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5 Signs International Business Machines Corp. Needs New Management

By Leo Sun - Mar 10, 2017 at 11:00AM

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Could a new leader help IBM break its multi-year streak of revenue declines?

Investors who don't follow IBM's (IBM 2.62%) earnings reports might assume that Big Blue's doing well, since the stock rallied 30% over the past 12 months. However, most of that growth likely stemmed from demand for high-yielding stocks with cheap valuations in a low interest rate environment.

If we look at the long-term chart, IBM's performance look less rosy. CEO Ginni Rometty took the helm back in 2012, but IBM's stock remains down 10% over the past five years. Let's take a closer look at Rometty's five biggest shortcomings to see if it's time for a new leader to take charge.

IBM CEO Ginni Rometty.

IBM CEO Ginni Rometty. Image source: IBM.

1. 19 straight quarters of sales declines

Many investors simply want IBM to deliver one single quarter of positive year-over-year sales growth, which it hasn't done for 19 straight quarters. That probably won't happen anytime soon -- analysts expect IBM's revenue to drop about 2% over the next two quarters.

IBM attributes that weakness to slower enterprise spending, competition from smaller competitors, currency headwinds, and the fact that its five higher-growth "strategic imperatives" (cloud, mobile, social, security, and analytics) aren't growing fast enough to offset declines in its older hardware, software, and IT services businesses.

2. Slowing growth in strategic imperatives

Under Rometty, IBM divested lower-margin "empty calorie" businesses and invested more heavily in businesses that fit into its strategic imperatives ecosystem. But even after acquiring nearly 50 companies (or parts of companies) since 2012, that ecosystem still isn't growing fast enough to boost IBM's top line. Instead, its strategic imperatives growth has remained fairly unimpressive over the past few quarters:


Q1 2016

Q2 2016

Q3 2016

Q4 2016

YOY growth





% of IBM's TTM revenue





Strategic imperatives annual sales growth. Source: IBM quarterly reports.

Those businesses are still growing, but investors are likely wondering if that growth will ever offset the declines in its older businesses.

3. Inability to counter Amazon in cloud platforms

IBM frequently highlights the "cloud" as the core of its strategic imperatives. The company noted that its cloud revenue rose 35% to $13.7 billion in 2016, with its cloud-as-a-service's annual run rate rising 61% to $8.6 billion.

A woman demonstrates Watson's AI capabilities to two children.

A woman demonstrates Watson's AI capabilities to two children. Image source: IBM.

Those numbers sound impressive, but the cloud service market has lower growth and thinner margins than the cloud platform one. The higher-growth cloud platform market -- which lends out computing power, storage, and development platforms to companies -- is dominated by Amazon's (AMZN 3.58%) AWS, which hit an annual run rate of $14 billion last quarter.

IBM's comparable platform, Bluemix, had an annual run rate of just $600 million in late 2015, according to Forrester Research. Even if that figure had doubled since then, IBM would remain a distant underdog in the cloud platform race.

4. Its heavy dependence on India

In 2013, IBM's headcount in India eclipsed its headcount in the U.S. The reason was simple -- the average pay for an IBM employee in India is about $17,000, compared to $100,000 for a senior IT specialist in the U.S.

IBM brings many of its Indian employees to work on projects in the U.S. under H-1B visas. As long as those workers are paid at least $60,000 per year, IBM is exempt from laws meant to prevent companies from using H-1B visa workers to displace American workers. However, critics note that $60,000 remains well below the market rate for American IT professionals.

Rometty repeatedly failed to address this imbalance, and H-1B visas are now being targeted by both Republicans and Democrats. The U.S. recently suspended the processing of premium H-1B visas, and regulations could soon be tightened further -- which would hurt the profitability of IBM's struggling IT services business.

5. That hypocritical promise to create American jobs

In January, Rometty promised to hire 25,000 American workers and spend $1 billion training them over the next five years. Shortly after that annoucement, which was clearly aimed at appeasing the Trump Administration, IBM's employees and critics quickly pointed out that Rometty didn't mention that the company had been slashing "thousands" of jobs which were likely being sent overseas.

Former IBM employees told Bloomberg that the technology services division aimed to reduce its percentage of its permanent U.S. employees from 30% to 20%, a claim which IBM called "inaccurate." Nonetheless, Rometty's track record indicates that IBM will likely struggle to balance its foreign and domestic interests under the spotlight of tighter regulations.

Does IBM need a new leader?

Rometty has already done a much better job than her predecessor, Sam Palmisano, who relied so heavily on divestments and buybacks to inflate IBM's earnings that he forgot to invest in the company's long-term growth.

But Rometty still hasn't delivered any top line growth, IBM's "high growth" businesses aren't growing fast enough, and she's done little to address the company's addiction to cheap overseas labor. Perhaps a new leader with fresh ideas might finally get Big Blue's growth back on track.

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