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IBM drops long-standing $20-EPS-or-bust goal

IBM CEO Ginni Rometty joined the company’s third-quarter earnings call Monday morning during which she expressed disappointment with the company’s overall performance. And she saved one noteworthy tidbit for her closing remarks: IBM will no longer be held to its pledge to hit $20 earnings per share by the end of 2015. The company lowered its 2014 EPS guidance to the $15.97 to 16.31 range, down from its prior guidance of at least $18.

That target was set in 2012 by Rometty’s predecessor Sam Palmisano and reaffirmed multiple times since. But it was increasingly viewed as irrelevant by analysts, most of whom think that this EPS bullseye was not only impossible to hit but sort of beside the point when investors should be focusing on revenue growth.

Analyst Patrick Moorhead, founder of [company]Moor Insights & Strategy[/company], said it was important for [company]IBM[/company] to move off that “artificial” goal. “Iron-clad targets may galvanize the company, but often lead to bad strategic choices,” he said via email.

Perhaps the most concerning news from today’s call was the lackluster performance of services and software — two areas highlighted by Rometty as high-value strategic businesses. From the earnings release:

Pre-tax income from Global Technology Services decreased 11 percent and pre-tax margin decreased to 17.7 percent.  Global Business Services pre-tax income decreased 15 percent and pre-tax margin decreased to 17.5 percent.

Business services is technology consulting, while technology services is outsourcing.

And as for the software segment, revenue there was down 2 percent year over year to $5.7 billion.

Rocky shoals for IBM

IBM is navigating a tricky transition from relying on the sale of big, turnkey hardware and software systems toward becoming more of a software, services and cloud technology provider. Towards that end it’s exiting capital-intensive and lower margin businesses — offloading servers to [company]Lenovo[/company] earlier this year and actually paying GlobalFoundries more than $1 billion to take over its microelectronics business.

In this new cloud-inflected arena IBM has to contend with more nimble providers with lower cost structures exemplified by [company]Amazon[/company] Web Services, which has shown itself a formidable competitor even in enterprise accounts. [company]Microsoft[/company], HP, [company]Cisco[/company] and other legacy IT giants are all fielding clouds of their own.

The company is in a very tough spot, Moorhead said. “They are the systems leader, but their kind of monolithic systems are a lot less in vogue these years, and OpenPower isn’t gelling quickly enough to make up the shortfall.  The market is shifting to open systems and software and while IBM is working very hard to shift there, they started a lot later than companies like HP.  As an example, [company]HP[/company] was one of the first to adopt OpenStack but IBM was nearly last, only before [company]Oracle[/company].”

Selling software and services is hard in this arena where customers are “suspicious of anything that smells like a lock-in,” Moorhead continued. That means buying decisions, even by IBM’s most stalwart customers, are very slow and that hurts IBM.

Looked at another way, the enterprise sales cycle has undergone considerable change in recent years, with customers buying (or renting) more of their applications from SaaS providers rather than signing big multi-year enterprise licensing agreements with older line companies. More on that here. 

Note: This story was updated throughout the morning.

2 Responses to “IBM drops long-standing $20-EPS-or-bust goal”

  1. I am one of the many who quit IBM once it became painfully obvious that the EPS target was a farce. By turning this financial indicator into a single target for the company, all medium to long term investment stopped. If there wasn’t an ROI within the same quarter that you wanted to spend money then it got blocked. Ginni actually stood up in front of the company and said “failure is not an option” – this at the same time as successful tech companies were proudly announcing “moonshots” and “failure is OK, but we must fail fast and move on”. As an engineer, which sounds most exciting to you? The execs gambled on being able to make the 2015 EPS target by borrowing money to buy back shares and other financial engineering tricks, but reality finally caught up.

    Expect a significant “right-sizing” (did I just write that? Urgh!) operation over the next couple of quarters. Formers colleagues of mine, I hope your resumes are polished up. Good luck.