Arik Hesseldahl

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IBM Has Challenges, but Still Looks Solid Going Into Q4 Earnings Report

Computing giant IBM will report earnings for the fourth quarter of 2012 and the full year today, after the close of markets in New York. Analysts expect Big Blue to report per-share earnings of $5.25 on sales of $29.1 billion.

Chris Whitmore of Deutsche Bank Securities expects the quarter’s results to be in line with those expectations, but not without headwinds. Hardware sales should be solid, and should grow about 1 percent year on year, he wrote in a note to clients issued this morning, primarily on the strength of a recent refresh in mainframe machines, Power7 servers and IBM’s newer Pure Systems line.

Software sales should be a mixed bag. With a “choppy” macroeconomic picture as a backdrop, sales of new software licenses may be uncertain. However, IBM’s main software business units, including Tivoli group, WebSphere and storage management software, are all likely to report healthy growth. He expects software sales overall to show growth of 4.5 percent.

The biggest worry about IBM going into today’s earnings report will be around services. The company announced only two large deals during the quarter, fewer than in recent quarters, and none of them had values announced along with them. “IBM’s services bookings figure remains a wildcard this quarter,” Whitmore wrote. He pegs revenue from services at $21 billion.

Another worry will be the currency effect. IBM does business all over the world, and when it gets paid in non-U.S. currencies, the strong U.S. dollar erodes the value of some of those payments.

IBM’s gross margins, a key metric indicating profitability, will be an important number to watch. Whitmore expects a gross margin of 51.4 percent, up from 50.2 percent a year ago, and operating margins of 26 percent, up from 24.5 percent in the year-ago period. Efforts by IBM to reduce its costs, and shifts toward new hardware and software products, will help keep margins growing.

The other long-term item to watch is any indication that IBM may miss its goal to report $20 billion in new revenue and $20 in annual per-share earnings by 2015. Whitmore says Big Blue is still on track and will demonstrate that in its guidance. He expects IBM to project sales growth of about 10 percent, which would imply annual earnings this year in the range of $16.60 to $16.65 per share.

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Just as the atom bomb was the weapon that was supposed to render war obsolete, the Internet seems like capitalism’s ultimate feat of self-destructive genius, an economic doomsday device rendering it impossible for anyone to ever make a profit off anything again. It’s especially hopeless for those whose work is easily digitized and accessed free of charge.

— Author Tim Kreider on not getting paid for one’s work