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Big Blue Stokes Tech's Rekindled Fire

By Spencer E. Ante Like a crucial base hit in a post-season baseball rally, IBM (IBM) kept the tech-earnings momentum going with its third-quarter announcement on Oct. 15. After the market closed, Big Blue reported that sales for the quarter ended Sept. 30 grew 9%, to $21.5 billion, up from $19.8 billion in the same period last year. Profits from continuing operations increased 5%, to $1.8 billion, up from $1.7 billion.

"We are beginning to see signs that the economy has stabilized," said CEO Samuel Palmisano in a prepared statement. "Although it is too early to say that a rebound is at hand, we are confident that we will benefit from both a pick up in IT spending and an economic recovery."

IBM's pronouncement reassured investors about the near-term future, although it's unclear how they'll react when the market opens Oct. 16. So far, investors have been mostly unimpressed with stronger-than-expected earnings as the unofficial earnings seasons swings into full gear.

STRONG PIPELINE. Still, IBM's quarterly results suggest that tech companies are finally expecting a pickup in demand, as opposed to increased profits as a result of cost-cutting (see BW Online, 10/16/03, "Wanted: Food for the Bull"). Indeed, IBM said it expected to add approximately 10,000 new positions in key skill areas, including services, hardware, and software. That kind of hiring could go a long way toward convincing consumers that job creation is back on track -- although it's unclear how many of those new jobs will be U.S.-based.

Sales of IBM's global-services unit, which appear to be gaining momentum, grew 17%, to $10.4 billion, although pretax income declined 4%, to $1.2 billion, partly due to lower margins from the high startup costs of big outsourcing deals. IBM signed $15.4 billion worth of new services deals in the quarter, up 70% over the previous year. New signings are typically seen as a harbinger of growth. "Our pipeline of opportunities is strong," said Chief Financial Officer John Joyce.

IBM's third-quarter results buttressed its strategy of focusing on technology services and software. The software group reported solid results, with an 11% jump in sales over the year-ago period, to $3.5 billion. Most surprising was a turnaround in its struggling Tivoli and Lotus groups. Tivoli sales were up 25% and Lotus grew 9%. IBM's data-management and WebSphere businesses reported solid growth, too. "We grew or held share in all of our key segments," Joyce said.

DOWN NOTES. Although total hardware sales declined 1%, IBM's important server and storage group saw a 6% rise in sales, to $3.2 billion. It continued to gain strength in all segments of the server business, especially in its Intel (INTC) servers, which grew 16%.

Looking to the fourth quarter, Joyce said analysts' "current sales and profit estimates are reasonable." Those expectations are for IBM to report sales of $25 billion, an increase of 6% over last year's $23.7 billion in the fourth quarter.

Not all the news was upbeat. Big Blue's technology group continued to drag down the company. Sales dropped 30%, with half of the loss attributable to IBM's exit from the card-assembly and test business. The other weak part of that business is its computer-chip manufacturing unit, which lost $96 million.

IBM execs tried to sound a positive note, saying Big Blue was working out manufacturing glitches and signing up new customers. "In 2004, we should return to profitability," predicted Joyce. That optimism could help keep a tech-inspired rally on Wall Street alive and well. Ante covers IBM for BusinessWeek in New York

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