Rometty: IBM Did Not Meet Expectations in 2013

IBM (IBM) chief Ginni Rometty told investors in the company’s annual report the vendor fell short of expectations in 2013 but reaffirmed her commitment to hit the promised $20 per share in earnings by 2015.

“We must acknowledge that while 2013 was an important year of transformation, our performance did not meet our expectations,” she wrote. “So, while we continue to remix to higher value, we must also address those parts of our business that are holding us back.”

This has been Rometty’s clarion call for some time now—paraphrased, it boils down to “sorry for the bad quarter but we’re still going to meet our projected EPS roadmap.” Given her track record to date—amid growing employee discontent galvanized by the recent large layoff, framed by an 11 percent slide in share value in the past year—it’s surprising there’s been little to no buzz about replacing her at IBM’s helm, no public leaks of disgruntled shareholders or executive discord. Maybe IBM’s board believes shuffling top management would make things worse.

By most measures, Rometty’s back is right up against the wall, having presided over seven consecutive quarters of declining revenue and eight straight period of missing analysts’ sales expectations, most recently posting a 3 percent year-over-year downturn in sales to $27.7 billion in Q4 2013. For the year, IBM posted sales of $99.8 billion for a 2 percent dip from last year, and net income of $16.5 billion, a 1 percent slide. IBM is guiding investors to expect full year 2014 GAAP earnings of at least $17 per share and non-GAAP of at least $18 per share.

Still, there’s the promise of that EPS roadmap.

Rometty’s road ahead is marked by greater emphasis on data analytics, the cloud and emerging markets—her three top priorities to move IBM off the schneid. Having sold off its x86 server unit to Lenovo, we can expect IBM to add fuel to its Power and storage portfolios and to Linux, Rometty said. “Let me be clear,” she wrote, “we are not exiting hardware.”

But the sale of IBM’s x86 business has sparked opportunistic rivals. For example, Hewlett-Packard (HPQ) chief Meg Whitman twice publicly has said she intends to take advantage of the haze surrounding IBM’s hardware business.

“We think there is a real near-term opportunity for HP to actually gain share among some of our competitors who appear to be a little less stable than we do right now,” Whitman said in a recent presentation at a Morgan Stanley conference, referring to IBM.

Among the weeds of IBM’s recent quarterly results, there’s active concern about its performance in growth markets, which accounts for 23 percent of the vendor’s sales and showed a 2 percent revenue decline for the year. Revenue in Brazil, China, India and Russia slid even further, to 6 percent.

“While IBM’s growth in Latin America and Middle East and Africa was strong, enterprise spending slowed in other key growth markets,” wrote Rometty. “We are intensifying focus on new growth opportunities.”

Some analysts have openly questioned IBM’s EPS roadmap. In a note to investors earlier this month, Bernstein Research analyst Toni Sacconaghi wrote, “Why is IBM steadfastly driving to its roadmap? It is hard to say. Perhaps IBM genuinely believes it can invest and do what’s right for the business while simultaneously achieving its roadmap. Perhaps it is worried about disappointing Wall Street. … Another possible explanation is that the roadmap/prevailing financial model is the way executives have always run the company, and changing it is uncomfortable and/or requires a different skill set and risk appetite.”