IMS Health (RX) did not have a spectacular quarter to put it mildly. Revenue decline (on constant currency basis) accelerated to 4% from a 2% decline last quarter. Pharmaceutical companies are becoming more stingy and thus RX’s business got pinched. However, most of the revenue damage is taking place on the consulting side of the business which accounted for about 20% of total revenues and less than that on a net income basis. Note that consulting is a lower profit margin business, and the revenues in that segment fell 17% for the quarter.

The company lowered earnings guidance for the year by 10 cents, though this is not uncommon in today’s environment, but the management was pounding the table only last month that $1.70 was a set-in-stone number. As of today the set-in-stone number is $1.60 (lower side of the guidance). Wall Street obviously did not like that and took down the stock.

But here is how I look at the quarter. First of all, the company did not change free cash flow guidance for the year – $380 million ($320 if you take out the one-time stuff). That is good news. Also, the company is going to cut costs by $80-85 million by 2011. In other words, they’ll be rightsizing the company for a new operating environment. Things are not improving in the pharmaceutical sector. We knew that, but the pharmaceutical sector worldwide is not falling off the cliff.

Another thing to consider, the most revenue decline at RX is taking part in the lower margin consulting business. Thus, as we saw this quarter, the impact on the bottom line is a lot lower than the top line would lead you to believe.

Finally, this quarter’s performance reminds me of eBay’s performance a couple of quarters back. It seemed then that there was no end of bad news in sight. Consumers were retrenching and sales declines were accelerating. eBay reported numbers yesterday and suddenly investors realized that its business has a fairly high competitive advantage and high recurrence of revenues and was not completely destroyed by Amazon and the economy. RX shares these qualities too, to an even greater degree.

I don’t know when (do you ever really know?) but in the not so distant future IMS Health will likely be turning around and its numbers will be less bad. Then they’ll become better and then good. At today’s valuation – IMS is trading at 7.8 times earnings. I am not particularly worried about when they’ll become less bad, as long as they don’t turn horrible – which my research leads me to believe is an unlikely scenario.