International Business Machines Corp Chairman Louis Gerstner's strategy of relying on sales of computer services will help him report a third-quarter profit as rivals announce losses because of a decline in information-technology spending.
Gerstner is reaping the benefit of multiyear contracts to manage other companies' computer networks, an effort that contributes to recurring revenue estimated at US$30 billion a year and as much as half of IBM's profits. Interest in corporate disaster preparedness following the Sept. 11 terrorist attacks may spur fresh sales, analysts said.
Even so, investors and analysts said the slowdown, which has reduced growth in spending for information technology from an expected 12 percent this year to 2 percent to 5 percent or less, is likely to erode profit by cutting into computer and software sales. Services contracts may also slow, investors said. Analysts' estimates of fourth-quarter profit are down an average of 8.8 percent from a month ago.
"They have a good services business," said Don Easley, a buy-side analyst with T. Rowe Price Group Inc, which owns IBM shares. "But the overall economy is terrible, and they're not immune from that."
IBM, the largest seller of computer services and hardware, is expected to report profit of US$0.89 a share on sales of US$20.8 billion when it issues third-quarter earnings today after US trading ends. Those average estimates, from analysts polled by Thomson Financial/First Call, compare with year-earlier profit of US$1.08 and sales of US$21.8 billion.
Rivals, including server-computer makers Sun Microsystems Inc and Hewlett-Packard Co, are cutting jobs as orders slow and pursuing the same kind of services contracts that Gerstner has stressed.
Analysts expect Sun, Compaq Computer Corp and EMC Corp, a maker of data storage systems, to record losses for the September quarter. About a third of IBM's sales and almost half its profit are recurring because of services contracts, mainframe software sales, and patent royalties, the company said. Services accounted for 41 percent of IBM's second-quarter sales, up from 38 percent a year earlier. IBM's services contracts, some valued at more than US$1 billion and running five to 10 years, will deliver US$95 billion in revenue in coming years.
"Overall we are very positive on Lou Gerstner's strategy," said Kevin Fujimoto, a computer analyst for Banc of America Capital Management, which holds IBM shares. "We really think that IBM has the strongest business model in terms of an annuity-like revenue stream."
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