IBM reported a 5 percent drop in third-quarter revenue as sales of the company's IT products and services fell across the board -- led by a 13-percent plunge in server and storage system hardware.

IBM, nevertheless, managed to hold the line on net income, reflecting the company's increased emphasis on profitability over revenue growth. "In spite of this revenue decline, we had solid operating profit growth, with pre-tax income up 7 percent and net [operating] income up 5 percent," said IBM Chief Financial Officer Mark Loughridge in a call Tuesday with financial analysts and investors.

For the third quarter ended Sept. 30 IBM reported sales of $24.7 billion, down 5.4 percent from $26.2 billion in the third quarter of fiscal 2011. Net income was $3.8 billion, flat from the same period last year.

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"Despite facing challenges," Loughridge said, "that performance reflects our disciplined approach to delivering profit growth."

Some of the negative results could be attributed to one-time events, including the sale of IBM's Retail Store Solutions to Toshiba Technology, a divestiture that reduced total revenue by 1 percent. Earnings took a hit from a one-time $162 million charge for pension-related expenses in the U.K. And currency fluctuations took their toll, reducing revenue by nearly $1 billion.

While business remained steady through the first two months of the quarter, Loughridge said IBM experienced "a falloff in the growth rate in the third month of the quarter." The CFO said the slowdown specifically occurred in the company's Global Business Services operations and its software sales -- the latter due to "a handful of deals that fell out of the quarter." Those deals would have boosted software sales by two percentage points, Loughridge said.

Geographically, the slowdown occurred in North America and several countries IBM designates as "growth markets," specifically Mexico and Australia.

While analysts continued to ask about the September slowdown, Loughridge was reluctant to attribute it to any long-range factors such as economic uncertainty related to the presidential election or the budget debate in Washington D.C.

NEXT: Decreased Sales Across All Of IBM's Hardware Lines

Loughridge did highlight some positive aspects of IBM's third quarter. Revenue from business analytics products and services were up 14 percent year over year while revenue from the company's "smarter planet" initiative grew more than 20 percent. And revenue from cloud-related sales and services through the fiscal year's first three quarters has exceeded cloud–related sales for all of fiscal 2011.

Sales of hardware products from IBM's Systems and Technology operations were $3.9 billion, down 13 percent year over year. While that decline was only 11 percent when the Retail Store Solutions divestiture was factored in, System z mainframe sales were down 20 percent, System x sales declined 5 percent and Power Systems sales dropped 2 percent. Revenue from System Storage products was off 10 percent year over year.

Despite the slower hardware sales, Loughridge said IBM "continued [its] success in competitive takeouts" against rivals Hewlett-Packard and Oracle Sun, replacing hardware from those vendors in more than 260 locations with IBM products valued at $200 million. Last week, IBM debuted additions to its PureSystems line of converged infrastructure servers.

Revenue from software sales in the quarter were $5.8 billion, down 1 percent from one year earlier. Sales of the vendor's Tivoli line of IT management software increased 5 percent and sales of WebSphere middleware grew 2 percent. But revenue from Information Management software was down 1 percent, Lotus collaboration software sales dropped 10 percent and revenue from Rational development software declined 16 percent.

Revenue from IBM's services operations also declined in the third quarter. Global Technology Services revenue was $9.9 billion, down 4 percent from one year earlier. Global Business Services revenue was $4.5 billion, down 6 percent from one year ago.

PUBLISHED OCT. 16, 2012