Tuesday, October 21, 2014

IBM Is in Even Worse Shape Than It Seemed (BusinessWeek)

Virginia Rometty, CEO of IBM, at the Mobile World Congress in Barcelona on Feb. 26
Virginia Rometty, CEO of IBM, at the Mobile World Congress in Barcelona on Feb. 26

Like a driver obeying the commands of a GPS system even as passengers shout that the car is clearly headed toward a ditch, IBM’s chief executive officer, Ginni Rometty, has followed the profit “roadmap” laid out by her predecessor. The company was going to reach $20 in adjusted earnings per share by 2015, damn it, even as nine straight quarters of sinking revenue made that an increasingly untenable feat of financial engineering. IBM (IBM) laid off workers, fiddled with its tax rate, took on debt, and bought back a staggering number of its own shares to make the math work, even as all that left the company less able to compete with the likes of Amazon.com (AMZN) and Google (GOOG) in cloud computing.
Today Rometty finally abandoned “Roadmap 2015,” announcing that IBM cannot hit the target after all. IBM also said it will pay a chipmaker called GlobalFoundries $1.5 billion to take its chip division off its hands, while also taking a $4.7 billion charge. And IBM reported its third-quarter results—a 10th consecutive period of falling sales, marked by weaker performance in growth markets. “We are disappointed in our performance,” Rometty said in a statement. “We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry.” In response, shares of IBM were down more than 7 percent on Monday morning, Oct. 20.
I wrote, for a May 22 Bloomberg Businessweek cover story, about Rometty’s nearly impossible task of reinventing IBM for the era of cloud computing while handcuffed by the “Roadmap.” IBM is 103 years old and has survived upheavals in the technology industry before—selling mainframes, then personal computers, then getting into the consulting game. Rometty will tell anyone who listens that the changes demanded of IBM today are as great as they’ve ever been. One question is whether IBM has the technical chops to compete with Amazon and others: After losing a lucrative CIA cloud project to the upstart, IBM had to acquire a small competitor, SoftLayer, to competently provide the services its customers are now demanding. The arrival of cheap cloud computing means that corporations don’t need IBM’s big, expensive mainframes. And even if IBM does catch up, the cloud might be such a thin-margined industry that it can’t sustain the profit margins IBM had been telling investors to expect. Until today.
This morning’s selloff is the worst in four years for IBM, Bloomberg News reported. “IBM needs to find success and growth in the cloud through organic and acquisitive means,” Daniel Ives, an analyst at FBR Capital Markets, told BN. “Otherwise there could be some darker days ahead for the tech giant and its investors.” In other words: Focus not on financials but on making stuff people will pay money for, or else.
Nick Summers covers Wall Street and finance for Bloomberg Businessweek. Twitter:@nicksummers.

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