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Friday, January 18, 2008

IBM Q4:2007 Results

IBM services revenue came in substantially better than the consensus. Even more impressively, bookings came in at 15 billion, some 20% better than the consensus estimate, driven by short-term bookings strength. Much of the upside to consensus EPS assumptions is coming from pension cost savings.

There’s a longer-term trend towards outsourcing of IT functions and IBM with their size and breadth is a prime beneficiary. The bulge in short-term contracts suggests corporate uncertainty – customers have likely been delaying implementing service contracts and are reluctant to be locked in. IT budgets are still holding firm despite the macro-economic environment. IT has become a real productivity tool over the last few years, particularly with the advent of always-on employees via internet connectivity. Customers will replace less hardware and software and milk their existing infrastructure more in an uncertain environment. Nonetheless, I’m surprised services blew out expectations like that.

IBM is a defensive stock. It tends to trade between 10 and 20 times earnings expectations. With the stock trading at ~13* earnings and the economy looking so iffy, it’s a long. Investors will hide there.

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