IBM's Strong Services, Software Results Lift Hopes For Peers
21 Janvier 2009 - 9:35PM
Dow Jones News
International Business Machines Corp.'s (IBM) strong earnings
performance validates the company's push into software and
services, and offers hope in this recession to other tech companies
that provide such products.
On Tuesday, IBM posted an unexpected 12% rise in fourth-quarter
net profit and offered earnings guidance for 2009 that was
comfortably ahead of Wall Street's forecasts. Although sales
declined at its global services division, which includes
outsourcing, software applications development and traditional
business consultancy, higher-than-expected signings of new
customers impressed analysts who say the unit is holding up
well.
The results suggest some of IBM's competitors in the
services-and-software sector, such as Accenture Ltd. (ACN),
Microsoft Corp. (MSFT) and Oracle Corp. (ORCL), may be able to
weather the recession better than some smaller companies. Like IBM,
these companies have scale, products needed to run global
companies, and services that corporate customers can't afford to
drop. Because many of these products are sold on service contracts,
the companies also have strong and predictable recurring revenue
streams.
"We believe these results [from IBM] are a good indicator for
trends impacting managed services providers," Srinivas Anantha, an
analyst at Oppenheimer & Co., said in a note to clients. "We
see overall signings trends as demonstrative of businesses looking
to third-party providers to reduce costs and conserve capital."
The earnings performance lifted shares of IBM as well as some of
its competitors. In early afternoon trading Wednesday, IBM shares
were up 10% at $90.17, while the S&P 500 Applications Software
index was up 2.9%. Microsoft, Oracle, Accenture and SAP AG (SAP)
were all higher as well.
Over the past 10 years, IBM has transformed itself from a
computer maker into a services-and-software giant. While it still
retains a presence in hardware, it has moved to drive more revenue
and profitability from its services and software businesses, which
now account for 80% of the $103.6 billion in total annual
sales.
In particular, the company's $58.9 billion services business has
benefited by serving as an outsourcing destination for many
corporate customers looking to cut costs by shifting their
information-technology functions to specialists, rather than
maintaining their own staffs. The business accounts for about 55%
of IBM's overall sales.
Corporate cost-cutting benefited IBM in the fourth quarter as
North American outsourcing signings, a closely watched measure of
new business, rose 45%. Business from European customers grew even
faster, at 66%.
Accenture, another large global outsourcing company, is also
well positioned to benefit in the current environment.
IBM is seen as well positioned to benefit in the early and late
stages of a recession. While its Global Technology Services
business handles outsourcing, popular among clients in the early
stages of a recession, its Global Business Services operation,
which includes traditional consulting and applications development,
becomes more attractive as companies begin to retool for
growth.
Global Technology Services declined by 4% in the fourth quarter,
up 2% adjusting for currency, and Global Business Services declined
5%, flat after adjusting for currency. While revenue for the
overall services unit fell 4%, signings - a closely-watched measure
of new business - were well ahead of Wall Street expectations at
$17.2 billion.
IBM's outsourcing business, and those at its competitors, is
expected to grow during the recession. In particular, IBM has fared
well from the consolidation of the financial industry caused by the
credit crisis, said Citi analyst Richard Gardner.
"IBM is clearly gaining significant market share in services,
especially outsourcing," Gardner said.
Although IBM has offered outsourcing services for 15 years, it
has moved to make the business more profitable in recent years by
standardizing its services across different regions, said Carl
Claunch, an analyst at Gartner. Claunch said IBM's services
performance also shows the company has gained from global scale
which has allowed it to benefit from better global sourcing,
helping to keep costs down.
IBM's software unit also held up well, growing 3% on a reported
basis to $6.4 billion, driven in particular by the strength of
middleware, products that act like software glue to bind
company-wide applications together. IBM's software strength comes
from the fact that most software revenue is recurring in nature
because of maintenance contracts the company signs with
clients.
This makes for both more reliable revenue streams and more
profitable business; gross margin for IBM's software unit is close
to 90%. According to J.P. Morgan's John DiFucci, the read-across is
positive particularly for companies such as Oracle, which also gets
a large amount of its revenue from recurring sources.
-By Jessica Hodgson, Dow Jones Newswires; 415-439-6455;
jessica.hodgson@dowjones.com
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