For IBM, Software Looms Large
ARMONK, N.Y. (
) -- Software could be the key battleground for
IBM
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when it reports its
first-quarter results
after market close.
Investors will be closely monitoring the tech bellwether's numbers for further evidence of a tech recovery, with software playing a key role. Software accounts for 20% of IBM's sales, but can open the door to other revenue, according to Louis Miscioscia, an analyst at Collins Stewart.
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"The reason software is key is that it is a solution sale," he wrote in a note released last week. "It involves solving a customer's business need, and with the sale usually comes hardware and services, which drives up revenue and profits."
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Despite beating Wall Street's estimates in its first quarter, IBM saw overall revenue dip 5% on a constant currency basis. IBM's software business returned to revenue growth, albeit at a modest 2%, but still slipped 4% when adjusted for currency. The company nonetheless posted its highest-ever software operating profit of 46.5%.
IBM saw some software deals slip between the fourth and first quarters, according to analyst firm Thomas Weisel, which could be reflected in today's results.
Rival
Oracle's
TheStreet Recommends
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better-than-expected third-quarter results
also suggest that large corporates are opening their wallets, according to Miscioscia.
"Software
is an area which should see some product areas hitting double-digit growth rates in Q1 as the pipeline and backlog are both in good shape," he added.
Analysts surveyed by Thomson Reuters expect IBM to report first-quarter revenue of $22.75 billion and earnings of $1.93 a share, up from $21.7 billion and earnings of $1.70 a share in the same period last year.
Collins Stewart initiated its coverage of IBM last week with a buy rating and $160 price target, citing the healthier IT spending climate, which is expected to improve even further in the second half of the year.
"IBM will grow again," explained Miscioscia. "Our checks throughout the quarter continued to show that demand was coming back."
IBM is famed for its ability to
squeeze profit from high-margin areas such as software and services
and has raised its 2010 earnings guidance to over $11.
All the signs certainly point to a decent quarter for the hardware and software giant. Last week
Intel
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, another tech bellwether,
blew the doors off in its own first-quarter results
, and
AMD
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also
.
IBM's arch-rival
Hewlett-Packard
is another company on an upswing. The Palo Alto, Calif.-based firm saw its stock hit a
52-week high last week
amid expectations of a PC and server boost when it reports its second-quarter results next month.
Some analysts, however, have pointed to companies such as
Brocade
(BRCD)
and
EMC
(EMC)
as offering
more upside to investors
than IBM , and there is also growing interest in virtualization software specialist
VMware
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.
Both VMware and its parent company EMC report their own results this week.
IBM shares were up 67 cents, or 0.51%, to $131.30 on Monday, despite a modest dip in tech stocks that saw the Nasdaq slip 0.17%.
-- Reported by James Rogers in New York
