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Big Blue's big boost?
Better-than-expected results from IBM could help lift tech stocks -- and the rest of the market.
January 18, 2005: 8:12 PM EST
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - A surprisingly strong earnings report from tech bellwether IBM is the latest sign that concerns about a slowdown in tech spending at the end of last year may have been a bit overdone.

IBM, like Intel (Research) and Apple (Research) last week, surpassed Wall Street expectations. The world's biggest computer manufacturer and services company said healthy sales of servers and software were a big reason behind the stronger-than-anticipated results.

During a conference call with analysts, IBM (Research) chief financial officer Mark Loughridge said the improving economy in 2004 helped IBM and that corporate customers have shifted from operating in a recovery mode to one of moderate expansion.

Shares of Big Blue gained slightly in after-hours trading according to INET.

All in all, Tuesday was a busy afternoon for tech companies, with Yahoo! (Research), Motorola (Research), Juniper Networks (Research), and Check Point Software (Research) all posting solid quarterly results as well. With the exception of Motorola, shares of these companies all rose in after-hours trading.

Barry Randall, manager of the First American Technology fund, which owns IBM, said that Wall Street's reaction to these results show that investors were probably not expecting that much in the way of positive surprises from tech companies.

"People seem content. I'm not sure that there was much upside baked into anyone's expectations," said Randall.

But there were some concerns about profit growth in IBM's mammoth global services business, which accounts for nearly half of the company's total sales. While revenues increased 10 percent from the same period a year ago, gross margins were up only slightly.

And Richard Petersen, an analyst with Pacific Crest Securities, noted that much of IBM's sales growth came from the weak dollar, and not strong demand.

To that end, IBM reported a year-over-year revenue gain of 7 percent in the fourth quarter but said sales would have increased just 3 percent if not for favorable currency exchange rates.

IBM and other multinational corporations have benefited from the dollar's weakness since it inflates the value of sales made in other countries. Nearly 60 percent of IBM's total sales in the fourth quarter came from outside the Americas.

In addition, IBM reported just a small increase in sales from its personal systems division, which includes personal computers. Big Blue announced last month that it was selling its personal computer business to China's Lenovo Group. Loughridge said that there was some disruption in this segment during the holidays, typically the strongest for PC sales, due to the announcement of this sale.

However, Loughridge said during the conference call that IBM should be able to post sales growth for 2005, excluding the PC business, that is a percentage point higher than the current consensus estimates. Analysts are predicting a 6 percent increase in sales to $102 billion.

He added that IBM is comfortable with forecasts of about a 10 percent increase in earnings per share, excluding the impact of pension expenses, in 2005. That means that consensus forecasts of $5.55 per share will probably need to increase to $5.60 a share to reflect the fact that IBM beat earnings estimates by 5 cents a share in the fourth quarter.  Top of page


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