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IBM's Ready for Downturn

Big Blue says it's well-positioned to succeed after its restructuring.
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SAN FRANCISCO -- Big Blue has found its buffer zone to weather the current economic downturn.


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expects to protect itself by selling software and services that reduce costs for its clients.

In recent years, the company has restructured and shifted its focus toward such growth businesses as software, consulting and outsourcing services, while continuing to invest in its hardware business.

The Armonk, N.Y., company

released full fourth-quarter results on Thursday after disclosing $28.9 billion in revenue earlier in the week.

The stock was up $2.78, or 2.8%, to $103.88 in recent trading.

CFO Mark Loughridge said on a conference call Thursday that he does not see the current business contraction as related to any overcapacity in data center hardware, as it was during the dot-com bust of 2001 that IBM stock lost half its value. This time around, he said, corporations are more interested in taking costs out of their businesses to drive cash flow and solve their capital constraints.

Because IBM has structured its products and services to solve those problems, the company saw an increase in short-term bookings last quarter while encountering a tougher sell on long-term and new contracts, Loughridge said.

Much of the growth is expected to come overseas. "We believe that the current concerns over a slowdown in IT spending ... may actually result in an increase in outsourcing and IT consolidation projects to drive savings," JPMorgan analyst Tien-tsin Huang wrote in a note Friday. IBM is an investment banking client of the firm.

That was already evident in the fourth quarter, when the company had unexpectedly strong bookings of $15.4 billion in global services. Short-term signings grew 8% as the unit signed 17 deals larger than $100 million apiece. The backlog in global services rose $2 billion year over year, to $118 billion, Loughridge said.

The company's Business Transformation Outsourcing unit saw revenue grow 56%, according to Loughridge.

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Noting that this unit's new bookings grew 150%, Huang wrote that such outsourcing firms with geographically diversified revenue are likely to outperform in the coming year.

"Record-high consulting bookings are an encouraging sign regarding corporations' near-term willingness to spend," said Citigroup analyst Richard Gardner in a note Friday. He raised his target price on IBM to $146, from $142. IBM is an investment banking client of Citi.

Thomas Weisel analyst David Grossman wrote Friday that new software sales in 2008 will be "challenging" and generally flat, although "infrastructure software companies are often better positioned to withstand an economic slowdown." IBM is an investment banking client of the firm.

Even in the flagging hardware division, Grossman expects a new mainframe system and the upgrade to the Power6 architecture to be catalysts for new sales in 2008. Grossman raised his EPS estimate to $8.26, from $7.95.

Loughridge projected 2008 earnings of $8.20 to $8.30 a share.

IBM's acquisitions of







and other companies should add $1.3 billion or more to 2008 revenue, according to Gardner. Analysts polled by Thomson Financial expect 2008 revenue of $102.6 billion.

IBM also will be helped in 2008 by an overall tax rate that at 27.5% will be one percentage point lower than in 2007, as business booms in emerging markets. The company expects its pension expenses will also be lower.