IBM's Second Chance

He expects IBM's services operations to show improved performance and good bookings for the just-completed second quarter. And overall, he doesn't forecast the company to miss its targets. "I would expect a reasonable rebound vs. the disappointment they had in the last quarter," Morris says.

On average, analysts forecast earnings of $1.03 a share on sales of $21.9 billion, according to Thomson First Call. These estimates exclude an expected charge of $1.3 billion to $1.7 billion for job cuts announced in May and a $1.2 billion gain from the sale of its PC unit. However, they include the 10 cent-a-share impact from employee stock options.

IBM is struggling to prove it can grow as it sticks with its services-centric strategy. Its long-term targets call for double-digit earnings growth and mid- to high-single-digit sales growth.

So far, Wall Street hasn't totally bought into the growth story. Consensus estimates project a 4% decline in earnings and a 5% drop in sales this year. For 2006, early targets project an 11% increase in earnings, and sales growth of 2%.

Investors also will be keying in on the direction of margins in each business unit. Services account for half of IBM's revenue, but carry the lowest margins, at 24.3% in the first quarter. Hardware is the next-largest group, but revenue will take a hit as the sale of the PC division officially closed during the second quarter. Software accounted for 15% of IBM's first-quarter sales, but carried the company's highest margins at 86.7%.

Another factor for this international provider is the dollar's strengthening against both the euro and the yen. What had been a boost in prior quarters' results is now a drag.

As always with IBM, there are myriad moving parts to consider, but services clearly has become the pivot around which the stock is trading. The job-cut announcements weren't enough to lift shares back in May and the recent rally only started once indications started trickling out that IBM didn't flub another quarter. Another leg higher in the stock will only come once services appear to be fully righted.