Ginni Rometty: Reinventing Big Blue
Naysayers are ganging up on IBM CEO Ginni Rometty. But her plan to turn around the 103-year-old company just might work.
Ginni Rometty likes to say that there's no such thing as a bad day if you learn from it. And since taking over as chief executive of International Business Machines in January 2012, she has learned a lot. Big Blue's revenue has fallen for eight straight quarters, reaching the lowest level in five years in the first quarter of this year.
IBM (ticker: IBM) is still hugely profitable, of course, earning $18 billion last year on revenue of $100 billion. But in many ways, it faces its biggest challenge since the early 1990s, when it was on the verge of bankruptcy.
The challenge on everyone's mind is cloud computing. The problem is most tellingly illustrated by the loss last year of a major cloud-computing contract with the Central Intelligence Agency, which, like the rest of the federal government, has been an IBM customer for decades. The winner in a two-company showdown: Amazon.com (AMZN).
Another challenge is Wall Street, which has lost patience with the stock. IBM shares are down 15%, to $184, from their March 2013 high. The worry is that the company will find it increasingly hard to drive earnings higher without a surge in revenue. Rometty, a 33-year IBM veteran who holds a degree in computer science and electrical engineering, is unflappable in the face of such criticism, citing big data and analytics as the company's next big growth engine.
"We're a $100 billion ship that's going to turn," she says. "Every client I speak to -- every head of every business -- is interested in cloud, to a certain degree. But what they are really interested in is the data and analytics piece. That's going to change how they operate and what they can do."
Rometty says, "A leader's job is to paint reality and give hope." Photo: Matt Furman for Barron's
Rometty, 56 years old, is nothing if not client-focused. In her first two months as CEO, she met with the heads of more than 100 IBM customers. Says David Seaton, the CEO of Fluor (FLR): "When you're with her, you feel you're the only person in the world. She has an extraordinarily high emotional-intelligence quotient. That really amplifies her ability to listen and come up with what you're asking her for."
Alex Gorsky recalls that when he took over as CEO of Johnson & Johnson (JNJ) in April 2012, Rometty knew the ins and outs of every project IBM was supporting at J&J, including diabetes care, orthopedics, big data, and computational technology. "If I gave Ginni a call right now, she would know about each one of those projects," says Gorsky.
She's also famous for showing the love -- even when a reporter shows up 30 minutes late at IBM's Armonk, N.Y., headquarters, after getting caught in a rainstorm. While other CEOs might be testy, Rometty is relaxed, gracious, and candid, despite a packed schedule that includes meetings with two client CEOs -- including the head of a large U.S. bank -- and a flight to India later that day. She has a firm handshake and a butterscotch voice.
"Catch your breath," she insists, before asking the first question of the interview: "What are people saying about IBM?" Told that cloud computing is the No. 1 concern, she asks, almost professorially, "Why do you think they say that?" Then she explains that cloud computing is just one piece of the disruption in information technology. "It's cloud, it's data, it's mobile, all at one time," she says.
ROMETTY IS THE ninth CEO in IBM's 103-year history; for the first 60 years, the company was run by founder Thomas J. Watson and his son, Thomas J. Watson Jr. Rometty is the third chief since the company's near-death experience in 1993.
Each of the CEOs in the past two decades has faced big challenges. Louis Gerstner Jr. restructured the company, slashing costs and offloading low-margin manufacturing businesses. Sam Palmisano expanded the consulting and services business dramatically, purchasing PwC Consulting for $3.5 billion in 2002, a deal championed by Rometty. He sold off the personal-computer business to escape what he called "commodity hell," and took on the very real threat of Indian outsourcing by building a massive presence in that country.
Both Gerstner and Palmisano ran headlong into criticism from Wall Street, and both were hugely successful. Now Rometty is being tested.
IBM GENERATED $4.4 billion in revenue last year from cloud computing, and Rometty expects that to climb to $7 billion in 2015. "If it was its own company, someone would think that's very large," she says acidly.
This year, the company will spend $1.2 billion to double the number of data centers for enterprise clouds, while at the same time boosting the data-security, privacy, and tracking functions that customers need for compliance and other regulatory functions.
Public cloud computing, like that offered by Amazon Web Services, allows users to rent only the computing power they need, not unlike a utility. Multiple clients share the same servers, which increases efficiency. A private cloud gains the same efficiency by sharing servers, but all are dedicated to a single client. IBM is by far the leader in private cloud computing.
"Some of the consumer guys [companies focusing on public cloud computing] brag about 99.95% availability," says Rometty. "You can't run a bank. You can't run a railroad. You can't run an airplane…that's not enough. We are used to a world of 99.99999s."
Bigger and even more promising for IBM is data and analytics, in which the company has invested about $24 billion, most notably culminating in Watson, a supercomputing system that in 2011 defeated two ranking Jeopardy champions in a $1 million exhibition match. Soon after, WellPoint (WLP) deployed Watson to help doctors and nurses make decisions on treatment options. The system can sort 200 million pages of medical research in less than three seconds, providing precise answers in plain English -- or whatever language you need -- not computerese.
Watson is being used by USAA, the Development Bank of Singapore, and V.F. Corp.'s (VFC) The North Face, among others, to sort through vast storehouses of customer data to help predict behavior and address customer needs. Watson is also helping the New York Genome Center on a trial to map the unique genomic mutations in brain cancer.
Rometty says data and analytics, including Watson Group, now a separate business unit, will generate $20 billion in revenue next year, up from $16 billion in 2013.
The third pillar of IBM's strategy is what the company calls engagement -- how clients reach their customers, employees, and other people. That includes mobile and social networking, which are the weak links in security for enterprise computing.
ROMETTY'S PERSONAL STORY shows the source of her grit and her formidable organizational skills. She grew up outside of Chicago as Virginia Nicosia, the eldest of four children in an Italian-American family. When she was in her midteens, her father left. "We had no money, we had no food," she says. "We had to go on food stamps."
Her mother got a job at a call center, and attended night school for hospital administration.
Thinking about this period, Rometty grows pensive. "She had two choices: despair, or her four kids. She was so proud. She never complained. This was not going to be permanent. She wasn't going to let people define her to be something other than a success."
From this, Rometty learned to make her own rules: "My brother says we all learned from watching [our mother]. You learn quickly to prioritize what's important. You look forward; you set a long-term course; you stay on it." All three of her siblings now have high-powered corporate jobs. They recently had a surprise party for their mother's 75th birthday.
After earning a degree from Northwestern University in 1979, Rometty went into a two-year training program at the General Motors Institute, which rotated recent college grads through various jobs at the company. That's where she met her husband, Mark Rometty, now a private-equity investor. From there, she joined IBM as a systems engineer in Detroit.
Before taking over as CEO in January 2012, she headed global sales, marketing, and strategy at IBM.
In 2007, Rometty's predecessor, Sam Palmisano, laid out what he called a "road map" to take profit from $6 a share to $11 a share through revenue growth, productivity increases, share buybacks, and fatter margins. Three years later, he upped that to $20 a share by 2015.
Analysts expect the company to earn $18.2 billion, or $17.90 a share, this year, according to FactSet, and come up 15 cents short of its target next year. Critics question the quality of IBM's earnings, which have been lifted by stock buybacks and tax maneuvers.
Rometty counters that the road map is really "a capital-allocation plan that has an outcome in earnings per share." But it's clearly a touchy subject. "We did $6.2 billion in research and development last year," she says. "We did almost $4 billion in capital expenditures. A little over $3 billion in acquisitions. About $4 billion in dividends, and a little shy of $14 billion in share repurchases. We return 100% of our net income and 100% of our free cash flow to our investors. We have a very long-term shareholder base, and they don't want us managing the company for day traders."
Her growth plan includes stabilizing hardware sales, aided by a new line of mainframe computers, and selling more open-source hardware, such as Power8 chips, which Google (GOOG) is testing in its servers. It also assumes that growth in private clouds will pick up. And with China slowing, Rometty has her eye on the next source of robust revenue gains, including Africa, where she has set up a full-fledged research lab and quadrupled IBM's presence in the past 15 months.
And yes, she says IBM will achieve its $20-a-share goal next year.
REVENUE HAS SLIPPED on Rometty's watch, from $106.9 billion in 2011 to an expected $97.4 billion this year, in part because IBM will have sold off low-margin businesses with $6 billion in revenue by the end of 2014, including its commodity-server business. Other businesses, like semiconductor manufacturing, could also go on the block.
Not coincidentally, operating profit margins have moved up in the same period, to an expected 27.5% this year from 24.9% in 2011. High-value annuity businesses, such as "mission critical" core-processing services required by banks and insurers, produce 50% of revenue and 60% of profits. And that, says Rometty, is improving every year.
For investors, however, the next year or two could be a slog. "The story is not going to work until they get the revenue growth," says Steve Milunovich of UBS. Until then, the naysayers are going to have the floor. The consensus price target for the stock on Wall Street is $194, only 5% above the current quote. The shares yield 2.4%.
Still, for all the hand-wringing over the cloud-computing business, including a price war among public cloud providers Amazon, Google, and Microsoft (MSFT), there are signs that the market may be turning IBM's way. A survey published recently by the Open Data Center Alliance, a consortium of 300 large companies, showed that interest among its members in private clouds is growing rapidly; 70% said they expect to run at least 40% of their operations on internal clouds by 2016, up from 31% today, largely due to security and regulatory concerns. Members' interest in public clouds barely budged at 20%.
"This finding suggests that IBM may be right when it says the cloud game is in the first inning," Milunovich wrote in a note to clients last week. If so, and if Rometty's transformation plan works, she could join Gerstner and Palmisano as one of the country's most-respected CEOs.