* IBM reports 1st quarter earnings after the bell Tuesday
* IBM sees EPS of $14.85 for 2012 vs analysts’ $14.94
* Software demand could lead to higher full-year outlook
By Nicola Leske
April 16 (Reuters) – IBM Corp reports earnings after
the bell on Tuesday and investors are hoping strong software
demand will make for a repeat of last year’s first-quarter
performance, when the company raised its full year forecast.
After Oracle Corp’s strong first-quarter software
sales and outsourcing firm Accenture Plc’s positive
outlook on IT spending, there is a chance that IBM – which
competes with both companies – may raise its full year outlook.
Sterne Agee analyst Shaw Wu wrote in a recent note that there
was a “fair likelihood” IBM would “modestly raise” its outlook.
Software represents IBM’s most important division and
biggest growth driver and includes everything from data
analytics that help forecast and fight crime to software that
manages infrastructure.
IBM, which dumped its PC business in 2004 to concentrate on
consulting and services, has squarely focused on software as a
means to provide the foundation for its growth strategy. The
company proved that once again on Monday, with the Nikkei
business daily reporting it sold its point-of-sale (POS)
terminal business, which includes cash registers and related
devices, to Toshiba Corp for 70 billion yen ($870.86
million).
IBM declined to comment.
IBM’s software business generated 44 percent of its pre-tax
profit last year and the company has said it will contribute 50
percent to its segment profit by 2015.
IBM has said it expects to reach an operating EPS of at
least $14.85 this year compared with analysts forecasts of
$14.94, according to Thomson Reuters I/B/E/S. In the first
quarter, analysts expect IBM to post an operating EPS of $2.65
and sales of $24.8 billion.
The thinking behind IBM’s strategy is that specialized
software is of higher value and will result in higher margins,
keeping IBM firmly on track to reach its earnings per share goal
of $20 by 2015.
Sterne Agee’s Wu agrees, saying IBM’s strategy of marrying
IT with software and services “has given it strategic and
structural advantages.”
Improving demand for branded middleware – a software that
facilitates integration of applications or end devices and
servers – and continued momentum in analytics could make
software the stand-out division this quarter and this year for
IBM, according to Goldman Sachs.
IBM competes with business software makers Oracle Corp and
SAP AG as well as Hewlett Packard Co.
IBM’s services business, its second-largest unit, is
expected to be stable given rival Accenture’s strong quarter and
optimistic outlook. That is good news for investors considering
that outsourcing competitors Infosys Ltd and Cognizant
Technology Solutions Corp had warned that customers
were spending less.
The services unit incorporates PriceWaterhouseCoopers
consulting business, which IBM bought in 2002. It generated 42
percent of the company’s pre-tax profit in 2011.
IBM’s smallest division, its mainframe business, is expected
to continue to show declining revenue in the first half of 2012.
But rising demand for storage should boost the business
near-term, Goldman Sachs said.
“We believe a new mainframe cycle and remarkably easy
comparisons could produce healthy revenue and profit growth in
the second half,” Goldman Sachs said.
Stifel Nicolaus’ David Grossman said IBM may even be taking
server business away from HP and Oracle.
“In hardware, HP and Oracle posted weak January and February
quarters, respectively, which we believe at least partially
reflects competitive displacements by IBM,” Grossman said,
adding that IBM would likely benefit from an ongoing
infrastructure build-out in emerging markets.
IBM trades at 13.2 times estimated 12 month forward
earnings, according to StarMine, which gives more weight to
timelier forecasts and those from the historically most accurate
analysts. By comparison, Oracle and HP are valued at 10.9 and
5.8, respectively.
As it has done historically, IBM’s Chief Financial Officer
Mark Loughridge will run the company’s earnings call and not new
Chief Executive Virginia Rometty, who made headlines last week
for attending the Masters golf tournament, hosted by the Augusta
National Golf Club – a men’s only club.
IBM is one of the sponsors of the tournament and its CEOs
have traditionally been granted membership to the exclusive
club, but so far Augusta chairman Billy Payne has refused to say
whether it would change its policy for Rometty.
(Reporting By Nicola Leske; editing by Peter Lauria and Andre
Grenon)
