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Confidential Annex Research Client Edition

FINANCIAL

Analysis of IBM’s Fourth Quarter and Final 1999 Business Results

A Slam-Dunk of Bunk!

Biggest Surprise: A Sharp Drop in Services Revenue Growth - Up Only 2%!

PHOENIX, Jan. 19 – In our 30+ years of watching the IBM and the computer industry gears turn, we've certainly heard our share of BS from various IBM and other executives.  But rarely has so much bunk been plunk(ed) on so many deaf ears by so few IBM executives’ shifting of gears, as was the case during this afternoon's 4Q99 teleconference with analysts.  In terms of delivering pure bunk, the Big Blue(s) just scored a slam-dunk!

  • A $557-million loss incurred by the Big Blue’s PC operations in 1999 was merely a “profit decline,” according to John Joyce, IBM’s new CFO, who started his “news” with a spin, and proceeded to obfuscate the news as spin.

The man should be offered a PR job at the Clinton-Gore White House which constantly turns “red” into “black.”  And vice versa.  For, this IBM unit’s result can be called a “profit decline” only compared to a bigger $992 million “profit decline” (i.e., the loss) which the IBM PCs incurred in 1998.

  • A precipitous drop in growth of the IBM Global Services’ revenue to only 2% in 4Q99, should encourage us.  Why?  Because “we’re pleased that the Y2K issue is behind us,” per Joyce’s rejoicing.

So the good news nowadays at Armonk is when the Big Blue stops hitting its head against the wall.  But Joyce shouldn’t rejoice too soon…

  • Because an 11% drop in hardware revenues and a 4% decline in overall fourth quarter revenues were both well below Wall Street’s, and even our forecasts.  As was the 31% drop of hardware gross profit and margins (34.2% to 26.6%).

As for the IBM servers, led by the AS/400 and the mainframes, they are being decimated.  Server revenues are down 32%; pretax income is down 73%. 

Text Box:  Joyce also said that the MIPS shipments of its S/390 systems declined by 38% in the fourth quarter.  And that the AS/400 revenues were “down significantly.”  The RS/6000 business volumes also declined, though not as much as those of the other two servers.

During the question and answer period, Joyce refused to quantify the rates of decline for individual server lines.  Why?  To keep gullible investors gulping down the IBM bunk?  Because if they learned the truth - that hardware products which account for more than 50% of IBM’s profit are in a tailspin, they may also bail out of the Big Blue stock?

  • An 11% drop in net earnings, accompanied by losses or pretax profit declines in four of IBM’s seven business segments, and a single-digit growth in the remaining three, should give us cause for optimism, per Joyce, since the universe is unfolding according to the IBM business model. 

If true, it should have actually made any sane analyst wonder about who would have drafted such a business model.  Perhaps an official Fortune 500 mortician?

So how will the stockmarket react to such a heap of bad news from Armonk?  Look for the IBM stock to rise tomorrow (Jan. 20). 

Text Box:  Rise?  Yes.  Why?  Because any sane analyst would have left the crazed Wall Street casino long ago.  And because the remaining ones will probably rejoice tomorrow that IBM had not dumped any bigger surprises on them, as the now demoted former IBM CFO, Doug Maine, did last October (see Annex Bulletin 99-32, 10/21/99).  After all, they have to protect their bullish forecasts, don’t they?

The sin on Wall Street, the street of sinners these days, isn’t to sin.  Nor to report the spin as news, as IBM has just done. The sin at the Wall Street casino these days is to be found out.  And our bet is that Wall Street won’t want to find out just how badly IBM’s business has been hurt.  Not only by the Y2K problem; by its heavy dependence on the industrial era dinosaurs - still IBM’s biggest and best customers.  Against which we warned almost four years ago (see “Louis XIX of Text Box:  Armonk,” Annex Bulletin 96-42, Aug. 21, 1996).

In short, IBM is afflicted by an endemic problem, which isn’t going to go away quietly as the Y2K issue will.  Eventually. 

Is there a solution to it?  There was.  Once upon a time.  But the time has just about run out for it. 

An erstwhile solution was to get rid of the Armonk emperor who wanted to centralize everything, despite the global decentralization trend, as epitomized by the Internet.  And to break up the company into smaller, nimbler units.  Which might have a better chance of competing with the likes of AOL or Yahoo.  As we have been also saying for almost four years now (see “Break-Up IBM!” - Annex Bulletin 96-19, Mar. 20, 1996). 

But don’t count on it happening any time soon.  After all, “Louis XIX of Armonk” hasn’t exercised all of his stock options yet, which are still worth half a billion dollars or more by today’s stock prices.  And Gerstner has stacked the IBM Board with his “dino-pals” who are evidently looking after his, not the general IBM shareholders’ interests.

In addition, IBM has spent the equivalent of several small countries’-worth of GDPs (more than six Albania’s, for example), bribing the Wall Street’s “king-makers” through the stock buybacks - without creating a single job or a product for its shareholders.

So buying the Big Blue shares at this stage of the game at their current grossly inflated prices is like accumulating fools’ gold for the sake of your grandchildren.  It’s a sure way of ensuring that your grandsons and granddaughters hate you.  Sooner or later…

Text Box:  Fortunately for the Armonk and Wall Street mints of “fools’ gold,” there are plenty of fools hanging around the Wall Street casino these days, willing and ready to empty their wallets into the pockets of the gleeful casino owners’ and other “fools’ gold” dealers.

Meanwhile, IBM’s America’s fourth quarter revenues dipped 4% from the year before (2% in constant currency).  And its European (EMEA) business dropped by 15% (6% in constant currency).  Which left the Big Blue’s Asia/Pacific operations as the only geographic growth area with a revenue increase of 12% (2% in constant currency).

IBM’s OEM revenues also were up by 12% - in current and in constant currencies.

For the full fiscal year 1999, IBM America’s revenue were up 5% (7% at constant currency); the EMEA business was up 2% (6% in constant currency), while the Asia/Pacific revenues grew by 19% (8% in constant currency).

Happy bargain hunting!

Bob Djurdjevic

NOTE: The print edition of this report contains additional charts and tables not included here.





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Volume XVI, No. 2000-04
January 20, 2000

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

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