Word to IBM: Let’s lose the long-term earnings guidance and move on

Almost everyone outside of IBM’s executive suite now agrees that the goal of hitting $20 earnings per share by 2015 did more harm than good. In its attempt to get to that magic number — promised by former CEO Sam Palmisano in 2010 — IBM has laid off thousands of employees and sold or attempted to sell off less profitable businesses, in moves seen by many as counterproductive for the long haul.

On Tuesday, [company]UBS[/company] analyst Steve Milunovich said these long-term projections are not worth doing in this era of tech realignment and that IBM needs to focus on long-term strategy instead of EPS goals. IBM’s trailing twelve month EPS is $14.85, so it has a tough row to hoe between now and the end of its fiscal 2015, which would be Dec. 31, 2016.

IBM Normalized Diluted EPS (TTM) Chart

IBM Normalized Diluted EPS (TTM) data by YCharts

“We advocate guidance that does not target a long-term EPS number,” Milunovich wrote in a research note released Tuesday morning.

He added:

We think IBM should (1) give annual and perhaps next quarter earnings and cash flow guidance but not beyond; (2) build on the analyst meeting by providing consistent metrics round three segments: strategic imperatives, recurring core franchises, and transacaitonal businesses; (3) provide more detail on the overall financial impact of cloud and Big Data on financials.

IBM should also think about using its cash to pay dividends rather than share buybacks and (shock) emphasize long-term principals–“margin over revenue” —  he noted.

For the record, Milunovich himself thinks [company]IBM[/company] will hit the target, but the question is what it has to do to make that happen. If it makes the number but only because of low tax rates and layoffs etc., what does it really mean?

IBM CEO Ginni Rometty, who took the reins in January 1, 2012, has done her best to hew to her predecessor’s roadmap and has bet big on cloud, big data and associated analytics including the $2 billion acquisition of SoftLayer last year. She also recommitted to the $20 EPS target in May. But now that many investors and analysts including Sanford Bernstein’s Toni Sacconaghi, have called the EPS goal irrelevant, she may have enough cover to change course. IBM is slated to announced results for its third quarter ending September 30, on October 14.

Current IBM CEO Ginni Rometty with her predecessor Sam Palmisano.
Current IBM CEO Ginni Rometty with her predecessor Sam Palmisano.

 

Feature photo courtesy of  Flickr user redjar