IBM to Deliver Solid Q4 2012 Earnings: Analyst

IBM is expected to deliver another solid quarter, driven by software, services and a rise in hardware, according to a preview from investment firm Sterne Agee.

IBM is expected on Jan 22 to report solid results for the fourth quarter of 2012, according to a financial analyst following the company.

Sterne Agee analyst Shaw Wu, who offered a preview of IBM's quarterly results based on triangulating data points from its peers, supply-chain checks and currency calculations, said he anticipates IBM will show slightly light revenue and better earnings per share (EPS), driven by a mix focused on software and services.

"For its outlook, we expect the company to back its 2015 EPS view of $20," Wu said in a report on IBM's upcoming earnings results. "Our sense in talking to investors is that expectations are fairly low. IBM is one of our top picks for 2013 as we see easier revenue comps and a Power 7+ driven product cycle."

Wu further noted that Sterne Agee expects IBM to report solid December-quarter results, versus consensus estimates of $29.1 billion in revenue and $5.25 in EPS. Sterne Agee has Big Blue at $29 billion in revenue and $5.29 in EPS.

"We expect revenue to be slightly below consensus due to currency and continued macroeconomic headwinds, and EPS to be better, driven by a continued mix shift towards software and services and value-added segments, including analytics and cloud," Wu said.

In addition to a continued shift in the mix of IBM software and services, Wu said he also sees hardware recovering for the company. Hardware took a hit in the third quarter, which ended in September. Typically strong segments like software and services were down for Big Blue in the third quarter. Software revenue dipped 1 percent, and services revenue dropped 5 percent. Meanwhile, IBM's Systems and Technology, read hardware, revenue was down 13 percent.

However, Wu said, "In terms of business units, we are picking up that software (23% of revenue) is benefiting from greater focus from its sales force and channel partners and some large deals that should have closed in the September quarter end up closing this quarter," Wu said.

From feedback Sterne Agee received from IBM channel partners, the firm believes IBM gained share in services. For hardware, Wu said he expects the segment to pick up, driven by new Power 7+ processors.

IBM has made moves to beef up its channel presence in the U.S. Big Blue recently expanded its distribution strategy and authorized two national distributors—Ingram Micro and Tech Data—to sell IBM Power Systems and enterprise-class storage products in the United States.

The move represents an expansion of existing relationships IBM has with the two companies, and they join distributors Avnet and Arrow in this space, effectively doubling IBM's efforts in this regard.

This distribution channel expansion signals IBM's aggressive focus on the fast-growing, midsize customer segment for midrange to high-end servers and storage, a growth area fueled by the ever-increasing data computing and storage needs of modern midsize businesses. IBM estimates the midmarket segment to be a $160 billion opportunity in North America alone, growing at rate IBM estimates to be 3 percent annually.

This all bodes well for IBM, according to Wu.

"We maintain our 'Buy' rating as IBM is arguably the model company in the enterprise space others are trying to emulate," he said. "We believe the company's pioneering vision that the value-added in IT is software and services has given it strategic and structural advantages."