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IBM Assures Shareholders of Profit Goals After Earnings Stumble

May 01, 2013

IBM Assures Shareholders of Profit Goals After Earnings Stumble

Ginni Rometty. Photographer: Graham Carlow/IBM via Bloomberg

International Business Machines Corp. (IBM) Chief Executive Officer Ginni Rometty, facing more skeptical investors after the company missed quarterly earnings estimates for the first time in eight years, said she remains confident about reaching long-term profit goals.

Speaking at IBM’s annual meeting in Huntsville, Alabama, yesterday, Rometty said she was “not satisfied” with the first-quarter results. To shape up, IBM is divesting businesses and focusing on more profitable and faster-growing areas, such as data analysis and cloud computing. The company is still on track to meet its five-year plan for profit growth, put in place under her predecessor Sam Palmisano in 2010, Rometty said.

“It is important to understand IBM’s long-term model,” said Rometty, who became CEO of the computer-services giant in January 2012. “We are an innovation company. This means that we pursue continuous transformation.”

IBM, famous for methodically setting and then meeting its goals, jarred shareholders on April 18 when it posted first- quarter profit of $3 a share, missing the $3.05 predicted by analysts. It was the first earnings shortfall since 2005, according to data compiled by Bloomberg. The shares tumbled almost 10 percent over the following two trading days.

On a post-earnings conference call with analysts, Chief Financial Officer Mark Loughridge blamed the shortfall on an “execution problem” and a failure to close contracts with customers. IBM’s computer-hardware business, where sales dropped 17 percent in the period, was one of the biggest weak spots.

Job Cuts

In a bid to get back on course, IBM will spend $1 billion eliminating jobs in the second quarter and will divest businesses later this year, Loughridge said at the time. Gains in the second half will make up for those expenses, he said, a tipoff that a transaction may be in the works.

IBM also boosted its dividend by 12 percent and approved $5 billion in stock buybacks at yesterday’s meeting.

Calvin Ford, an IBM shareholder and former employee, said at the event that he’s worried about IBM reaching its 2015 earnings target of $20 a share.

“I don’t feel as comfortable as I did at the time Palmisano projected that,” he said. “Hardware ain’t going to get you there. The world economy bothers me more than anything else, and IBM has got to be looking at other opportunities for business.”

Lenovo Talks

IBM could be poised for a one-time gain if it sells its low-end server division. The company is in talks with Lenovo Group Ltd. (992) about the business, which could fetch $2.5 billion to $4.5 billion, depending on what assets and liabilities are included, a person familiar with the discussions said last month. Lenovo previously acquired IBM’s personal-computer division, making it a natural buyer for the servers, which rely on similar x86 processors.

IBM, based in Armonk, New York, is making other changes at its hardware division. Rod Adkins, the head of the unit, will become senior vice president of corporate strategy, a person familiar with the matter said last week. Tom Rosamilia, who has been overseeing corporate strategy, will take charge of the hardware business, reporting to Steve Mills, senior vice president of software, the person said.

Rometty said yesterday that the company is relying heavily on incentives to motivate employees. As much as 90 percent of some workers’ pay is dependent on performance, she said.

IBM shares rose 1.7 percent to $202.54 yesterday after Rometty’s speech, bringing the stock within $5 of its pre- earnings level.

More Open?

The company is making an effort to prove to investors that the earnings miss was just a hiccup, said Maynard Um, an analyst at Wells Fargo & Co. in New York.

“They’ve been a little more open than in the past,” said Um, who has a neutral rating on IBM’s shares. “They had to give more clarity and more color because leaving it to speculation would be a worse thing.”

Loughridge and IBM’s investor-relations team are taking pains to show investors how the company is working through its challenges, said Ed Maguire, an analyst at Credit Agricole Securities in New York.

“What they were trying to do is be as open as possible because they understand that disclosure is extremely important for their stakeholders,” said Maguire, who has the equivalent of a buy rating on IBM’s stock.

While investors appreciate the attention, they won’t be forgiving if IBM’s challenge turns out to be deeper than a few missed sales, Maguire said. Demand for hardware has waned as companies turn to cloud-computing technologies that allow them to store data remotely, and it isn’t clear how deeply IBM is affected, he said.

For now, investors seem confident that IBM can get itself back on track, said Bill Snow, a retired employee who attended the shareholder meeting. When he asked Rometty about the stock drop, she said the company was in a transitional period, then moved on to other topics.

“The fact that nobody dwelled on that says to me that people are generally satisfied,” he said.

To contact the reporter on this story: Sarah Frier in New York at sfrier1@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net


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