Despite IBM Profits, A Tech Gloom Still Looms

By: AP
By: AP

Even after IBM Corp. surprised Wall Street with a healthy profit in the third quarter and a reaffirmation of its earnings outlook for the rest of the year, the broader technology sector dived again Thursday. There's just not enough of what lifted IBM to go around.

Tech stocks were pummeled Thursday, and IBM ended the day down as well. Analysts expressed fears that Armonk, N.Y.-based IBM could see trouble in the fourth quarter and into 2009 if the lending and spending climate worsens as expected.

Signs of weakness in the just-concluded third quarter could also emerge when IBM releases its full results for the period on Oct. 16. The company announced more than a week early Wednesday that profit per share was 4 cents higher than Wall Street's forecast, helped by an internal clampdown on spending.

What IBM didn't include in its short statement was any mention of the value of the new technology services contracts it signed, a key measurement that Wall Street uses to gauge the revenue IBM will be able to count on in coming years.

With the deepening distress in the financial services market - which accounts for nearly 30 percent of IBM's sales - analysts fear that IBM has taken a big hit like other companies in the past few weeks, damage that wouldn't show up until the fourth quarter.

Earlier this week, for example, business software maker SAP AG said its sales plunged at the end of September as global financial turmoil escalated. Dell Inc., the world's second-biggest PC maker, also warned last month that softening demand is hurting its business more than expected.

"While the IBM announcement kind of soothed some nerves, I don't think it calmed them completely because there's still a lot of uncertainty out there about how long this credit crisis will play out," said Rick Hanna, an equity analyst with Morningstar Inc.

IBM shares fell $1.55, 1.7 percent, to close at $89. That outperformed the Dow Jones Industrial Average, which includes IBM and dropped by 7.3 percent. The tech-laden Nasdaq fell 5.3 percent.

The warnings from companies like Dell and SAP jibe with a recent Forrester Research report that 43 percent of businesses have cut back on their information technology spending to brace for more severe economic problems. The report also found that 70 percent of businesses are looking to negotiate lower prices with their technology service providers because of their own projected revenue shortfalls.

Bob Djurdjevic, an analyst with Annex Research, pointed out that IBM can still profit when companies are cutting back on technology spending, because IBM does big business in taking over computing tasks for other companies.

That's one reason why IBM is somewhat of an anomaly whose health is not always the best gauge of the tech sector's fortunes. IBM also gets about half its revenue from annuity-like payments in long-term contracts. That helps explain why IBM can express confidence it will still hit its full-year 2008 profit guidance of at least $8.75 per share even with the recent escalation of the financial crisis.

"They may still be too optimistic - there may be some significant slowdowns in new deals," said Forrester analyst Andrew Bartels. "I would not be surprised if the (fourth-quarter) numbers come in weaker than what they expect."

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