IBM reaping profits from e-business push

Big Blue's revenue growth could approach last quarter's 15 percent, better than the 12 percent estimated in a July report from Merrill Lynch. Analysts anticipate earnings per share of 88 cents, according to a consensus taken by First Call. This compares to 75 cents a share last year in the same period.

IBM's respectable growth comes at a time when a number of the company's strategic initiatives are finding acceptance in the marketplace. The company's emphasis on e-commerce has seemingly begun to pay off and distinguish IBM as one of the leading software and hardware providers for this segment.

The company has also begun to increasingly leverage its Technology Business Group as a vehicle for selling computing components to competitors.

Merrill Lynch said in a report that IBM is becoming a quasi-Internet company, because 25 percent of its revenue is now from e-business.

"Our surveys show that IBM and Sun have broken away from the pack in user recognition," said Steven Milunovich, a vice president at Merrill Lynch, in the report. "We agree that IBM wins as corporations stampede to the Net. E-business is growing 20 percent and 60 percent of the revenue will be services."

The investment house also said that IBM is not getting out of PCs "in the belief that profits can be significant when services are wrapped around it. We do expect IBM to outsource more production."

Software and services
Software and services continue to be stellar and major growth areas. "The future of IBM is software and services, everything else is secondary," said Thomas J. Bittman, an analyst and vice president at GartnerGroup Dataquest. IBM chief executive Lou Gerstner said in May that that if services can grow at 15 percent, the company can grow at 10 percent or better, in line with the industry.

The company signed major services contracts in the second quarter totaling about $900 million. The company is getting closer to signing large contracts in Japan also.

"We are comfortable with our first quarter earnings per share estimate of $0.90, up 20 percent from $0.75 in the second quarter of 1998," said Salomon Smith Barney in a report.

"We are projecting revenue of $21.6 billion, up 12 percent in constant currency year over year," according to Salmon Smith Barney. Revenues last year in the same quarter were $1.45 billion. The company is pegged as a "strong buy," according to a First Call consensus. The stock has been on a six-month tear since the beginning of the year, starting at just above 90 in January rising to this month's levels of above 135.

IBM also continues to show great revenue potential for its component supply business under the purview of the new Technology Group. "This is a huge growth business for them," said Bittman.

A number of analysts say that IBM doesn't see a Y2K slowdown at this point. "More people are buying up front," said Bittman.

In the PC market, Bittman believes IBM has put the inventory glut almost completely behind it. "This has been resolved over the last few quarters." Industry sources put the current inventory at 4 to 6 weeks, which is relatively healthy. Previous levels were twice this, said sources.

Big Blue will report earnings after the stock market closes Monday. Other highlights include:

• The Technology Group which supplies companies like Dell Computer and Acer with components such as chips, hard drives, and liquid crystal displays is positioned to contribute much in revenue growth. "This is nice [profit] margin stuff," said Kim Brown, a hardware analyst at GartnerGroup Dataquest. Last quarter, revenues were a whopping $8.8 billion.

• IBM is also in the midst of incorporating Sequent Computer, a maker of high-end Intel-based servers, which it recently bought. "They could have just gone with an equity stake in Sequent, but they bought it lock, stock, and barrel. There is huge switch under way to Intel servers," said Bittman. But analysts say Sequent is barely eking out a profit and will be hard-pressed to make high-end revenue estimates.

• RS/6000 Unix servers are a big question mark now, according to some analysts, as the company puts its server chips in its Windows-Intel Netfinity servers and Sequent. AS/400 and 390 mainframes continue to contribute solid revenues.

• Consumer PCs were not profitable, but IBM is expected to remain active here because a retreat from this market could translate to a loss in business PCs, say analysts. The Aptiva line is being targeted more at small businesses now which is a major component of "consumer" PC purchasing.

• Software and services: In addition to the revenue it provides, this drives a lot of the growth in other areas. "This is where IBM is beating Microsoft," said Bittman. He claims that Microsoft will eventually have to implement a huge strategy shift to combat IBM in services.

But IBM will also have a tough time defending its turf as Microsoft's software becomes more sophisticated and upscale.