Annex Bulletin 2012-07                              July 18, 2012

A partially OPEN edition



Oracle Runs Out of Oracles (Analysis of latest quarterly results)



Updated 7/19/12, 8:30AM HST, adds Market Update: "IBM's Mysterious Growth"

Analysis of IBM's Second Quarter Business Results

Lack of Growth: IBM's Achilles Heel

Free flow of emotion floods Wall Street; No amount of PR spin can alter the hard fact: IBM is shrinking!

HAIKU, Maui, June 18 - This is what we wrote before the IBM second quarter earnings release:

Forget the left brain. Emotion is everything when it comes to Wall Street. What is happening in the market today is another case in point. Intel delivered inline results. Yet it still faces significant challenges in the future (see Intel Still Has A Device Problem).

Never mind. When investors decide the market should go up, they will grasp at straws for a reason.  Or no reason at all.  As a result, the Dow is up 100 points, as are most of the top IT stocks, except for Apple!? (Go figure, right? - see Apple Continues to Dominate to see which way is really up these days on Wall Street).


When reporters would ask me over the years on days like this, just before IBM and others were due to release their latest earnings results, what I expected the market to do, I would usually tell them that I don't do markets.

"That would be like trying to predict the moods of teenage girls," I'd add.  And as a father of two girls, I can speak about that from experience.

If they insisted anyway, I would usually tell them that eventually Wall Street tends to get it right. When the emotions settle down again. And so to that extent, it is good to be reminded what we said yesterday about the current valuations of IBM and other top IT global companies (see Table 1 above).

Yesterday, IBM at $184 was slightly undervalued. Today, IBM at $188 is slightly overvalued.  I'll leave it to you to figure out what that says about the likely market reaction to IBM's release which is due this afternoon after 4PM New York time. 

My guess? Up, up and away.  Until collective emotions, like a giant wave, exhausted of energy that created them, crash upon the shores of reality.

No amount of PR spin can alter the hard fact: IBM is shrinking!

After the IBM earnings came out, it has been all spin. Listening to Mark Loughridge's comments during the post-earnings teleconference with analysts, Lou Gerstner's CFO, John Joyce, used to host in the 1990s (see, for example, Slam-Dunk of Bunk," Jan 2000).

"So I think the composition of the growth this quarter was balanced across the sectors, was balanced across the brands and indicative of both the BRIC countries and the broader view of the growth market," IBM's CFO said answering an analyst's question just before wrapping up the conference.

Growth?  Balanced?  Make that kind of "growth" a decline.  Or "negative growth," a euphemism the former IBM CFO Allen Krowe invented in the 1980s.

As for balance, the only balance we see in these shrinking numbers is that most lines are pointing SOUTH (see red bar highlights):

The trends are similar for IBM geographies and industries:

Government was the only industry segment that grew (but only by 1%). And Asia/Pacific was the only geographic region that reported higher revenues (by 2%).  The rest of the industries and geographies were all DOWN.  And IBM's overall revenues were down%.

So when we heard the IBM CFO proclaim this afternoon that, "the growth this quarter was balanced across the sectors, was balanced across the brands..." - one could not help but wonder, "is this a John Joyce reincarnation?"

[BTW, speaking of the former IBM CFO, he landed eventually on the HP Board as one of the staunchest supporters of Mark Hurd, the disgraced former HP CEO.  Wrong bet again.  Joyce and three other directors left the Board after Meg Whitman took over as CEO. And we saw in our yesterday's report how HP is doing these days (see Apple Continues to Dominate, July 17). ]

Our initial reaction: IBM business down, stock up

As for our initial reaction, here's what we said:

IBM's second quarter release is out now.  And so is the truth about its slow or no growth trends. In fact, it's getting worse.  This is what we said about the first quarter results back in April (see Big Blue Feet of Clay, Apr 2012):

Analysis of IBM's First Quarter Business Results

Big Blue Feet of Clay

IBM is still solid like the Rock of Gibraltar, but is also stuck like the Rock of Gibraltar in low or no growth enterprise market; Will history repeat itself?

IBM revenues were flat back then. Now, they are down 3%. Sure, foreign currency translations was a negative factor. But then this has also boosted IBM's growth in the past when the US dollar was dropping against the Euro or other currencies. And sure, the earnings are up. In fact, IBM is even trying to talk up its forecast for the full year EPS (raising it from $15.00 to $15.10).

But no amount of rhetoric will change the fact that BIG BLUE HAS STOPPED GROWING. And we don't see any signs for optimism in the short term, either.

IBM Global Services is by far IBM's biggest and the most important segment. Its business is down 3%. New contract signings are down 4%. More importantly, IGS' backlog is down 6%. And backlog is an indicator of FUTURE revenues. 

IBM Software has been the company's most profitable segment. It has also stopped growing.
IBM Hardware is having ALL of its revenue lines pointing south.

The "growth markets" are up only 2%.  What will IBM call them when and if they stop growing as well?

Get the picture? Not pretty.  Yet...

When I just checked the market action in after-hours trading, the IBM stock was UP at the moment:

After Hours: 191.25 Up 3.00 (1.59%) 4:31PM EDT 

IBM actually kept on rising after that. Here's where it settled in early evening:

After Hours: 193.55 Up 5.30 (2.82%) 7:56PM EDT

See what I mean by "forget the left brain?" Big Blue shares are evidently trading purely on emotions. For now...

Eventually, Wall Street will get it right.  It usually does (see this old chart from the last decade - Wall Street Knows Which End Is Up by Looking at Companies Upside-Down, Mar 2005). When it does, you may not want to be the one holding a lot of overpriced IBM shares.


Click here for detailed tables and charts (Annex clients only)

Happy bargain hunting

Bob Djurdjevic


Bloomberg: "IBM's Mysterious Growth"

HAIKU, Maui, June 19 - IBM stock is pulling a reluctant Dow up by its bootstraps this morning. IBM is up nearly 8 points; the Dow only 25 as we write this.  The S&P index is even more hesitant. It rose only 3.8 points so far.  Maybe that's because there are some voices being heard even in the mainstream financial media that are sounding cautionary notes.

The Wall Street Journal, for example, warned that, "For Earnings, ‘Better Than Expected’ Does Not Equal ‘Good’." And Bloomberg Newswires digs even deeper in its "IBM's Mysterious Growth" TV report. 

Bloomberg's West Coast tech editor Cory Johnson reports on IBM, a company that beat earnings estimates but is faced with declining sales growth. He speaks with Emily Chang on Bloomberg Television's "Bloomberg West." Here are some charts from that story...


Johnson hit the nail on the head. What he may not realize (we don't what he was doing in the mid-1990s) is that all this "financial engineering" stuff IBM's CFO was talking about yesterday is reminiscent of similar moves Big Blue was making under Lou Gerstner's leadership in the mid- and late-1990s.  Like now, IBM was then struggling to grow its revenues.  In fact, just like the quarterly declining revenue growth chart that Bloomberg used, ours shows the same over a 100-year period. Gerstner's and the current IBM era are the worst in terms of growth in its corporate history (see the chart).

So Gerstner and his Armonk executives went to work to try to generate an appearance of growth using financial and cost-cutting tricks. 

We called it "financial engineering" at the time (for example, see "Armonk's Fudge Factory," Apr 1999, or SEC investigation of IBM, June 2003).  And yes, stock buybacks that Bloomberg's Johnson also talks about today were a part of it (see ).  In fact, they were invented by Gerstner and his team in 1995 (see below).

"So the more things change, the more they stay the same," as Alphonse Karr noted.  Which, in IBM's case, is not a cause for celebration.


Some Insiders Cashed In On IBM Stock's Rise, Buybacks. PHOENIX - Six senior vice presidents and the IBM controller exercised many of their stock options last ...
Stock Buybacks: A New Wall Street Fad. ... latest Wall Street fad; the expensive ( multi-billion) corporate "cabbage patch" dolls of the 1990s - the stock buybacks.
Apr 25, 2007 ... The explosion of stock buybacks has led to an implosion in the number of shares outstanding. The record levels of stock buybacks by S&P 500 ...
Apr 30, 2002 ... PHOENIX, Apr. 30 - the IBM Board approved another $3.5 billion for stockbuybacks at the IBM Annual Meeting this morning. No surprise there ...
May 4, 2005 ... Analysis of New Stock Buyback Trends. The Phantom Is Back. After a Three-year Lull, Stock Buybacks Are Soaring Again, Spurred by IBM's ...
Sep 12, 2006 ... Dell, Erstwhile "King of Fluff," Suspends Stock Buybacks ... Like death and suffering in the Middle East, the stock buybacks have become banal.

Volume XXVIII, Annex Bulletin 2012-07
July 18, 2012

Bob Djurdjevic, Editor

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