It's amazing how after years of clamoring for the top line, financial analysts have woken up to earnings quality as a measure of success. That is best exemplified in IBM's better than expected Q4 results which Larry Dignan dissected a short while ago.
At one level you have to ask yourself how a company that is posting so many negative year over year numbers garners so many plaudits. The answer comes in three flavors. First, as Larry points out, IBM is adept at cost management. In the highly lucrative software division, margins crept up to 87.7% in the final quarter. If IBM works a bit harder on this then they could top out very close to 90%. That difference alone could yield an extra $1 billion to the bottom line. That's before building in anything for potential growth, the second flavor.
All of IBM's divisions are looking flat-ish with the exception of the software division. On the earnings call, CFO Mark Loughridge said: "Companies are increasingly turning toward outsourcing in a recession. That trend is benefiting IBM." Whether that will hiccup as a result of the Satyam fiasco remains to be seen. Somehow I suspect that IBM will be regarded as a safe haven supplier as the outsourcing market reshapes itself at a time when shifting cost off the balance sheet looks very attractive to hard pressed CFOs.
IBM is making a lot of noise about its software business and especially its so-called Web 2.0 apps. Coincidentally, Lotusphere is on this week and the Twitterage is prodigious to say the least. Earlier in the week, Phil Wainewright took a mild poke at the event, casting it as 'Back to the Future.' The Alloy announcement between SAP and IBM which is really a reprise oof SAP and Microsoft Duet didn't cause much of a stir. Most of my Irregular colleagues gave it a collective shrug. But that won't matter to many of IBM's target customers who are being sold social computing like it is manna from heaven.
Let's be clear. IBM is no Web 2.0 company. Its DNA is still rooted in a bygone age where the real deal is around services. It's almost complete lack of business blogger representation at Lotusphere and strong focus on Notes engineers is telling. Sure, they'll get a lot of oohs and aahs from the faithful but savvy buyers see straight through that. Even so and given that the company cannot realistically apply premium pricing to products that have low or no cost equivalents in the marketplace, the Notes>Web 2.0>service play is a natural.
Right now, all the market noise suggests that Microsoft Sharepoint and Lotus Notes are going to be the long term Web 2.0 winners but IBM's place is not secure. Mike Gotta of Burton Group reminds us that:
When I talk to clients nowadays regarding their shift from IBM to Microsoft, or about Lotus in general, it is clear that many of them have developed a poor "mindset" about IBM and its Lotus portfolio. Even years after the "Dual Highway" and "Workplace" disasters - IBM is still battling to overcome those negative perceptions (viewpoints that Microsoft and other competitors are only happy to reinforce).
Mike offers sage advice to IBM about overcoming these perceptions at this year's Lotusphere. The early signs with customers up front and central on the opening day extolling Notes are good. As a technology buyer advocate I am always impressed when customer stories are given priority. Even if you think that's a sideshow, IBM's acquisitions that include analytics products like Cognos are well regarded in the marketplace and so should do well.
But the real nugget is the $117 billion global technology and services backlog. This is a feather bed that other companies can only dream about. It provides the kind of assurance that stock pickers dream about in turbulent markets. The only question now is whether companies can find ways to renegotiate those deals in a general market that has yet to hit the recessionary bottom.