By V Heiskanen and M R. Miller, Bloomberg
New York : International Business Machines Corp. (IBM), the world’s biggest provider of computer services, is expected to post an earnings rise of 80% over the next three years as software sales generate a bigger percentage of profit.
The company aims to get about half its earnings from software by 2010 to compensate for slowing growth in hardware, CEO Sam Palmisano said on 18 May at a meeting with analysts in Yorktown Heights, New York. Stock buybacks and reduced pension costs also may help IBM reach its earnings target of $11 per share, up from $6.11 in 2006.
IBM has acquired 56 companies since 2003 and is ready to spend more to continue growing, Palmisano said. At the same time, the Armonk, New York-based company has sold businesses such as its personal-computer and printer units. That’s let it focus on software, where sales growth was almost quadruple the rate of its hardware unit last quarter.
“This has to happen,” said Summit Analytic Partners’ Richard Williams, referring to the shift to software. “Hardware profit margins have eroded away to nothing as third-world manufacturers enter the business.”
Sales at IBM’s software unit climbed by 8.8% last quarter to $4.25 billion, the fastest growth of any division, the company said last month. Services revenue rose by 8% to $12.4 billion, while hardware sales increased by2.3% to $4.52 billion.
“We shifted, we adjusted,” said Palmisano, 55. The software division will continue the “strategy that we’re on.”
The company is aiming for sales growth of 7% to 10% in the software business over the long term, compared with 4% to 5% for hardware and 6% to 8% for services.
Half of earnings will potentially come from software “between now and 2010,” Palmisano said today. IBM got 40% of profit from software in 2006.
Shares of IBM fell 56 cents to $105.31 in New York Stock Exchange composite trading. The stock has climbed by 8.4% this year.
The company has repurchased $1.6 billion worth of shares since expanding its stock buyback program on 24 April said CFO Mark Loughridge. IBM is buying back about $100 million of stock a day and may complete its entire authorized buybacks of $16.4 billion before the end of 2007, he said.
The company’s forecast models assume buybacks of $40 billion through 2010, up from $27 billion in the period between 2003 and 2006, Loughridge said. The company’s board will decide on the size of the buybacks later, he said.
IBM also probably will double sales in countries such as India, Brazil and China in the next three years, Palmisano said. While Brazil, Russia, India and China represent about 5% of IBM’s revenue now, they generate more than that in profit, said Frank Kern, head of IBM Asia Pacific.
Revenue from those countries amounted to $4.54 billion in 2006, 21% more than a year earlier. Brazil contributed $1.82 billion in sales, while China provided $1.7 billion.
“We performed well there,” Palmisano said. “There’s potential to double our business.”
Palmisano also aims to increase the profit margin at the services unit by 2 percentage points by 2010. The division, the company’s largest, accounted for 37% of profit in 2006. Hardware and financing units accounted for 23%.
So-called virtualization software, which allows computers to run several operating systems at the same time, will add $1 billion to IBM’s profit after production costs by 2010, Palmisano said.