Rometty: Boosting Profit Margins More Important Than Growing Sales
Don’t expect IBM (IBM) to break its two-and-a-half year revenue losing streak anytime soon. In fact, sales are likely to get worse as the vendor more closely adheres to chief executive Ginni Rometty’s blueprint to move the company to higher-value ground and boost margins.
Don’t expect IBM (IBM) to break its two-and-a-half year revenue losing streak anytime soon. In fact, sales are likely to get worse as the vendor more closely adheres to chief executive Ginni Rometty’s blueprint to move the company to higher-value ground and boost margins.
Rometty, on the heels of IBM’s dismal Q3 2014 performance in which sales tumbled 4 percent year over year to $22.4 billion with a 17 percent downturn in GAAP net income to $3.5 billion, told attendees at the Boston College Chief Executives’ Club that improving the company’s profit margins is more important than growing its sales.
“It’s a dangerous thing to talk about your target being just a size without the relevance of what you do,” Rometty said, as Bloomberg reported. “What’s most on my mind is that I keep remixing in high growth.”
Along those lines, after tenaciously holding on to a goal originally set by Rometty’s predecessor Sam Palmisano to deliver $20 of operating earnings per share to investors in 2015, she apparently looked more closely and abandoned that target.
Rometty’s emphasis on margin growth is starkly reflected in the company’s three major divestitures this year—the sale of its customer care business process outsourcing services unit (CRM BPO) to Synnex (SNX) for $505 million, offloading its x86 server business to Lenovo for $2.3 billion, and, most recently, paying Globalfoundaries $1.5 billion to take over its semiconductor unit.
“The three divestitures this year represent about $7 billion of revenue with pre-tax losses of about $500 million, so clearly we’ll have an improved margin profile,” IBM chief financial officer Martin Schroeter said on a Q3 2014 earnings conference call.
“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,” he said. “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.”
Still, big questions remain not only about Rometty’s repositioning of IBM for the future but also about whether she’s late in transforming the IT powerhouse away from old line and unprofitable businesses to high margin territory. Rometty herself has noted that IBM lags behind the pace of change in the industry so what’s to say her plan isn’t tardy as well?
What’s more, IBM may have been spending its money in all the wrong places, according to a New York Times report. Since 2000, the vendor has spent $138 billion on repurchasing its own shares and in paying out dividends and only $59 billion on building its business either through capital expenditures or acquisitions. That suggests the vendor has spent far more lavishly on shareholders than it has invested for its own growth.
Viewed in that light, Rometty’s challenge isn’t merely to reposition IBM’s market targets but also to redirect where its money goes.
