IBM Global Services "rocking" - but what of the future?

On the surface, IBM’s results for Q1, announced last night, looked extremely positive and gave another boost to the tech sector – coming a day after some good results from another tech bellwether – Intel. See IBM’s Q1 earnings jump 26%; company raises outlook from AP and Global sales give IBM earnings boost from Financial Times. As a result, IBM’s shares rose 4% to $125.4 to a six year high in after hours trading.

The 11% revenue rise and the 26% earnings jump do indeed look pretty good. Surprisingly, IBM’s US revenues rose by an impressive 6%. Trouble is that, elsewhere, much of it was due to the weak dollar. Stripping that out, revenue rose by just 4%. Indeed, revenues from EMEA were up just 4%, adjusting for currency. Software, at $4.8 billion, showed a 6% rise after adjusting for currency. Elsewhere the results were not impressive. Hardware sales fell 7%.

Again the results from Global Services (IBM’s largest business line) look good (“Rocking” as one analyst put it!). Revenues grew 9% to $14.6b with strong double-digit growth in all lines of businesses – I would estimate this growth to be well above average market growth; thus cementing IBM’s top position. Global Technology Services segment revenues increased 9% to $9.7 billion. Global Business Services segment revenues increased 9% to $4.9 billion. However, in a possible signal of worse times to come, services contracts signed were down 2% at $10.8 billion. IBM ended Q1 with an estimated services backlog, including Strategic Outsourcing, Business Transformation Outsourcing, Integrated Technology Services, Global Business Services and Maintenance, of $118 billion, an increase of less than 2% year over year.

All the indications coming to me right now are that IT Services - in particular ITO and BPO – if not ‘rocking’ and indeed fairing pretty well in these troubled times. The CEO of one of IBM Global Services very largest competitors in Europe told me earlier this week that they would report double-digit (that usually means ‘just’ 10%!) growth in the year to 31st March 08. Large companies do turn to outsourcing to save money in times of downturn which should bode well for many of the larger players. But they want payback FAST – “no more ROI in 2+ years, CEOs want it within the financial year” I was told.

That’s why the order book from IBM Global Services looks both perplexing and a bit worrying. I’d have expected an inline growth here to match the 9% historic revenue growth – but we got less than 2%.