Under-performing IBM to address struggling hardware business

IBM CEO Ginni Rometty has admitted the company must address its under-performing hardware business following a year of disappointment for the tech giant.

In an open address to investors, Rometty accepted that in order for the business to progress, certain changes must be implemented during 2014.

“We must acknowledge that while 2013 was an important year of transformation, our performance did not meet our expectations,” Rometty told investors.

During the past twelve months, IBM’s operating pre-tax income was down 8 percent while the company’s revenue in 2013, at $99.8 billion, was down 5 percent as reported and 2 percent at constant currency.

“So, while we continue to remix to higher value, we must also address those parts of our business that are holding us back,” Rometty admitted. “We have two specific challenges, and we are taking steps to address both.”

The first, according to Rometty, involves shifting the IBM hardware business for new realities and opportunities.

“We are accelerating the move of our Systems product portfolio—in particular, Power and storage—to growth opportunities and to Linux, following the lead of our successful mainframe business,” she said.

“The modern demands of Big Data, cloud and mobile require enterprise-strength computing, and no other company can match IBM’s ongoing capabilities and commitment to developing those essential technologies.”

IBM also announced, in January, an agreement to sell much of its Intel-based x86 server business to Lenovo.

“This divestiture is consistent with our continuing strategy of exiting lower-margin businesses, such as PCs, hard-disk drives and retail store solutions,” Rometty added.

“But let me be clear—we are not exiting hardware.

“IBM will remain a leader in high-performance and high-end systems, storage and cognitive computing, and we will continue to invest in R&D for advanced semiconductor technology.”

The second challenge involves the world’s growth markets. While IBM’s growth in Latin America and Middle East and Africa was strong, Rometty acknowledged that enterprise spending slowed in other key growth markets.

“We are intensifying focus on new growth opportunities,” she said. “Overall, the opportunity in the world’s growth markets remains attractive.”

2013…

But despite the admissions, Rometty argued that by many measures, it was a successful year for IBM.

The company’s diluted operating earnings per share in 2013 were $16.28, a new record. This marked 11 straight years of operating EPS growth, with the firm also growing operating net income by 2 percent, to $18 billion.

“In 2013 we invested $3.1 billion for 10 acquisitions,” Rometty added. “We invested $3.8 billion in net capital expenditures. We invested $6.2 billion in R&D, while earning the most US patents for the 21st straight year.

“While making all these investments in IBM’s future capabilities, we were able to return $17.9 billion to you in 2013—approximately $13.9 billion through gross share repurchases and $4.1 billion through dividends.

“Last year’s dividend increase was 12 percent, marking the 18th year in a row in which we have raised our dividend, and the 98th consecutive year in which we have paid one.”

To read more about the IBM Strategy click here.