IBM 4Q Earnings Preview: Good Profit Gains On Flat Revenue Due to Services

International Business Machines Corp. (NYSE:IBM), the No. 2 computer company, is expected to report fourth-quarter net income rose about 6.5 percent on essentially flat revenue due to sales of software and services, part of a deliberate strategy.

The Armonk, N.Y., company Tuesday is expected to report net income of $5.97 billion, or $5.24 a share, on revenue of $29.12 billion, compared with prior-year net income of $5.59 billion, or $4.71 a share, on revenue of $29.48 billion.

For the year ended Dec. 31, IBM is expected to report net income gained 10 percent to $17.47 billion, or about $15.13 a share, compared with prior-year net income of $15.85 billion, or $13.83 a share, even as revenue dipped slightly to $104.36 billion from $106.92 billion, according to Thomson Reuters surveys of 27 analysts.

On a revenue basis, IBM’s results will rank it No. 2 behind Hewlett-Packard Co. (NYSE:HPQ), the No. 1 computer company, and well behind Apple Inc. (NASDAQ:AAPL), the most valuable technology company, which sells Macs as well as iPhones, iPads and entertainment services but doesn’t provide consulting services.

Compared with HP, of Palo Alto, Calif., which reported a record loss of $12.65 billion, or $6.41 a share, on revenue of $119.9 billion for the year ended Oct. 31, IBM’s performance looks like a sleek engine running in a technology sector buffeted by easing demand for products, especially by consumers, as well as the European financial crisis.

Industry bellwether Intel Corp. (NASDAQ:INTC), the No. 1 chipmaker, previously reported fourth-quarter net income dipped 27 percent and market researcher Gartner Inc. (NYSE:IT) said global PC sales slipped 3.5 percent last year. IBM no longer participates in the consumer sector, but its enterprise services require continued overall demand for computing services.

Under its first year of management by new Chairman and CEO Virginia Rometty, 55, IBM seems to have gained from its reliance on services and software for generating new profit, as well as its half-year-old focus on PureSystems, or selling products compatible with what customers already have, for new sales.

Software and services together account for as much as 81 percent of revenue, while sales of IBM’s high-powered servers and chips are the rest. That’s one reason why analyst Shaq Wu of Sterne Agee lauds it as “the model company in the enterprise space” as it keeps building on the model.

Wu rates IBM shares a ‘buy” with a $230 price target. They closed Friday at $194.47, up 82 cents, for a total annual return, including dividends, of 4.9 percent. Markets were shut Monday for a federal holiday.

At Jefferies, analyst Peter Misek expects the model will keep generating higher earnings for IBM this year, forecasting full-year 2013 net income as high as $16.70 a share, compared with the consensus estimate of $16.64. IBM will likely report “an OK quarter,” he said, but the real news will be in its outlook.

Misek rates IBM shares “hold” with a price target of $225.