Will Software Win Again for IBM?

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Software is now IBM’s (NYSE:IBM) biggest growth driver, and investors are hoping the division will again push the company’s profit outlook for this year as it did in 2011. The company is reporting first-quarter earnings at close of markets on Tuesday.

IBM has been focusing on letting software boost growth since dropping its PC business in 2004. Last year, the division generated 44 percent of the company’s profits. However, IBM wants the segment to be pulling in 50 percent of profits by 2015, since specialized software gives much higher margins than some of its other businesses. That will help IBM meet its lofty earnings per share goal of $20 by 2015. This year, the company expects to reach an operating EPS of $14.85.

In this first quarter, analysts are predicting IBM will post an operating EPS of $2.65 and sales of $24.8 billion.

IBM will also hope to match the positive quarterly news from competitors Oracle (NASDAQ:ORCL) and Accenture (NYSE:ACN). Both have already reported strong first-quarter software sales and a positive outlook on IT spending this year.

Sterne Agee analyst Shaw Wu wrote in a recent note that IBM’s strategy of focusing on software and services “has given it strategic and structural advantages.”

The company’s second-largest unit, services, is also expected to match up to Accenture’s strong results despite warnings of decreased consumer spending released by Infosys (NASDAQ:INFY) and Cognizant Technology Solutions (NASDAQ:CTSH). The services unit generated 42 percent of IBM’s pre-tax profit in 2011. The company’s mainframe business is likely to post another revenue decline in this quarter, but could soon improve on the back of rising demand for storage, analysts think.

Stifel Nicolaus analyst David Grossman said IBM may even be taking server business away from Hewlett-Packard (NYSE:HPQ) and Oracle. “In hardware, HP and Oracle posted weak January and February quarters, respectively, which we believe at least partially reflects competitive displacements by IBM,” Grossman said.

According to the Nikkei business daily, on Monday, IBM also sold its point-of-sale terminal business to Toshiba for 70 billion yen ($870.86 million).

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