IBM is combining software and services to attract smaller, more-profitable tech outsourcing and consulting work even as two recent contracts signal that the era of large deals is not yet over, a senior executive said on Tuesday.
The big contracts with Vodafone Group Plc and French shipper CMA CGM Group could give International Business Machines Corp its best quarter of technology services deals in nearly two years, analysts said.
But Ginni Rometty, senior vice president of IBM global business services, one of two divisions in the group's largest unit, cautioned that one quarter does not yet make a trend.
"The very large deals are very intermittent and not always predictable," she told Reuters in an interview on Tuesday. "You have both dynamics coming at the same time. In general, there is a trend of clients doing things in more bite-sized pieces."
IBM of Armonk, New York, may report that fourth-quarter contracts for technology outsourcing and consulting deals rose at least 13 percent from a year earlier to an estimated $13 billion, according to Sanford C. Bernstein analyst Toni Sacconaghi, who has an "outperform" rating on the stock.
Rometty, who reports to Chief Executive Samuel Palmisano, said recent large contracts do not yet signal a return of the megadeals of the past, but they do supplement the growth of smaller, shorter signings that are typically more profitable.
IBM is offering about 40 so-called business solutions that combine software and services for specific client problems, Rometty said. These include claims-processing for insurers as well as ways to track products from manufacturers to buyers.
IBM and other companies recently announced a service dubbed "Beer Living Lab" to track cargo shipments of Heineken beer from Europe to the United States using satellite and cellular technology. The goal is to reduce the reams of paperwork and red tape now required for such shipping, Rometty said.
Expected growth in fourth-quarter services signings would counter a series of disappointing quarters for IBM in which services deals dipped as low as $9.6 billion in the second quarter, down 34 percent from a year earlier and the lowest since the third quarter of 2002.
IBM services signings are a closely watched barometer of future revenue growth. Revenue in services rose just 2.7 percent in the third quarter, compared with 8.9 percent growth in computer hardware and 8.5 percent growth in software.
Even at $13 billion, IBM's fourth-quarter services signings would still fall short of the four-year, fourth-quarter average of $14.9 billion, according to figures compiled by Sacconaghi.
"There's still a big hurdle ahead of them," said Alexander Motsenigos, a program director at market researcher IDC who studies technology services contracts.
Technology services make up about half of IBM's revenue and are its biggest business, but the segment's profitability lags software and hardware. Bookings were down nearly 12 percent in the first nine months against the same period in 2005.
"Fourth-quarter bookings, critical if IBM is going to try to re-establish better growth prospects for services, are likely to be solid enough to remove it as an issue, at least for the current quarter," wrote Goldman Sachs & Co analyst Laura Conigliaro, who has a "buy" rating on IBM shares.
Investor concern over services bookings has been a drag on IBM shares, according to Conigliaro. The stock is up about 13 percent this year compared with the 35 percent gain of competitor Hewlett-Packard Co IBM trades at 14 times expected 2007 earnings per share compared with HP's 16.
In the Vodafone deal, announced on October 5, the British mobile phone service provider outsourced information technology functions to IBM and Electronic Data Systems Corp Vodafone did not disclose the contract size, but Sacconaghi estimates it is worth some $2 billion to IBM over seven years.
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