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Analysis of IBM’s First Quarter Business Results

Waiting for Godot…

IBM Global Services’ Growth Stalls, Hardware’s Plummets 12%

LONDON, Apr. 20 – Hope springs eternal.  When all else fails, a prayer might have to do.  That’s about all that’s left for the enthusiastic supporters of the IBM stock.  Many are still clinging to it like a dog with a bone, hoping and waiting, hoping and waiting…

Waiting for what?  For the flesh to grow  back on the bone?  For Wall Street to turn sane?  For “Louis XIX” to abdicate his throne? 

Better not to ask.  For, you won’t get an answer to such questions anyway.  Just as you’ll never find out what Estragon and Vladimir[1] are waiting for in Samuel Beckett’s “Waiting for Godot.” 

Indeed , this masterpiece of the “theater of the absurd,” written in French in 1948, translated by the author into English, and first performed in London in 1953, very much epitomizes the current situation with the Big Blue stock on Wall Street.  Things are suddenly looking so bad after seeming so good for so long that everybody is hoping for something momentous to happen; something that would bail them out of a losing investment.

It won’t happen.  It was never going to happen.  Smart money left the IBM stock a long time ago.  Smarter money never got into it.  Yet, those with large sums of money on the line are holding on to IBM, waiting and hoping for Lou Gerstner’s final miracle. 

It won’t happen.  Gerstner’s black hat is clean out of rabbits. 

When IBM executives first signaled last Fall that their ship had sprung some big leaks, they blamed it on the Y2K bug.  We said that was “an excuse, not the reason.  And a lame excuse at that” (see “Big Blue Sings Y2K Blues,” Annex Bulletin 99-32, 10/21/99):

“The Y2K issue has been well known and researched for years.  So for IBM executives suddenly to wake up after one down quarter and then realize what had hit them is almost comical.  Especially after IBM's chairman and other insiders have been selling stock (see "Gerstner: Best Years Are Behind; Dumps 328,000 Shares Worth $40.9M" - Annex Bulletin 99-28, Aug. 10, 1999).”

The Y2K bug has now long come and gone (see “The Bug That Didn’t Bite”).  Yet IBM troubles are continuing, as was evident from its first quarter business results.  Consider the following highlights:

·        Hardware revenues, still 40% of IBM, were down 12%;

·        Global services, now also 40% of IBM and the company’s only real growth business, were flat (i.e., the only real growth business reported zero growth in the first quarter).

·        Software, which represents about one-third of IBM, was also flat.

·        Enterprise Investments, “Lou’s Kitty” as we called it last year (see “Armonk’s Fudge Factory”), was down 13%;

·        Global financing, only 4% of IBM, turned in a 16% revenue growth;

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So only one of IBM’s business segments was growing in the first quarter.  Alas, since it represented only a tiny 4% slice of the company, the overall Big Blue revenues also declined by 5% since a year ago.

Pretty bad, huh, for a Wall Street highflyer?  Well, IBM’s top of the line was relatively “good news” in a bad quarter.  Even though the company managed basically a flat bottom line (net profit), some of the segment revenue and pretax numbers were downright disturbing.  Here are some highlights:

·        Technology (OEM) revenues were down 11%, eking out a pretax profit margin of only 0.6%;

·        PC revenues were down 13%, with the pretax loss widening to $178 million from a loss of $55 million a year ago;

·        Enterprise systems revenues were down 11%, while their pretax profits dropped 20%;

·        Global services revenues, flat by our previous account, were actually down 1% once internal revenues were taken into account;

·        Software revenues were also down 1% by the same standards, while its pretax profits declined 18%;

·        Enterprise investments’ (“Lou’s Kitty”) 13% drop in revenues also carried a $43 million loss;

Overall, the aggregate pretax profit from IBM’s business segments declined 7%.

Balance sheet highlights were just as disturbing :

Net cashflow was a negative $2.2 billion;

·        Equity was down $1 billion (since Dec. 31);

·        Cash was down $1.8 billion (since Dec. 31);

·        Core debt was up $600,000 (since Dec. 31);

·        Stock buybacks continued unabated, with $2.1 billion wasted on this in the first quarter, the same amount as in the fourth quarter 1999;

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And how did the stockmarket react to such a breadth and depth of bad news from IBM?  It shrugged it off.  Too many tens of billions of dollars at risk to risk using sound business judgment when judging IBM’s real worth.

And so, since the day IBM disclosed last October that the Y2K bug would bite it, the Big Blue’s stock has appreciated (!?) 23%.

Mad?  It gets “madder.”  Since July 1996, roughly the time IBM went on a stock buyback binge, squandering about $34 billion dollars on it without creating a single product or a job, the IBM stock outperformed the record bullish Dow Jones Industrial average, of which the Big Blue is a part, by 3.5 times! 

Game, set and match! For the Wall Street Lunatics over the Main Street Smart Money.

Happy bargain hunting!

Bob Djurdjevic

[1] Estragon and Vladimir are two main characters in this play.  Estragon symbolizes the body; Vladimir the intellect.  Thus, they cannot live apart.

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




Volume XVI, No. 2000-12
April 20, 2000

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

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