IBM Eye

I thought it worth noting that on Thursday, IBM’s shares hit $123.72, their highest price since 2002. The night before, IBM said that its first-quarter profit jumped 26 percent raising its full year outlook accordingly. It was the second strong quarter in a row for IBM. Folks have upgraded IBM with analyst Peter Misek calling the stock “one of the safer investments during a U.S. economic downturn.” I agree 100%, though I would rephrase that a little bit to read, IBM is a very good investment so long as the dollar stays weak. IBM has invested big globally to drive its growth and those contracts are paying in non-dollar currencies. I believe IBM is pretty solid but spectacular earnings growth will be with us only as long as exchange rates stay favorable. When the dollar recovers, IBM will have a tough year because those year to year comparisons won’t be pretty.

Barron’s had a statement on IBM this week saying that shares could easily climb above $120, citing eps growth (fewer outstanding shares), software sales growth and growth in emerging markets. That was the number I had in my head to, and I thought I’d blogged it (I was looking to toot my own horn) but alas I couldn’t find it. So if IBM runs up to $120 in the coming months, is it still a hold?

Steve Jobs’ fake blog did a post Tuesday about IBM and their software growth hype:

You gotta hand it to IBM. No matter how crappy their business is they can always find a chunk of fool’s gold in the pile of dogshit and then get someone in the media (or everyone in the media) to focus on that. Latest example was this story in yesterday’s Wall Street Journal about how IBM’s software division is just setting the world on fire. According to our spies at Fortune, IBM’s flacks have been shopping this story around since January. At last someone bit. Wow, software sales were up 14% in the last quarter and a galloping 7% for the full year, and now Steve Mills is the second coming of Gerstner. Never mind that the way IBM did this was to move some revenue that used to get recognized in other categories over into the “software” division.

A fake celebrity blog is a great idea, and that one’s a lot of fun because the posts really seem to reflect his flair. (another great fake celebrity blog is Drew Bledsoe’s from last year). Anyhow, I kinda feel busted in so far as he’s right about the software growth being in no small way attributable to acquisitions and number tricks. Maybe I did buy into the hype. I guess because I keep an IBM blog and bought in, I’m just a fan boy at this point.

That said, Lotus Notes busted out last quarter, not because of acquisitions or Enron accounting, but due to a solid reputation and a killer offering. I’m still high on Sametime 7.5 too. But all in all, Steve Jobs called me out. Way to go Steve.

IBM released earnings after the bell today and the news was largely good. Revenue rose 7.5% to $26.4 billion and profit was up $3.54 billion, or $2.31 a share, up from $3.19 billion last year. That was slightly above “expectations”, but press has been glowing of late (another great IBM article was in this month’s FastCompany (subscription required) , talking about how math can be sexy). It looks like IBM’s stock will dip for at least a few day (like I know what I’m talking about) but I really believe this is going to be a big year for the company.

The encouraging part of the release was that services division is growing much faster than it had been (maybe IBM wasn’t lying when they said there were some contracts in Q3 that were held up). The blemish on earnings was the hardware division, which, other than Bob Hoey’s fine advertisements, have been pretty neglected. That said, IBM will fare as their services division does. Great quarter IBM.

Craig Mullins of DB2Portal referenced a news piece I missed this week.

The San Francisco Chronicle reported today that IBM is officially the second largest software provider, bypassing former number two Oracle, but still behind number one Microsoft:

In its most recent quarter, IBM software generated $4.4 billion in revenue, and it’s the company’s main profit generator, with an 85 percent profit margin. Thirty-seven percent of IBM’s profit comes from software. In 2005, it sold $15.8 billion worth of software, topping the $14.4 billion that Oracle posted in fiscal 2006, which ended June 30.

So take THAT HP.

IBM released earnings today.

Per Forbes:

IBM has purchased 50 companies, 31 of which are software firms and 48 of which are at least software related, in the past four years.

The rain cloud in this sunny forecast is that the growth came mostly from hardware and software top and bottom line growth. To really grow, IBM needs their services division to be sailing along at that clip. Services grew at 2-3% depending on your math. That’s better than flat but that’s IBM’s lever.

OK, I don’t really hate HP.  Congratulations HP on your turn-around.  And your laser printers work great (not the low-end “Personal LaserJets” though… they stink).  But man am I tired of the all the press over HP soon passing IBM in terms of revenue.  A scan of headlines reveals:

• Reviving HP has IBM in its sights
• With strong results, HP to overtake IBM
• HP to steal IBM’s crown in computers
• Hewlett-Packard soon to usurp IBM’s title
• HP is the Greatest! Lowly IBM Stinks.

Maybe it’s just sour grapes because IBM has been feeling so tired lately.  OK… since the late 90s when IBM announced that 25% of their business was “from the Internet”.  There’s no real buzz surrounding the company.  My problem with the articles though, is that by and large they don’t mention that IBM has been selling off high revenue / low margin divisions for years.  IBM purged $9 Billion in annual revenue by selling the Thinkpad. That alone would put IBM head and shoulders above HP. IBM is (for now) substantially more profitable and more valuable than HP, but these facts are left out of the news.  It’s bad press for IBM when the only mention they get is half of a fact, used to bolster the case that a key competitor is overtaking them.

There has been a lot going on in the IBM world the past few months that we’ve been down.  I wanted to summarize broader things if only becasue they’ve hit my radar. As a quick overview of some things that caught my eye: