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IBM still looking at more challenges than opportunities

Aaron Pressman
Daily Ticker
IBM Chairwoman and CEO Virginia "Ginni" Rometty speaks at an IBM Watson event in lower Manhattan, New York in this January 9, 2014, file photo. International Business Machines Corp reported lower-than-expected quarterly revenue as weakness in its storage and server businesses continues to offset gains in its software services, April 16, 2014. REUTERS/Brendan McDermid/Files (UNITED STATES - Tags: SCIENCE TECHNOLOGY BUSINESS)

IBM (IBM) CEO Virginia Rometty has been getting out quite a bit this week ahead of the company’s Wednesday analyst meeting, trying to make the case that she’s figured out how to revive growth at the stalling tech giant.

“We are making progress, and we just need to keep moving with speed,” Rometty told New York Times reporter Steve Lohr in article that appeared on the front of the paper's business section on May 12.

“We manage this company to move to high value over time – this is how you get to be 103 years old,” she told CNBC’s David Faber in a live, televised interview a day later.

"This company reinvents itself every decade. It’s doing it again,” she told a couple of reporters from the FT.

But while these high-profile media hits are easy to find, the best place to seek evidence to judge Rometty’s turnaround efforts may not be from the CEO’s words but those of her customers. That’s a little harder to find and a lot less upbeat.

Times reporter Lohr left it to a blog post to describe how big companies that are at the core of IBM’s customer base are shutting down whole data centers, slashing hardware spending and drastically reducing IT budgets as they move to cloud services from IBM and others. That's what some might call a "win-lose" between the customer and the IT industry, as opposed to the "win-win" Rometty and other CEOs are seeking.
And General Electric (GE) hired away one of the top execs from Verizon’s (VZ) cloud service, Terremark, to oversee its shifting (and likely declining) IT spending, the Wall Street Journal reports, in a post also relegated to a blog. By enlisting services from upstart Box and others, GE’s aim is to help reduce its administrative spending by $4 billion.

The real challenge

The anecdotes help illuminate the real challenge to major tech companies such as IBM, Hewlett-Packard (HPQ) and Oracle (ORCL). It’s not just that customers want to change the way they buy and use technology, it’s that they want to spend a lot less on it, too. Even those using IBM's newer cloud services, for example, are hoping to spend less. And fierce competition in this space could cut down profit margins.

IBM may be able to build a great cloud offering but, at the same time, most of its other lines are struggling to find revenue growth. Industrywide, while cloud services take off, many traditional lines of business, including PC and server sales, are sinking. That's why IBM has reported lower year-over-year sales for eight quarters in a row. Much of its growth in profits per share has come via financial engineering – lower tax rates, stock buybacks and the like.

Both reasons have prompted many investors to shun the stock, which has lagged the market by a huge margin for the past two years under Rometty’s tenure.

Analysts are mixed on the company and focused on short-term quantitative metrics, such as Rometty’s stated goal of hitting $20 of earnings per share in 2015. They expect to hear about new growth initiatives at Wednesday's meeting, ranging from booming sales in Africa to new strategies for selling artificial intelligence advice from supercomputer and Jeopardy champion Watson.

But Bernstein research analyst Toni Sacconaghi cuts to the chase, as he often does.

“IBM has discussed a myriad of growth initiatives over the years, including business transformation services, virtualization, growth markets, business analytics, smarter planet, etc, yet revenue growth has remained low-single-digits over the period,” he wrote ahead of today's meeting.

The bottom line? There's still more challenge than opportunity in this company’s shares.