IBM Sets Example for Riding Out the Financial Storm

With solid third-quarter earnings, IBM provides the tech industry with a beacon. The company's CFO says short-term signings look good to sustain growth, while insulation from reliance on financial services market revenues and exposure to tarnished financial institutions limit potential threats. Once again, IBM Software and Services lead the way to growth for Big Blue.

As IBM indicated a week before in announcing preliminary earnings, the company had a solid third quarter, with revenues up 5 percent and profits up 20 percent over the same period a year ago. However, it was not so much what the company said about its current financial results during its Oct. 16 earnings call, but what it said about why IBM's outlook will remain strong during the economic crisis that bears the attention of the tech sector.

During the IBM earnings conference call, Mark Loughridge, IBM's senior vice president and chief financial officer, said there are at least three things fueling IBM's ability to weather the storm. One is that IBM has "confidence in the short-term signings profile and how that's going." Indeed, Loughridge said short-term signings for IBM's services business were up 8 percent and in the United States up well beyond that.

Second, IBM does not pursue deals that expose the company to risk. "We have confidence in the quality of the deals we've signed," Loughridge said. And, third, IBM has continued to work to "take cost out" of its entire operation, from production to supply chain to distribution-all across the board.

Google's Q3 profits jump 23 percent. Read more here.

However, Loughridge drove home the point that perhaps the main thing buoying IBM during the financial mess is "we have a manageable level of exposure to financial institutions" involved in the crisis. Indeed, in the financial services industry, Loughridge said, "the amount of revenue IBM generates from these institutions is only about 1 percent" of IBM's overall revenue. Moreover, in general, IBM draws only 7 percent of its overall revenue from the financial services sector, Loughridge said. So IBM's exposure is minimal, he said.

And despite the fact that periods of economic turbulence provide opportunities for services deals with customers "looking for ways to reduce cost, reduce capital or just to survive," some of those opportunities are "not worth the risk," Loughridge said.

"IBM's portfolio of services, software and hardware helps its clients ride out the wave of turmoil by providing cost-cutting or outsourcing solutions or offering strong revenue generation opportunities through consulting and systems integration," said Eugene Zakharov, senior analyst of professional services at Technology Business Research. "By focusing on business outcomes, IBM has its skin in the game and is able the make its story very appealing to clients who can be going through tough times."

In addition, Loughridge said IBM's own Global Financing arm, which is used to facilitate enterprise client acquisition of hardware, software and services, is itself insulated from the credit mess. "We have a rock-solid booking business and a very solid customer base," he said. Moreover, Loughridge said 97 percent of IBM Global Financing's portfolio is in its core competency of technology financing and has no exposure to consumers or mortgage lending.