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IBM Gives Optimistic View but Few Specifics

Big Blue's CFO says the company can generate double-digit EPS growth, but dodges questions about near-term growth.

IBM

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continues to believe its earnings per share can grow in the double digits in the long term, CFO John Joyce said during Big Blue's analyst day Thursday.

Based on the company's use of capital, its cash flow and leverage in operating margins with its PricewaterhouseCoopers acquisition, IBM is looking to grow earnings per share in the double digits and continues to believe it can do so over the long term, Joyce said. But he did not provide a specific period of time.

"We believe that we will grow our profits through our gain-share strategy," Joyce said. "Our cash flow position is excellent and we think we'll be able to utilize that."

IBM executives did not provide specific financial guidance, which was not a major surprise because they've remained mum on its numbers at past analyst days. They also refused to give any more details about the economic picture beyond what CEO Sam Palmisano said in October, when he reported IBM is "beginning to see signs that the economy is stabilizing."

Joyce said IBM believes the IT industry will grow faster than GDP but refused to predict how fast the economy is going to grow next year. "Businesses are starting to take some risks," he said.

Instead, IBM executives spent most of the time extolling the benefits of their acquisition of PricewaterhouseCoopers, e-business on demand strategy and focus on industry-specific solutions.

Sanford C. Bernstein analyst Toni Sacconaghi, who has a market perform rating on IBM, pressed Joyce at the meeting to explain why it's a positive that IBM's lowest margin business -- services -- is growing the fastest. Joyce effectively skirted the question, reiterating past forecasts that the PWC business will lose money in the first half of the year and then make money in the second half. (Bernstein doesn't do investment banking.)

Sacconaghi's question is one IBM executives are likely to face again in the coming year. Acquisitions of PricewaterhouseCoopers and Rational Software are expected to contribute almost 60% of IBM's top-line growth in 2003. But IBM's revenue growth in 2004 will be almost completely dependent on share gains and an improved macro environment, according to Goldman Sachs analyst Laura Conigliaro, who has a neutral rating on IBM. Goldman has done banking with IBM.

Separately, IBM on Wednesday launched a push to win share in the storage market from

EMC

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. Big Blue has formed a 100-member team dedicated to the fight with EMC and claims that it has already converted a number of major EMC customers, including

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and the U.S. Department of Agriculture.

The wins come at a good time. IBM admits that it has been losing share to "a major competitor" -- i.e. EMC -- while

Dell's

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partnership with EMC is bearing fruit. Speaking at a Credit Suisse First Boston conference earlier this week, Dell COO Kevin Rollins said the partnership has added more than 7,000 new customers since the beginning of fiscal 2003.

EMC was predictably unimpressed with the announcement -- and so was Wall Street. Pacific Crest analyst Brent Bracelin called the program "P.R.-ware," and said IBM's Piper technology, which the company emphasized in its announcement, wasn't all that new. (Pacific Crest does not have a banking relationship with either company.)

Still, the announcement points to the increasingly competitive nature of the enterprise storage market, a sector expected to grow strongly as IT spending bounces back from the recession.

Shares of IBM closed up $1.12, or 1.2%, to $91.42 before falling to $91 in after-hours trading.

Staff reporter Bill Snyder contributed to this story.