IBM: King of the Old-School Tech Giants

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By Michael Comeau
Big Blue may not be the most exciting tech firm, but its Q2 earnings show it's a monster at making money in corporate IT. The investment world's gotten used to so-so results and a lack of excitement from old-school tech behemoths like Dell
DELL
, Hewlett-Packard
HPQ
, Cisco
CSCO
, and Microsoft
MSFT
. IBM
IBM
, however, is hanging pretty tough, as shown in yesterday's stellar Q2 report. Let's quickly go through the headline facts and figures: 1. Revenue rose 13% year-over-year to $26.7 billion, comfortably beating the consensus analyst forecast of $25.4 billion.
(To see Henry Lachman's 10 cybersecurity stocks for the coming cyber wars, click here.)
2. Earnings increased 18% to $3.09 a share, surpassing Wall Street's expectations of $3.03 a share. 3. IBM now expects to earn over $13.25 a share this year, versus prior guidance of $13.15+ a share. 4. Hardware and software sales each rose by 17% year-over-year, while services revenue jumped 10%. 5. Service-contract signings were up 16 percent to $14.3 billion, significantly beating expectations. The company's backlog now stands at $144 billion. 6. IBM claims to have "stolen" $2.3 billion worth of Unix business from Hewlett-Packard and Oracle
ORCL
. 7. The company is sticking to its target of hitting $20 a share in earnings in 2015. IBM isn't exactly the sexiest company on Earth, but there's no doubt that its mid-'90s transformation into an enterprise software and services-focused company is paying huge, huge dividends. Now it's taken me a while to figure out exactly why IBM's makeover worked so well (I can't recall having been an IBM bull at any point in recent history), and I think I've finally got a hold on this beast.
(To read Steve Birenberg's article on why Google is still a growth company, click here.)
Essentially, IBM is a highly modular company built from two families of business units. Part of the company has been constructed from within via its engineering prowess, and that's rounded out by a seemingly endless stream of acquisitions that keep the company breaking into new fields. So if you're wondering why IBM's heading into the stratosphere while companies like Cisco are desperately cutting cutting costs due to a slowdown in demand, the answer may simply lie in IBM's flexibility of identity. IBM is really good at staying on top of corporations' IT needs, and so it is constantly evolving its offerings, which now encompass everything from outsourcing to consulting to software development to servers. IBM simply vacuums up money wherever there's money to be had in corporate IT. As of now, the only other tech company that is really making this type of model work is Oracle, though Hewlett-Packard and Dell surely want in, as indicated by their purchases of Electronic Data Systems and Perot Systems, respectively. However, I wouldn't expect HP or Dell to catch IBM in terms of earnings consistency anytime soon, simply because those two companies are simultaneously playing a fruitless game of catch-up with Apple
AAPL
in the consumer space.
(To read Justin Rohrlich's piece on the demise of the hog industry, click here.)
Going forward, IBM's going to be one of the safer areas in tech, simply because it serves up certainty in a very uncertain world. It hits its numbers and raises the bar quarter after quarter, so what more can you ask for?
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And Finally, a Few Housekeeping Notes
1. The outrage over the Netflix
NFLX
price hike is way, way overblown. I'm hearing a lot of complaints from fellow customers, but not much in the way of cancellations. Some folks will drop out, but in the end, the aftermath should be a wash in terms of actual earnings. (
See also:Netflix Raises Prices: Keep Your Cash With 8 Alternative Options
) 2. The closing of Borders should be encouraging to shareholders of Amazon.com
AMZN
. The changing economics of the book industry favor online distribution, and Amazon's top dog. 3. I sold my position in Motorola Mobility Solutions
MMI
a couple weeks back. I just don't see how this company's products stand out in a sea of lookalike Android
GOOG
phones, and that means an inevitable margin squeeze.
To read the rest, head on over to Minyanville.
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Posted In: Long IdeasTechTrading IdeasCommunications EquipmentComputer HardwareConsumer DiscretionaryEarningsInformation TechnologyInternet RetailInternet Software & ServicessoftwareSystems Softwaretech
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