Editor’s note: Eugene Zakharov is senior analyst for professional services at Technology Business Research.
HAMPTON, N.H. – Even in this uncertain environment with strengthening U.S. dollar, elongated sales cycles, slashed IT budgets, postponed consulting projects, IBM (NYSE: IBM) feels confident about its opportunities in 2009 and its ability to continue performing well on the bottom line.
On Tuesday, IBM reported a quarterly profit of $2.3 billion, or $1.70 per share. That share profit topped analysts’ expectations by four cents. However, revenue fell 11 percent to $21.7 billion, some $800 million under expectations. IBM did attribute 4 percent of the decline to a stronger dollar.
While IBM was not able to offset the largest revenue decline in its hardware business (Systems and Technology) with better-faring (but also declining) services and software, the company in general was able to navigate well avoiding rock bottoms and undersea currents.
IBM has been transforming itself, including focusing on globalization and shifting to higher-value areas, such as consulting and software. The company has successfully steered away from cyclical and commoditized products. Most of IBM’s profit comes from software, services and financial services, all of which proved to be mostly resilient and attractive in this downturn. TBR believes IBM’s buoyancy lies, in part, in the company’s ability to find the right match of cost-cutting or outsourcing solutions or offering strong revenue generation opportunities through consulting and systems integration.
In addition to the successful portfolio and 50%+ recurring revenues, TBR believes IBM’s services business and geographic diversification will also help offset some of the economic headwinds in the economy. In fact, IBM generates about 60% of its revenue outside the US and a portion of that revenue comes from China, India, Brazil, Chile, Eastern Europe, which continue to experience growth and need help with large infrastructure projects, transformational engagements, etc. We believe this focus on emerging economies will shield its business as well – Asia and countries like China and India continue to remain bright spots in IBM’s portfolio.
In 1Q09, the company improved its bottom line and was able to pull a variety of levers to ensure that utilization, productivity, cost structure and ultimately profitability continue to increase. IBM is ahead of pace in its 2010 roadmap to achieve EPS goals and the groundwork was laid late last and early this year. According to CFO, Mark Loughridge, much of the restructuring was front-loaded and is largely behind the company, especially in the U.S.
At the same time, IBM does not stop investing and laying down the foundation for now and for future even in this environment. It’s an IBM way… Just two weeks ago, IBM announced a launch of its new Business Analytics and Optimization practice within Global Business Services. With 4,000 consultants, it will be one of the larger GBS practices with some marquee clients such as FDNY, TD Bank, The Sentinel Group and many others. TBR believes this service line will continue to gain strong traction as its ROI-focused approach make the offerings very appealing to clients in the time of economic uncertainty.
IBM downplayed Oracle’s earlier acquisition announcement of Sun, claiming that the same mailing address will not solve all the problems, including Sun’s declining market share. However, TBR believes Oracle will challenge IBM, HP and Dell on the server front, with the ability to create aggressively-priced hardware/software/service bundles for items such as blade servers.
Overall, the first months of 2009 served to highlight the challenging market conditions and the global nature of the economic slowdown. The extent of the crisis prompted IT market forecast revisions and several less diversified IT services companies commented on the strong headwinds affecting the core of their business. At the same time, TBR remains cautiously optimistic about the impact of the economic recession on the IT services sector in 2009. TBR believes the impact is not going to be the same across the board and the companies with stronger outsourcing capabilities (IBM is one of the companies) and cost reduction value propositions will remain relevant in the market.