Rometty’s Three-Point Plan to Save IBM: High Value, Speed, Productivity

IBM (IBM) chief executive Ginni Rometty dismissed talk of splitting up the listless company amid a 10th consecutive quarter of declining revenue, as the vendor’s Q3 2014 sales tumbled 4 percent year over year to $22.4 billion with a 17 percent downturn in GAAP net income to $3.5 billion.

Obviously, the numbers are bad. So, if not a breakup as HP (HPQ) and Symantec (SYMC) recently have initiated to react more quickly to the lightning-speed market, what then is Rometty’s big fix for IBM?

Here’s one clue: “We are disappointed in our performance,” Rometty said. “We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry.” 

Clearly, Rometty believes IBM lags behind how fast the IT industry changes. At this point, Rometty’s two-year-long mantra that IBM steadily is improving its strategic market positions in cloud, data and analytics, security, social and mobile is proving to be just a tad slow on the uptake.

It’s pretty apparent that merely speeding up IBM’s transition to concentrate on more strategic areas of the market isn’t going to cut it on its own. There’s got to be more. Evidently, Rometty has a three-point plan that Martin Schroeter, IBM chief financial officer and Finance and Enterprise Transformation senior vice president, outlined to analysts on the vendor’s earnings conference call.

“Some of these fundamental shifts in the industry are happening faster than we planned, so we’re putting in place a series of actions to accelerate our transformation,” Schroeter said.

Here’s IBM’s grand plan: 

“Remix to higher value.” What does that mean? It appears to be IBM-speak for divesting itself first of its x86 business to Lenovo in a recently finalized $2.3 billion transaction, and now by paying Globalfoundaries some $1.5 billion to take control of IBM’s semiconductor manufacturing business. IBM’s selloff of its semiconductor business has been rumored for months with Globalfoundaries at the head of the buying pack for some time.

“We just took a bold step in our transformation going fabless with the divestiture of our semiconductor manufacturing business,” Schroeter said. “With Globalfoundaries operating at scale, we’ll get supply at market-based pricing for the long term and we’ll exit a business that was not only capital intensive but also a drag on our profit. Clearly, this is the right move for our business for the long term.”

As for the Lenovo deal, Schroeter described IBM’s former x86 business as a “$4 billion business for us in 2013 with effectively no annual profit.”

And, Schroeter hinted IBM’s sell-offs may not be over. “We’ll continue to re-mix our portfolio by investing higher value areas and making decisions on businesses that no longer support our high-value strategy,” he said.

Is storage the next IBM divestiture?

Improve agility. Schroeter said IBM is “implementing changes that make it easier to consume our capabilities and innovations and increase our agility.” What does that mean? A restructuring, of course. IBM is creating a dedicated business unit for cloud and other integrated units to address growth areas including security and smarter commerce, he said.

“This enables more focused investment and improves our integration speed in bringing solutions to the market and with our clients,” he said. Specifically, IBM will make its software more available online to customers. “We’ll have an end-to-end digital sales and marketing channel which will improve our reach.”

Accelerate productivity. What does that mean? IBM will speed up the use of automation in its data centers and “be more aggressive in our use of global delivery skills and intellectual property across our service lines,” he said.

The short-term impact of IBM’s full makeover? Down revenue in the near term but ultimately “an improved margin profile,” Schroeter said. “These actions also free up our spend and capital to be reinvested to areas that will accelerate our transformation, and these allow us to continue to provide very strong returns to our shareholders through dividends and share repurchases. All of this is consistent with our strategic direction and while there are impacts in the short term, we improve our position for the longer term.”

As for IBM’s much-publicized vow to deliver $20 EPS in 2015, well, forget that, which IBM should have done many quarters ago anyway.

“Given our third-quarter performance, the actions we’re taking and with only 15 months to the end of 2015, we no longer expect to deliver $20 of operating earnings per share in 2015,” Schroeter said.