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IBM confident, market less so

Tech giant reaffirms 2008 earnings target amid more gloomy IT spending forecasts.

By Scott Moritz, writer
Last Updated: October 9, 2008: 1:22 PM ET

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NEW YORK (Fortune) -- IBM tried to separate itself from the tech pack with a mixed third quarter earnings preview, but more budget cutting among among business buyers foreshadows trouble down the road.

The information technology giant said its service contract business remained solid and reaffirmed its full-year profit goal. Big Blue also said that it expects to post an adjusted profit of $2.05 a share. That compares with pro forma earnings of $1.68 in the year ago period and is above analysts estimates calling for earnings of $2.01 a share. Sales for the quarter ended last month were $25.3 billion, up from the $24.1 billion level last year, but below expectations for a top line of $26.5 billion.

Like the tech-loaded Nasdaq itself, IBM (IBM, Fortune 500) shares have dropped 21% in the past month as the credit crisis threatens to throw U.S. and European economies into a deep recession. The free fall, especially among tech stocks, has seen some highly profitable giants like Nokia (NOK), Dell (DELL, Fortune 500) and Verizon (VZ, Fortune 500) drop in value below their yearly sales levels. These negative price-to-sales ratios are a new milestone not seen even in the last tech crash.

"IBM's pre-announcement attempts to put out the fire sale," JPMorgan analyst Mark Moskowitz wrote in a research note Thursday. The investment community has taken a largely pessimistic attitude toward the tech sector, preferring to sell rather than wait out the storm.

The selling did take a break briefly Thursday morning, but buyers weren't exactly out in force. IBM shares hovered around $91 at midday, roughly flat with Wednesday's closing price.

As one of the key beneficiaries of the IT outsourcing trend, IBM has been in a relatively safe position in the tech spending swoon. But a new report Thursday from Forrester Research suggests that there are more challenging times ahead.

According to Forrester, 43% of the firms it surveyed have already cut IT budgets in anticipation of an economic slowdown, and 70% are looking to spend even less. Recent shakeups in the insurance and financial services industries are also starting to cause stalls and order cancellations among tech suppliers, Forrester says.

Some analysts see signs that the fallout from the failures in the banking sector are starting to show up in IBM's results.

"IBM's revenue shortfall likely came late in the quarter due to increased purchasing hesitancy, and may have been concentrated in consulting and short term services revenues, particularly in financial services," Sanford Bernstein analyst Toni Sacconaghi wrote in a note Thursday.

Tech watchers will tune in next Thursday to see if the company will be able to fill in more details when it releases its full earnings report. To top of page

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