Sunday, April 27, 2014

The Score This Quarter: Citigroup 64, JP Morgan 56...IBM 19.

 Well IBM’s first quarter results are in, and they’re—well, they’re about what we’ve come to expect from a high-cost, brand name, big-iron tech company in a world moving to a low-cost, generic, small-iron model: revenues down, margins down, earnings down, cash flow down, service bookings way down, share buybacks up and layoffs soaring.
 Remarkably, though, one number—IBM’s earnings-per-share—came in exactly in line with what the company had predicted some 90 days ago, and that’s what Wall Street’s Finest really cared about, because it meant their spreadsheets were correct.
 All the more remarkable was the fact that while IBM was finding a way to earn the desired net EPS number, its revenues—the mother’s milk of any businesswere coming in half a billion dollars below what had been foretold.

 But the outcome was really not so remarkable as you might think.
 Quarter after quarter, as we have seen (here, for example), somehow, some way, this $100 billion-and-declining revenue behemoth with 430,000-and-declining employees selling products subject to all manner of competition across all manner of industries in more than 170 countries around the world—each with its own unique tax rates and economic cycles, not to mention currencies—always seems to find a way to report net, after-tax, after-currency, after-layoffs earnings precisely as foretold before all manner of things happen during the quarter ahead.
 In this case, before Putin grabbed the Crimea, before Amazon cut cloud prices another 40%, before the Euro gained, the Yuan fell, the Brazilian Real jumped and the Loonie dropped against the dollar.
 Here’s how one analyst—one of the few IBM followers on Wall Street who actually keeps track of the shell shuffling by IBM’s bean-counters—began a long paragraph detailing the bookkeeping moves that made this particular “in-line” quarter possible:
 “… the ‘in-line’ EPS benefited by a lower-than-expected tax rate by 10 cents, a lower than expected charge by 8 cents and a lower than expected share count by 3 cents vs. our model.  Also, a higher-than-expected IP Income [pure profit generated by IBM’s aggressive patent monetization] offset lower-than-expected...”
 You get the drift: like watching a shell game on Fulton Street, you get dizzy just trying to keep track of the moves.
 The bottom line of it all, the same analyst wrote, was that IBM “really lowered its operating profit forecast for the year quite materially.”

 Not that you’d know that from IBM’s earnings call, which was its typically antiseptic, non-informative, let-us-explain-why-we-will-still-make-the-$20-per-share-Road-Map-number post-mortem.
 Indeed, the Investor Relations Vice President moved things along so swiftly—she cut off each analyst by asking the operator “Can we go to the next question please,” or some variation on it, eight times during the Q&A—that the CFO only answered 19 questions before she brought the hammer down at the end of the allotted hour.
By rushing through the Q&A, coincidentally, IBM’s Investor Relations team managed to avoid getting a single question about what might just have been the most important number in the Niagara Falls of numbers put forth by IBM in its quarterly data sheets.
 More important than revenue, which was down; more important than service bookings, which were also down; and maybe even more important than free cash flow, which was down because of stiffer cash tax payments—an amusing excuse from a company whose Netherlands-minimized tax rate is less than what Warren Buffett’s proverbial, long-suffering secretary pays.
 Rather, the important number that wasn’t asked about has to do with “the Cloud.”
 The cloud is, after all, where the world of technology is moving.
 And by measuring IBM’s success in moving its customers “to the cloud,” outsiders monitor how IBM is doing transforming its business in the way management claims it’s transforming the business.
 According to management, IBM’s cloud revenue (inflated though it may be by hardware sales, but we go with the definition offered by the company), “was up over 50%” in most recent the quarter.
 And while “over 50%” might sound good compared to IBM’s overall topline trend, it was a slowdown from last year’s growth of 69% despite all the cloud announcements pouring forth daily from IBM’s Twitter account.
 Meanwhile, Microsoft, to name another “old technology” company navigating the shift towards “the Cloud,” reported revenue growth from its cloud platform of over 150% in the same quarter.

 IBM’s conference call management technique—while effective, if the goal is to minimize tough questions—contrasts starkly with the recent, wide-open earnings calls at JP Morgan and Citibank (not to mention BankAmerica), which literally go until the last question has been asked and answered, with no time constraints at all. 
 In fact, on the recent JP Morgan call, we counted 56 questions asked by 13 Wall Street analysts. 
 On the Citigroup call, we heard 16 analysts asking 64 questions.   
 IBM, as we pointed out, got by with only 19 questions.
 And people say the banks aren’t transparent enough!

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2013)    $4.99 Kindle Version at

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The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.


Anonymous said...

Bravo....and remind us why WEB owns this company?

Anonymous said...

When do we get a post detailing how many times Warren said "Berkshire" at the annual meeting. We know you were out there, Jeff.

Anonymous said...

It's been 16 days since your last counting post. Surely you've counted something else since then that you'd be willing to share with your faithful readers. Thanks.

Jack Straw said...

Hi Jeff - was curious if you had read the recent Yahoo! Finance article on Eddie Lampert/Sears and if so, what your thoughts were? I know you've written about the company in this space before. The link is below and here is a teaser:

Lampert and Sears Holding never stood a chance against Target or Walmart. Lampert would have lost billions trying. Instead, he made a fortune chopping up the entire chain right before our eyes. There's a dark but undeniable genius at work there.

Jeff Matthews said...

I did read the Yahoo article, and thought it was somewhat content-free. Not clear how he's made "billions" on SHLD since the initial buy. Stock is where it was in 2004.

I get that he couldn't have competed against WMT, but he didn't even try. And the real estate thing hasn't panned out the way it appeared to be pre-crisis.

I found his conference call transcript today incomprehensible gibberish, talking about "levers" they have... the kind of language you expect from your average two-bit CEO, which Lampert is not.

Whenever I get confused about who's right, the geniuses who own the stock or the shorts, I always go back to the stores, and they are dreadful. Always.

Jack Straw said...

I agree with you on the stores. There is a Sears Hardware maybe a mile from me (Northern, NJ) and it is truly a depressing place. I've gone in there as a last resort from time to time looking for something, and while the product selection isnt terrible, the design and feel of the store literally makes you want to leave as quickly as possible. Not really what you want to drive traffic in retail.

I never understood the real estate play really. If Eddie Lampert wanted to invest in real estate, there are much better avenues to do that in, many of which have appreciated at a far greater rate than the space under a depressing Sears store. But land...God isnt making any more of it, as the saying goes.