As usual, Wall Street expects great things from Big Blue.
reports fourth-quarter earnings after the market closes Thursday.
Its smaller competitors already have reported modest improvements in some of its leading businesses, showing why investors have set the bar high for one the 10 biggest companies in the country and the tech sector's once-and-perhaps-future king.
IBM's results will be driven by the strength of its service business, the envy of high-tech. Investors expect good things from the software segment as well, though its 17% of third-quarter revenue is small potatoes compared with the service business' claim to 42% of last quarter's $20.4 billion in sales. (You can see why
( HWP) and
( CPQ) are so eager to merge, in the hopes of similar revenue generation.) IBM's financing group generates a mere 4% of Big Blue's quarter, leaving the remainder of the attention zeroed in on the hardware segment, which provided 37% of IBM's revenue, but which swooned in the third quarter along with the rest of the PC, server, storage and mainframe makers. IBM's hardware competitors have set a strong pace in their December quarter results, and even though it's the biggest, IBM has to keep up.
Current Wall Street consensus estimates call for a sequential 47% increase in pro forma profits and a 16% leap in revenue. Current analyst revenue estimates would constitute a 7% decline year-over-year from the $26.7 billion in sales for the fourth quarter of 2000.
The third quarter was a tough period all around for the computer industry, and IBM witnessed a 6% sequential decline in total revenue and a 22% drop in pro forma earnings per share. Hardware revenue led the way, dropping 14% sequentially from $8.7 billion in the second quarter to $7.5 billion in the third. IBM's got good prospects for a hardware segment rebound.
From all accounts given by IBM's PC competitors this week, the fourth quarter featured a bonanza of computer buying relative to the rest of 2001.
and Compaq have all exceeded Wall Street expectations with seasonal revenue jumps that may not match years past, but which were healthy increases from depressed third-quarter levels.
During the fourth quarter, IBM responded to grueling pricing pressure in the PC industry by testing a new cost-cutting strategy. The company agreed to outsource manufacturing for its NetVista desktop line to contract builder
, and sold its NetVista manufacturing operations to Sanmina as well, including facilities in Research Triangle Park, North Carolina; Scotland; and mainland Europe.
IBM's admired Global Services unit must shine. The group posted $8.7 billion in revenue in the third quarter, greater than Compaq's entire companywide revenue in the fourth quarter reported Wednesday, and good for 5% year-over-year growth. IBM inked big contracts with customers such as National Bank of Canada (in a $700 million deal) and
( CD) ($1.4 billion) for service deals in the fourth quarter. Given that Compaq's services group eked out an 8% sequential revenue gain in the fourth quarter, investors might infer that the market for IT consulting did not weaken at year-end and a bigger competitor such as IBM might thrive.
Despite a much-bemoaned environment for corporate technology spending, the enterprise giant managed to improve overall gross margins 2% to 36.2% during the third quarter, when compared with the third quarter of 2000. In a horrid year for companies focused on corporate customers -- just ask Sun Microsystems -- IBM's share price was up 14% on the year before Sept. 11, and climbed as high as 35% more in the tech rally that began in October.
Big Blue has shown that bigger is better throughout the year. In a week of upside surprises among PC makers, investors will no doubt expect only the best from IBM.