IBM Struggles as Tech Spending Fizzles
Armonk, N.Y.-based IBM is "running out of levers" to support its traditional earnings growth of around 10%, as margins are "maxed out" and share repurchases are already greater than free cash flow, ISI Group analyst Brian Marshall said in a note Tuesday. "Headwinds are getting stronger for the IT service industry."
The company reports fourth-quarter results after the market close on Tuesday. IBM edged past Wall Street's earnings forecast in its third-quarter results , released in October, but currency pressures weighed heavily on revenue.
A tech bellwether, IBM has traditionally been seen as a barometer for tech spending. Last week, chipmaker Intel(INTC) , another key player, reported its own fourth-quarter results, exceeding analysts' estimates, but delivered weaker-than-expected guidance.
Analysts surveyed by Thomson Reuters expect IBM to report revenue of $29.07 billion and earnings of $5.25 a share, compared to $29.5 billion and $4.71 a share a year earlier.
The fourth quarter of 2011, however, included around $240 million of revenue from IBM's divested Retail Store Solutions business. For the current quarter, this will hurt revenue comparisons by about 1 percentage point for IBM overall and 5 points for its hardware business.
Topeka Capital Markets analyst Brian White expects IBM to meet or slightly miss his fourth-quarter revenue estimate of $28.9 billion, but meet his earnings forecast of $5.23 a share.
"For 2013, we expect muted IT spending, but we believe IBM's high recurring revenue stream and more defensive portfolio will prove attractive to investors," he wrote in a note released on Tuesday. Specifically, the analyst predicts strength in fourth-quarter hardware and software, helping offset the company's services business.
Services accounted for 58% of IBM's total third-quarter revenue. Global Technology Services came in at $9.9 billion, while Global Business Services segment revenue was $4.5 billion.
White expects flat sequential service revenue in the fourth quarter, below typical seasonality, although he's more bullish on the company's software prospects.
"We are modeling Software sales (23%
IBM's third-quarter software revenue came in at $5.8 billion, while Systems and Technology sales were $3.9 billion.
The company may provide an update on its long-term financial roadmap. IBM has forecast operating earnings per share of at least $20 by the end of 2015 and predicts that, by that time, growth markets will account for almost 30% of the company's total revenue.
IBM shares rose 0.3% to $194.99 during Monday's trading.