SAN FRANCISCO (AP) — IBM Corp. is scheduled to report fourth-quarter financial results after the market closes Tuesday, Jan. 18.
WHAT TO WATCH FOR: Any signs of weakness in IBM’s outsourcing business, a source of concern for some analysts.
IBM, a company approaching its 100-year anniversary, has otherwise been on a tear. It has steadily increased profits even during the depth of the recession, despite sales challenges. It’s done that in large part by figuring out ways to tap its software and services for more profits, and by cutting costs and pouring resources into lucrative new infrastructure projects such as “smart” power grids and rail lines.
IBM is the world’s biggest provider of information technology services, which include outsourcing and technical support. Some of its most promising new projects include helping cities set up “smart” power grids — which require extensive communications, computing technologies and expertise in linking the two, for which IBM can charge a premium.
IBM’s hardware business is benefiting from stronger spending by corporations, many of which had frozen their budgets for new technologies as they held on to older equipment longer during the recession. Because it doesn’t sell to consumers, IBM isn’t being directly hurt by sluggish demand in several technology markets, such as televisions and personal computers.
Still, some analysts are worried about IBM’s outsourcing business. That business typically accounts for about half of the new services contracts IBM signs every quarter, and has experienced year-over-year declines in each of the last three quarters.
IBM has said that the figures are misleading. In the third quarter, for example, the company blamed the decline on a large outsourcing deal that was signed a week after the quarter ended. If that deal had been signed earlier, IBM’s outsourcing bookings would have risen.
IBM has argued that a more important figure is its backlog of all services contracts, which stood at $134 billion at the end of September. IBM says that figure is a better indicator of future revenue because it includes long-term deals that IBM has already locked in.
Analyst Ben Reitzes with Barclays Capital said he expects strong sales of IBM mainframes, which got a new model this past summer, and software, which has grown with acquisitions. But he cautioned that services signings should be subdued “as the market for large deals remains slow and IBM has seen some increased competition in outsourcing from smaller rivals.”
Reitzes added that while signings in the fourth quarter may have seen a pop from year-end budget flushes, IBM’s outsourcing business faces a long-term threat from rivals such as Accenture, which last month reported an increase in outsourcing signings in its latest quarter, and Indian firms. Those companies have improved their products, helping them gain market share through “crisper execution.”
Nevertheless, IBM is a technology powerhouse and its sheer scale helps explain why expectations run high. It’s difficult to meaningfully grow a company whose revenue is expected to top $100 billion this year, as IBM’s rival, technology giant Hewlett-Packard Co., has too found.
WHY IT’S IMPORTANT: Despite the fact it has some unique characteristics that prevent it from being a perfect proxy for the business technology market, IBM has a big footprint that gives investors clues about companies’ attitudes toward technology spending.
One of the characteristics that helps set IBM apart is the fact that its services business can do well even when the economy is souring. In fact, it’s expected to, as many businesses are inclined to save money by having a third party such as IBM handle gritty technology chores such as managing their data centers.
WHAT’S EXPECTED: IBM is expected to have earned $4.08 per share on $28.19 billion in revenue for the fourth quarter, according to FactSet. In the fourth quarter of 2009, IBM earned $3.59 per share on $27.2 billion in revenue.
For all of fiscal 2011, analysts expect IBM to earn $12.63 per share on revenue of $103.34 billion, on average. Analysts have become accustomed to IBM raising its profit guidance.
More acquisitions are also in the cards for the coming years. Acquisitions have helped IBM augment its technologies. IBM’s CEO Sam Palmisano said last year that he expects the company to spend $20 billion through 2015 on acquisitions, and that operating earnings should hit $20 per share by then.
STOCK MOVEMENT: IBM’s stock rose 8 percent in the fourth quarter, from $135.64 at the start of October to $146.46 at the end of 2010. The stock has come back from its 52-week low of $116 in May.
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