IBM's Q1 expected to be strong, but services a wild card

IBM's first quarter report Tuesday is expected to be better-than-expected on earnings as the company's hardware and software units grab share.

Analysts on Monday were upbeat about IBM's quarter. The enthusiasm was boosting the Dow Jones Industrial Average.

Wall Street is expecting IBM to report first quarter earnings of $2.65 a share on revenue of $24.77 billion. In general, analysts expect a solid quarter and a positive outlook even though IBM's services business is a bit of a wild card.

Shaw Wu, an analyst at Sterne Agee, said in a research note:

Based on our supply chain checks, we anticipate in-line revenue and a beat on EPS driven by software and share gains in high-end servers offset by mixed trends in services.

Specifically, Wu cited gains by IBM's high-end Power7 servers. Software growth will be driven by acquisitions. But services may be wobbly given mixed signals from Infosys and Accenture. Accenture was upbeat about its outlook, but Infosys was crushed after missing estimates.

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Other analysts echoed concerns about IBM's services business. Stifel Nicolaus analyst David Grossman said that IBM's services business can be "lumpy." The company inked one services megadeal in the first quarter north of $1 billion.

Grossman added that IBM is facing weak government spending on services. Longer term, Grossman said that IBM's move to embed more of its services knowledge into hardware and software is a positive. IBM last week announced its PureSystems family, which aims to integrate hardware, software and expertise.

Evercore analyst Rob Cihra said that IBM is benefiting from both hardware and services at HP's expense. "We see IBM competitively benefiting from Hewlett-Packard’s challenges, particularly in services and big-iron Unix hardware," he said.