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If you're IBM (and maybe HP), ain't life grand?

A counter-intuitive start to tech earnings season and this much is clear: the companies with high-margin businesses will pass through the storm a lot easier than everyone else.

What with a deepening recession and concern about the health of financial system, the best-case expectations for technology spending ranged between the bleak and the desperate.

So what do we get? A counter-intuitive start to the earnings season.


The sub-text to IBM's post-earnings conference callon Monday easily could have been: "We're in a recession and ain't life grand?" (We'll have to wait until next month for Hewlett Packard to report its December quarter, but barring a shocker, HP may sing a similar tune.)

Not because these are salad days for the hardware businesses-just the opposite. That's why it's so interesting. In fact, the tech spending slowdown is hurting demand for computers and servers. IBM's computer hardware revenue (the Systems and Technology business) felt the pain as much as anyone, declining by 20 percent in the fourth quarter of last year.

But consider this: IBM's two global services branches notched a record pre-tax profit with a 14.5 percent margin, up four points from the prior year while the company's software revenue grew 3 percent. So what if IBM's sales team floundered in the quarter. Big Blue's higher margin mix compensated for any decline as gross profits rose to 47.9 percent from 44.9 percent.

Sam Palmisano, who has capably run the company since 2003, is winning plaudits from investors nervous about where things may be heading. But the major thanks goes to Palmisano's predecessor. Don't forget it was Lou Gerstner, who steered IBM into the very high-margin businesses that are now acting as bulwarks against the recession.

IBM had lost millions selling personal computers and PC operating systems. But between 1993 and 2002, Gerstner reshaped the company. He pointed IBM in a different direction, directing the company to invest billions building up its services and high-end software offerings.

By late 2004, the CEO baton had been passed to Palmisano, who was in a position to sell the PC business to Lenovo. Gerstner's emphasis on high-margin businesses was a shrewd choice that looks even better in light of subsequent history. These days the PC business is imploding. The lousy numbers recently turned in by bellwethers Intel and Seagate, only hint at how grim it has become in PC land.

Watching Mark Hurd operate at HP, I'm reminded a lot of Gerstner. NCR's former No.1 has a similar sensibility and he understands that commodity companies don't have a bright future. Paying nearly $14 billion last year to buy Electronic Data Systems was his master stroke. But it was part of the same strategy that included paying big bucks to buy application management software, Mercury Interactive, as well as Marc Andreessen's a data center automation software maker, Opsware.

The odd man out these days? It might be Michael Dell.