IBM Outlines its Long-Term Financial Goals to Wall Street
May 21, 2007 Timothy Prickett Morgan
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As pointed out elsewhere in this issue, chairman and chief executive officer, Sam Palmisano, and chief financial officer, Mark Loughridge, hosted IBM‘s annual Wall Street analyst day event in Yorktown Heights, New York, last Thursday. At that meeting, Big Blue gave an overview of how it saw the next several years unfolding. To get a sense of what IBM said at the meeting, I perused a report put out by Ben Reitzes, who is the lead tech analyst at brokerage house UBS. According to that report, IBM is basically going to take the savings it is getting from shifting from a defined benefit pension plan to a 401k plan and plow the dough back into share buybacks. IBM’s board of directors has already authorized $16.4 billion in share buybacks recently, and went so far as to allow the company to borrow money if it needs to in order to buy the shares back. The plan between now and 2010 apparently calls for Big Blue to buy back up to $40 billion worth of its own shares, which is a staggering amount when you consider that the company spent around $75 billion from 1995 through 2006 to buy back 1.2 billion of its shares. IBM had 1.6 billion shares outstanding at the end of 2006, and $40 billion would take about a quarter of the company’s shares off the market. At this rate, by 2020 or so, IBM will be a private company. IBM has always been a company focused on growing profits, and in the past dozen years, it has been obsessively focused on it, ditching any business over the rails that didn’t contribute to the bottom line. IBM’s goal is annual earnings per share increases of 10 percent to 12 percent and it wants to reach $11 per share by 2010. That will be accomplished through a combination of share buybacks, organic growth in existing markets, expansion in emerging markets, and acquisitions of companies that build the bottom line. Of the additional $5 per share IBM needs to get to that $11 per share goal, 75 cents is expected to come from the growth of its existing businesses, $1 will come from enhanced productivity (cutting costs and improving efficiencies), $1.10 from share buybacks, $1.20 from acquisitions, and 90 cents from declining pension costs. IBM told the Wall Street analysts that it expected its Systems and Technology Group to grow at about 4 percent to 5 percent annually in the next four years, with Global Services growing from 6 percent to 8 percent and Software Group growing at anywhere from 7 percent to 10 percent. Interestingly, IBM expects that by 2010, it will double its sales in the merging markets–notably China, Russia, India, and Brazil. Profits in these four markets are growing faster than sales, by the way. The other interesting thing IBM said is that it expected Unix and X64 sales to grow between 4 percent and 6 percent, with mainframe sales growing 1 percent to 3 percent. If IBM said anything about the System i market, Reitzes did not mention it. IBM’s top brass also said that between now and 2010, server virtualization would itself drive $1 billion in gross profits because even though virtualization is driving fewer unit sales, it is also driving richer configurations. All I have to say about that projection is that in the late 1980s, when IBM sold off its rental base in mainframes at the same time it was selling lots of midrange and high-end mainframes, a young IBM chief executive officer named John Akers made the projection that IBM would sell so many mainframes that it would hit $200 billion in sales–and he started building the business to support that vision. By 1991, we were in recession and the mainframe business absolutely tanked as Unix took over enterprise computing. My point is, assuming that rich, virtualized server configurations will be able to offset the footprint count is the same kind of bet. Just because it happens for one year or two–as the mainframe market did wonderfully in the late 1980s–does not mean it is sustainable. As it is, IBM will probably crest above $100 billion in sales by 2009, if the world’s current economic state prevails. That is still a far cry from the $200 billion Akers once dreamed of. Of course, if IBM and Hewlett-Packard merged, that would be a different story.
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