the back of robust signings and higher recurring revenues. Moreover, the backlog payment is expected to positively impact the quarterly results. However, weaker-than-expected hardware sales coupled with high exposure in Europe and unfavorable foreign exchange rates are the possible headwinds for the company.

Recommendation

We believe the software segment of IBM to offset the sluggish growth in the services segment and decline in hardware segment. However, we remain cautious on the overall IT spending environment. Moreover, unfavorable foreign currency, sluggish macro-economic environment and stiff year-over-year comparisons in the hardware segment are the near-term headwinds. Additionally, stiff competition from Oracle Corp. (ORCL - Analyst Report), Accenture plc (ACN - Analyst Report) and Microsoft Corp (MSFT - Analyst Report) are the other headwinds going forward.

We believe that IBM remains well positioned for long-term growth based on its four key growth initiatives: smarter planet, growth markets, business analytics and cloud computing. We believe that IBM’s strong product pipeline, expansion into emerging markets and continuous acquisitions will help the company to achieve this target going forward.

We have a long-term (6-12 months) Neutral recommendation on IBM. Currently, IBM has Zacks #3 Rank, which translates into a short-term Hold rating.

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