NEW YORK (CNN/Money) -
Yahoo couldn't do it. Neither could Intel. Now it's IBM's turn to try.
Tech investors have been waiting for something -- anything -- to get excited about this earnings season. And if IBM delivers a sound second-quarter earnings report and gives an upbeat outlook for the remainder of the year, that would go a long way toward changing the market's tone.
True, IBM isn't as sexy as some of the more fast-growing techs: Analysts are expecting earnings of $1.12 a share, up 16 percent from a year ago, on sales of $23.35 billion, an increase of just 8 percent from last year.
But IBM (IBM: Research, Estimates), because of its huge presence in the hardware, software, semiconductor and services sectors, is the one tech company that can give the market the most accurate glimpse of the entire state of corporate technology spending.
"IBM is perhaps the most important earnings call because this company is the one that has made itself out as a new model of a major tech company," said Mark Stahlman, an analyst with Caris & Co.
Shares of Big Blue, like those of many other large-cap techs, have slumped on fears of slowing growth. Shares of the Dow component have retreated more than 15 percent since they briefly surpassed the $100 mark (a 52-week high) in early February.
Tech demand still strong?
Even though investors were punishing Intel (INTC: Research, Estimates) Wednesday following its second-quarter report, the Street's disappointment had more to do with a lower-than-expected outlook for its gross profit margin, not a weakening of demand. Intel boosted its third-quarter sales outlook.
Analysts expect similarly strong signs from IBM. "There is no evidence that points to anything other than a strong second half for IBM," said Stahlman. "Fundamentals are likely to continue to get better and investors at some point are going to stop worrying."
Stahlman thinks that IBM will post a strong quarter, thanks to burgeoning demand for servers, storage and services. Wall Street will be especially hoping for a good quarter from IBM's massive services division, which accounted for nearly half of the company's total sales in the first quarter.
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Stahlman adds that fears about a software slowdown are overblown, noting that despite a slew of recent warnings from several software companies, SAP -- the leader in enterprise software -- recently raised its second-quarter sales guidance. That bodes well for IBM's software unit.
Strong sales of software would be a big plus for IBM since the software division has much higher profit margins than the rest of IBM's business lines. Software accounted for just 16 percent of total sales in the first quarter, but the division's gross margin was a whopping 86 percent.
"The biggest driver to earnings is always software. If that business does better, that's good for IBM," said Richard Petersen, an analyst with Pacific Crest Securities.
However, even if second-quarter sales are robust, IBM would probably need to at least reaffirm, if not raise, its third-quarter guidance to prove to investors that a strong second half is in fact in the cards. Currently, analysts expect IBM to report sales of $23.44 billion in the third quarter, a less than 1 percent sequential increase.
But Petersen said that IBM should have no problem meeting this target. He adds that as long as IBM doesn't lower guidance, that would be a good sign since even a small sequential increase in sales would be an improvement over last year's third quarter, when IBM reported a sequential sales decrease.
"Expectations are pretty low. That's a positive," Petersen said.
Analysts quoted in this story do not own shares of companies mentioned and their firms have no investment banking ties to the companies.
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