Big Blue Should Keep Rollin'

Bob Djurdjevic, president of Annex Research, which owns shares of IBM, said he regards the services division as "the growth engine of the 1990s (that) has become the laggard of the 21st century. That's an area where I'd like to see if they've made any substantial improvements in the fourth quarter."

However, he says the company's new "service products" offerings (where services are streamlined into prepackaged modules instead of custom-designed for each industry) offers hope for upside in services in the future.

It's IBM's software group that has proven to be golden for the past several quarters. And the company has pursued an aggressive strategy, making 11 acquisitions in software in 2006 to boost the sector even more, including MRO Software, FileNet and Webify.

In the third quarter, software sales rose 9% (7% when adjusted for currency) to $4.4 billion year over year. IBM's middleware brands grew 12% over the comparable period to $3.4 billion, with WebSphere, Tivoli and Information Management all posting double-digit growth.

"Software has been growing substantially, and middleware is growing like gangbusters," says Djurdjevic. "These middleware products -- they've become the de facto standard upon which application software is being written. That's what's driving the revenue and profits up."

Bernstein's Sacconaghi forecasts an 11% growth rate for the software sector this quarter.

Don't overlook hardware, either. "Hardware has been growing in profitability since (IBM) jettisoned its PC business," says Djurdjevic.

In the previous quarter, hardware grew 9%, or 8% when adjusted for currency, to $5.6 billion compared with $5.1 billion in the same period the year before.

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