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IBM's Server Sale Would Be a Smart Move

Stocks in this article: IBM



Speaking at a glitzy New York City event to unveil the business unit, IBM CEO Ginni Rometty explained that Watson heralded a third "cognitive era" of computing when it was first launched in 2011. "It's a new species -- it is taught, not programmed," she said. "It learns from experience and interaction."

At its investor briefing last year, IBM increased its 2015 revenue target for analytics and big data to $20 billion from $16 billion, highlighting the potential for technologies such as Watson. Back in 2010, IBM had set an initial goal of $10 billion by 2015.

Underlining IBM's desire to tap new software and service dollars, just a week after its latest Watson news, Big Blue announced a $1.2 billion global cloud investment.

IBM's System x sales should also be viewed within the context of its broader business. The company's total revenue in fiscal 2012 was $104.5 billion, with Global Technology Services and Global Business Services bringing in, respectively, $40.2 billion and $18.6 billion. Software revenue was $25.4 billion, while the Systems & Technology group brought in sales of $17.7 billion. A source familiar with the situation told TheStreet that, within the Systems & Technology group, IBM's x86 server business had revenue of less than $5 billion in 2012.

IBM reports its fiscal fourth-quarter results after market close on Tuesday. Analysts surveyed by Thomson Reuters expect the hardware and software giant to post earnings of $5.99 and sales of $28.25 billion.

During the third quarter IBM beat Wall Street's earnings expectations but missed on the top line, weighed down by currency issues and weakness in key growth markets.

"We expect all segments to rise -- led by strength in software," wrote Cantor Fitzgerald's White, in a note released on Tuesday. "Recall, IBM experienced weakness in China and other developing markets in 3Q:13, a trend we expect to continue through the first half of 2014."

Despite this trend, White expects the company's software sales to rise 34% sequentially, above seasonal levels. Services should improve over 3% quarter-on-quarter, he added, in line with seasonality. The analyst expects IBM's System and Technology Group sales to increase 25% over the same period, well below historical averages, albeit with upside potential.

IBM shares dipped 0.96% to $188.27 in early afternoon trading on Tuesday.

--Written by James Rogers in New York

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