IBM May Be Thankful for Services Revenue

Tech bellwether IBM ( IBM) 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.

"We believe some of the company's offerings might be ahead of their time, thus adoption of some of the company's offerings might be ahead of their time," wrote Brian Marshall, an analyst at Broadpoint AM Tech, in a recent note.

Like Bailey, Marshall also gave IBM's shares a "neutral" rating and explained that technologies such as its cloud computing and "smarter planet" initiative are still in their relative infancy.

IBM, along with the likes of Microsoft ( MSFT) and EMC ( EMC), has thrown its not inconsiderable weight behind cloud technology, which lets users access storage and server resources via the Internet. Supply, however, may exceed demand.

"It is our view that cloud-based services are still in a nascent stage of development with broad-based adoption several years away due to numerous unresolved issues," explained Marshall, highlighting security, reliability and accessibility concerns.

Another long-term challenge for IBM is its ability to perform in a rapidly-changing tech landscape. Whereas IBM and Cisco ( CSCO) were once synonymous with servers and networks, respectively, this is no longer the case thanks to the networking giant's recent entry into the server market. With Cisco and H-P touting blade servers, and Oracle ( ORCL) soon to own Sun Microsystems' ( JAVA) extensive IP, IBM faces increased competition in enterprise accounts.

The tech behemoth can nonetheless count on its vast installed base to counter these threats, not to mention its $12 billion cash haul. IBM has also earned a reputation for adaptability and good execution during its almost 100-year history.

"Despite its global footprint, IBM has remained nimble and has kept its 'feet moving' by changing with technology trends," added Marshall, pointing to the shift from mainframe systems to software and services.

The tech giant, which raised its dividend by 10% earlier this year, has also proved adept at finding revenue outside the U.S, notably in emerging countries such as Brazil, Russia, India and China.

IBM's shares rose $3.97, or 3.85%, to $107.22 during Monday trading, outpacing the broader advance in tech stocks that saw the Nasdaq rise 3.51%.

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