IBM Chief Executive Officer Ginni Rometty will report earnings for the first time since she ditched profit goals inherited from her predecessor.
And with shareholders losing patience with the technology behemoth’s transformation, Rometty needs to reassure investors that International Business Machines Corp. is on the right track.
She’ll need to come armed with a specific plan to refocus a massive organization of more than 430,000 employees on industry-changing trends like cloud computing and the proliferation of smartphones. If she joins the earnings call, investors and analysts are likely to pepper her with questions about how IBM will start increasing sales again and what the financial expectations are for 2015.
We want to know she’s trying to put some sort of timetable together.
“They’ve got to get that revenue growing. How are they going to get there?” said Dan Morgan, a senior portfolio manager at Synovus Securities Inc., which manages about $10.2 billion including IBM shares. “We want to know she’s trying to put some sort of timetable together.”
When the company reports fourth-quarter results after U.S. markets close, IBM is expected to post adjusted profit that’s down from a year earlier to $5.41 a share as revenue declines for an 11th straight quarter, according to analysts’ estimates compiled by Bloomberg. Analysts’ projections were lowered after IBM’s results in October. The company already forecast a drop in full-year adjusted earnings for the first time in more than a decade. Here are the main questions Rometty will need to answer:
Services & Software
IBM said it faced lower productivity in the services division in the third quarter, as well as software sales execution problems. Those businesses make up more than three-quarters of total sales. Did the issues persist for the rest of the year?
Cash Flow
With IBM’s adjusted earnings per share boosted by stock buybacks, lower tax rates and other expense cuts, investors and analysts have focused on free cash flow as a key measure of the company’s financial health. That metric took a hit in October when IBM lowered its 2014 forecast for free cash flow to a range of $12 billion to $13 billion, down from a prior estimate of $16 billion.
Was IBM able to meet those lowered expectations? Will the company be able to generate more cash this year?
Cloud Business
Rometty recently reorganized Big Blue to create a designated cloud business, which is now headed by Senior Vice President Robert LeBlanc. The company has said it expects $7 billion in sales for cloud-related products this year.
“Long-term goals for companies are good on paper, but investors want to see results,” said Daniel Ives, an analyst at FBR & Co. “Part of it is about convincing investors that they have a product portfolio that can successfully transition the company into the cloud era.”
Is the company gaining customers against rivals Amazon.com Inc. and Microsoft Corp.? How is the new structure going to change how IBM develops and sells its products? Will IBM start breaking out the cloud business in its income statements?
Money to Shareholders Versus Investing in Business
IBM’s billions of dollars spent on stock buybacks, which help boost earnings per share, have become a point of contention for the company. Chief Financial Officer Martin Schroeter has defended the strategy, writing that it’s a “false choice” to think IBM has to choose between reinvesting in the business or returning money to shareholders.
Has Rometty spent the $6.4 billion remaining in its repurchase program as of October? Does the company intend on being as aggressive with buybacks? Or, will it allocate more money to capital expenditures, research and development or acquisitions?
2015 Forecast
Rometty surprised investors in October when she tossed the company’s goal of reaching $20 a share in adjusted earnings by 2015 after 10 straight quarters of declining revenue. While CFO Schroeter has said IBM is unlikely to put in place another “absolute” earnings-per-share roadmap, investors and analysts will undoubtedly be searching for some sense of the company’s guidance for this year.
“Not as bad news is good news,” IBM shareholder Morgan said.
