There’s a lot of hand-wringing going on about the fate of IBM, and its downward spiraling revenues.
CEO Ginni Rometty took the helm at the start of 2012 and she’s been hamstrung ever since by a promise from her predecessor, Sam Palmisano, made in another day and age: In 2010, Palmisano vowed to grow profits to $US20 earnings per share by 2015.
When Palmisano made that promise, he was doubling down on a tactic that had worked well for him before. In 2007, he promised to deliver earnings of at least $US10 a share by 2010. The company handily beat that number, delivering $US11.52 EPS, and became, again, a Wall Street darling.
In 2012, IBM made another bet on its own future earnings. That year it published a report outlining its “2015 Road Map” strategy, and once again predicted profits would hit $US20 per share (click to enlarge the chart below).
Between then and now, IBM’s falling revenues have led to mass layoffs and the sale of entire businesses. Employees have come up with their own disrespectful nickname for the the 2015 Road Map. They call it “Roadkill 2015.”
Since 2010, the tech world’s buying habits shifted dramatically. Companies no longer have to buy their tech the way IBM was selling it back then: hardware and software, installed in their own data centres, with consultants tying it all together.
Instead they can rent tech the way Amazon sells it, paying only for what they use on a monthly basis, saving money along the way.
In Palmisano’s time, enterprises were curious but distrustful of cloud computing. They didn’t think it was as safe and reliable as doing IT themselves. And back then, it wasn’t.
Palmisano all but dismissed cloud computing during IBM’s investor’s day in 2010, saying, “Enterprise will have its own unique model. You can’t do what we’re doing in a cloud.”
Flash forward to 2014 and cloud computing tech has matured, the risks are lower and there are options for running every kind of software in the cloud, including Oracle databases and SAP financial software.
It’s not clear why Rometty has stuck with the promise rather than go her own way. Given IBM’s culture, and the long history of this promise, it isn’t easy for her to ditch it. And now, one year away, she’s determined to fulfil it.
In a cover story in Businessweek on Thursday, Nick Summers summarizes:
Rometty is by many accounts a smart, vigorous CEO — who turned out to have inherited a far more dire position than she, or much of Wall Street, may have realised.
It’s not that IBM missed the cloud. It’s been one of the leaders in enterprise-class cloud computing, and it’s cloud revenue is one of its bright spots, up by 50% in the last quarter. But cloud revenue hasn’t been growing fast enough to replace its shrinking revenues from other businesses.
Meanwhile, its major competitors have grown up around it, namely Amazon, Microsoft and Google, who keep slashing cloud prices, making cloud a razor-thin margin business.
And all of IBM’s historic competitors, in a similar boat as IBM, are after the cloud now too: HP, Oracle, VMware and, recently, even Cisco.
Under Rometty’s reign, IBM’s revenues have declined for eight quarters in a row. It’s a house of cards effect: selling fewer servers means selling less hardware and services.
She’s been following a classic turnaround plan, shedding slow growing businesses, investing in high growth ones. For instance, IBM sold its commodity server business to Lenovo for $US2.3 billion, pending deal approval. IBM has spent $US7 billion on 17 cloud acquisitions since 2010, it says. Rometty has also committed another $US3.2 billion to expand its cloud and fund new offerings. IBM has also shed jobs. It spent $US2 billion over the last two years on employee severance costs. This year, one Wall Street analyst estimated IBM would shed another 13,000 workers.
And that’s why some employees call the plan “Roadkill 2015.”
But Rometty has also firmly stuck with the promise to deliver $US20 EPS by 2015, a decision that increasing numbers of sceptics question. Summers writes:
To make earnings rise while revenue is falling, Rometty has cut costs, sold business lines, fired workers, figured out ways to lower IBM’s tax rate, bought back shares, and taken on debt. Of the 25 analysts tracked by Bloomberg, nine predict that IBM will indeed hit the $US20 target. The question is what type of company Rometty will have left when she gets there.
One thing is certain. Rometty will likely breathe a sigh of relief once her hands are no longer tied by it.
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