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IBM May Be Thankful for Services Revenue

Tech bellwether IBM (IBM - Get Report) may look to services to offset ongoing weakness in its hardware business when it reports its second-quarter results after the market closes Thursday.

The Armonk, N.Y.-based firm missed Wall Street's first-quarter sales estimate but beat analysts' earnings forecast. Boosted by the shift from commodity businesses such as PCs into software and services, IBM is seen a key indicator for tech spending patterns, which are expected to continue in the second half of 2009.

"Our checks point to the hardware segment being the weakest of IBM's businesses," wrote David Bailey, an analyst at Goldman Sachs, in a recent note. "We expect hardware revenue to come in at $4 billion, down 23% year over year and similar to the decline in Q1, with storage and PC servers the softest categories."

Bailey expects IBM's services operation to generate revenue of $13.5 billion, down 11% compared to the prior year's quarter, but still comparatively healthy.

"The services segment continues to hold up better on a relative basis, as companies look to outsourcing to help reduce costs," he added.

Despite recently re-affirming its commitment to fiscal 2009 earnings of $9.20, IBM has not issued second-quarter guidance. Analysts surveyed by Thomson Reuters nonetheless expect second-quarter earnings of $2.02 a share and sales of $23.59 billion.

Despite IBM's extensive offerings in services, software and hardware, at least one analyst feels that it could be some time before the firm reaps the benefits of its diverse product mix.
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