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Summary:

IBM is hell-bent on achieving its promised earnings per share goal by next year. Analysts aren’t sure why it bothers.

IBM CEO Ginni Rometty
photo: IBM

IBM CEO Ginni Rometty, who has been press shy since ascending to the top job two years ago, has been unusually chatty of late. She surfaced in a New York Times interview Sunday,  on CNBC on Tuesday. And at an analyst conference Wednesday, she reiterated IBM’s goal of hitting $20 earnings per share by 2015. That target was set in 2012 and is now viewed askance by analysts, some of whom think that this EPS bullseye is not only unlikely but sort of beside the point when investors should be focusing on revenue growth.

Does this goal really matter?

For comparison, IBM’s operating non-GAAP EPS for fiscal 2013 was $16.28, so it has some ground to make up. The $20 target has become a north star for the company, driving big workforce reductions as well as acquisitions in service of its cloud goal, most notably its $2 billion buy of SoftLayer last summer. (When IBM laid out the $20 per share goal in 2012, it also pledged to spend $20 billion in acquisitions.)

In a research note Wells Fargo analyst Maynard Um, while generally bullish on IBM, wrote:

“Our 2015 EPS estimate is below $20 mainly due to lower software profit growth forecast vs. IBM’s expectations. We are modeling software profits to increase about midsingle digits given recent performance in the segment (3-year CAGR of 5.5%). Our estimates for taxes, share count and services and hardware profit growth are roughly in line with IBM’s expectations.”

So, while IBM reiterated its $20 mantra the market didn’t seem to care much; shares were off slightly Wednesday after the meeting.

IBM Chart

IBM data by YCharts

Tricky transition on road to cloud

Like all legacy IT providers, IBM is charting a tricky course from selling pricey on-premises hardware and software with associated services and maintenance to more subscription-oriented cloud-based computing. Its problem is that the more incremental sales of cloud technology cannibalizes legacy cash cow hardware and software sales. But face it, if IBM does not do this, Amazon Web Services and others will do it anyway. This is a topic of discussion with IBM/SoftLayer’s top cloud guy Lance Crosby who will speak at Structure next month. Furthering its cloud goal, IBM announced its latest OpenStack Cloud Manager implementation on Thursday.

In the run up to Wednesday’s analyst briefing, IBM announced a 7-year deal worth a reported $600 million in cloud services with NiSource, an existing IBM customer. What was unclear to me was how much of that deal (or a previously announced $500 million deal with the Hartford) was actually new business to IBM and how much was a shifting of existing business to a new model. Asked to clarify, an IBM spokesman said that NiSource pact represented $600 million of additional, “incremental” revenue to Big Blue. “We also continue to do the services work we did before for their traditional IT ops, but this deal is on top of that, not replacing that,” he said.

So, IBM continues to refocus around cloud (and mobile) selling off its X86 server business, cutting jobs. But the thing is, nearly all of its competitors — including Microsoft, VMware et. al– are all after that business. I agree with analysts like Bernstein Research’s Toni Sacconaghi who say the $20 EPS goal is more public relations than substance if profit comes from lower tax rates, layoffs and stock buybacks. IBM still has to convince the world that it can do cloud as well as, or better than Amazon, Microsoft, and a raft of other competitors.

 

IBM's road to $20 EPS, as published in the company's 2012 annual report.

IBM’s road to $20 EPS, as published in the company’s 2012 annual report.

 

 

 

 

  1. You didn’t mention that it’s likely many high level executives bonuses are directly tied to hitting the $20 EPS goal. Shareholders may not care at this point, but the executives certainly still do.

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  2. It’s like like the captain (and his direct reports) of a ship being paid big dollars (bonuses) to drive their ship onto the rocks, The crew know what’s going to happen and are getting ready to leap into the lifeboats soon after. Everyone else aboard is in the dark doing their duty as ordered and will be left to fend for themselves when the ship goes down after the 2015 target is hit.

    Companies and management shouldn’t be rewarded for hitting pointless targets like this. It’s about long term viability – something many have forgotten in chasing their medium term bonuses.

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  3. Is the $20EPS goal a GAAP or non-GAAP number? If it’s unclear, it gives them latitutude to play games and come to this number through games, and in turn, to give them a big bonus, but it wouldn’t be a core and true EPS number and would probably fall the following year since it come artificially on the target year.

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