Yesterday we took a close look at Coca-Cola (NYSE: KO), which is the top holding of Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A, BRK.B). Another top Berkshire holding, International Business Machines (NYSE: IBM) reported its results after the market closed on Tuesday.

Berkshire currently holds a 5.3% interest in IBM. The company bought its IBM stake in 2010 in a move that took many investors by surprise. That’s because Buffett had long shunned tech stocks because he found their businesses too difficult to understand.

But as Buffett explained in an interview with CNBC, he sees IBM as less of a tech stock and more of a servicing company for IT departments. He also noted that contracts for technology services tend to be long lasting—much like a company’s relationships with outside accountants and lawyers.

Strong Dollar, Weaker IT Spending are Weighing on IBM

Here’s how the latest results from IBM looked:

For the third quarter, IBM reported sales of $24.7 billion, down 5.4% from the third quarter of 2011. The latest revenue also fell short of the consensus forecast of $25.4 billion. Excluding exchange rates, revenue would have fallen 2%. The sale of the company’s Retail Store Solutions business trimmed another 1% from IBM’s revenue.

Revenue fell 4% in the Americas (3% accounting for currency) and 9% (1% accounting for currency) in Europe, the Middle East and Africa. The Asia-Pacific region saw a 1% gain (or 2% on a constant-currency basis).

Earnings declined 0.4%, to $3.82 billion. However, thanks to IBM’s ongoing share buyback program, earnings per share rose 4.4%, to $3.33. Without unusual items, earnings rose 10.4% from a year ago, to $3.62 a share, topping analysts’ expectations by a penny. Profit margins also rose 0.9%, to 47.4% from 46.5% a year ago.

IBM also stood by its full-year earnings guidance of $15.10 a share.

Services and Software Bring Steadier Business

IBM has shifted its business toward services and software, which are steadier and more profitable than hardware sales. In the latest quarter, services and software accounted for 82% of IBM’s total revenue.

The company’s services revenue was down 5% in the quarter, but was flat on a constant-currency basis. Software revenue declined 1%, but rose 3% accounting for exchange rates. Hardware sales, by contrast, fell 13%. The company’s services backlog rose 1%, to $138 billion.

“We continue to see value shifting to software,” said Mark Loughridge, the senior vice-president and CFO of IBM. “One thing that affected us was some software deals that fell out at the end of the quarter and rolled to the fourth quarter.”

IBM Is Taking Advantage of Rising Emerging Market IT Spending

Part of the company’s growth strategy involves focusing on emerging markets, and in particular the so-called BRIC countries (Brazil, Russia, India and China). In the latest quarter, the company’s sales in the BRIC countries rose 4%, or 11% on a constant-currency basis.

Overall, IBM expects emerging markets to supply 30% of its total geographic revenue by 2015. In 2011, the BRICs alone accounted for 19%.

Brazil, in particular, offers strong growth potential. IBM recently announced that it is opening three more offices in the country, to bring its total to 30. The company stands to gain from a number of near-term catalysts that should spur Brazilian IT spending, including preparations for the FIFA World Cup, which Brazil is hosting in 2014, and the Summer Olympics just two years later.

The country is already the second-biggest IT spender among emerging markets, trailing only China. In addition to the Olympics and World Cup, the Brazilian government is investing heavily in IT infrastructure through programs like its National Broadband Plan, which aims to expand high-speed Internet access in the country.

Specialized Services Have a Bright Future

A number of the company’s other growth plans are also paying off. For example, IBM says revenue from its Smarter Planet initiative, under which it makes specialized technology for business and government clients in areas from health care to green energy, is up more than 20% year-to-date.

The company is also seeing strong growth at its business-analytics division, which makes software that companies use to look for trends in their customers’ spending.

This is another fast-growing area for IBM. According to research firm IDC, the market for business analytics software grew 14.1% in 2011. The agency expects it to expand at a rate of 9.8% annually and reach $50.7 billion by 2016.

IBM is also benefiting from the transition to cloud computing: the company says its revenue from cloud-based products and services is higher through the first three quarters than it was in all of 2011.

Strong Balance Sheet, Brand Strength Underpin IBM’s Growth Plans

Despite these positives, the stock will likely continue to be held back in the near term by the weak global economy, which is likely to continue weighing on IT spending. However, the company’s balance sheet remains healthy, and it continues to inspire strong customer loyalty, thanks to its sterling reputation and its 100-year history. Its move into specialized services, including Smarter Planet, makes it even harder for IT departments to ditch Big Blue for a competitor.

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