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Goldman Cuts Revenue Outlook for IBM

By @NY Staff

Shares of International Business Machines edged down by just under 2 percent Wednesday to $95.39 after a Wall Street analyst trimmed earnings estimates for the technology bellwether.

Citing factors including slowing growth in Information Technology spending, analyst Laura Conigliaro of Goldman, Sachs lowered fourth quarter earnings per share estimates to $1.25 from $1.40 and also cut back estimates on calendar year 2002.

For the current year, she now expects revenues of $85.7 billion, down 3 percent from the year before, and full year EPS of $4.25 instead of $4.40.

For 2002, the revenue expectation is $87.8 billion, reflecting a lowered growth of 2.4 percent year-over-year, and EPS of $4.55 instead of $5.05.

But overall, she said the Armonk, NY-based company is well positioned to weather sluggish economic conditions that have intensified since the Sept. 11 attacks.

In her latest report, Conigliaro said "while IBM's numbers are likely to see less downside than many others given a strong annuity-like base, half of its earnings are still economically sensitive, with IBM's top and bottom lines being more linked now than previously."

The report said despite an earnings per share estimate of 7 percent growth for 2002, the year would unfold in two phases for IBM. The first half is expected to generate negative EPS growth of -8.5 percent from weaker global economies and lowered spending on IT projects.

But the second half, aided by various economic stimuli and "easier comparisons," is expected to mitigate the first half with EPS growth of 23 percent.

"Official 2002 IT budgets will also be conservative given that they are being formulated right now, just as the economy falls into recession. IT spending in the second half of 2002 may start to show signs of recovery as fiscal stimuli begin to have a positive effect on the economy, especially when compared to current extremely depressed levels."

Notwithstanding, the technology giant remains on Goldman's recommended list because of its ability to rebound once the economy recovers.

Even now, the report continued, "we are picking up increasing evidence of a shift in priorities towards disaster preparedness, suggesting that, when growth does resume, IT spending dollars should flow in this direction. This would further play to one of IBM's strengths."

Given the political and economic uncertainties that have intensified since Sept. 11, the investment bank expects IT spending to be limited but also sees less downside for IBM for two main reasons, annuities and their effect on profits and share gains.

Reflecting an industry-wide shift to more on-site outsourcing and long-term maintenance contracts, the report pointed to IBM's outsourcing and maintenance areas as annuity-like in nature, which together contribute 55 percent of IBM's services revenue (in a division that contributes almost half of the company's sales).

Despite missing quarterly revenue estimates that can amount to close to $1 billion, IBM's annuity-like profit stream helps it overcome and even beat EPS estimates, the report said.

"Annuities such as strategic outsourcing, mainframe software, maintenance and global financing account for about one-third of IBM's revenue. When combined with patent royalties of over $1.5 billion, these annuity-like sources also amount to about 50 percent of IBM's profits."

IBM is set to report its third quarter results on Tuesday, Oct. 16th.