Wednesday, January 20, 2016

Don’t Mention The Earnings Miss. I Mentioned It Once But I Think I Got Away With It...

  
  Well it’s earnings season again.  
  That means it’s time for IBM to puke another quarter and hold an incomprehensible—literally, incomprehensible—earnings call during which it spins every data point in such a positive light that you’d think they held the winning Powerball ticket, while strictly limiting analysts to one question—no follow-ups, please—and abruptly cutting things off when the hour is up.
  For those of us accustomed to the full disclosure practiced by the terrible, horrible, no-good banks, this practice of IBM’s management team not belaboring bad news is something out of Fawlty Towers (“Don’t mention The War.   I mentioned it once but I think I got away with it.”)  
  By way of comparison, Wells Fargo and Citi’s back-to-back earnings calls last Friday started at 10 a.m. E.S.T. and ended at 1:15 p.m., give or take.   
  Analysts on both calls were free to “get back in the queue,” as they say, and they did, until every question was exhausted.
  But that practice is not the IBM Way.   No sir.  
  Windy analysts are quickly cut off and the opportunity to follow-up an obfuscatory answer (the IBM norm) is not given—bringing to mind yet another Basil Fawlty line: “Trespassers will be tied up with piano wire.”
  So if you didn’t get a chance to listen to IBM’s earnings call—and we’ve poked fun at them for years, most recently here—you really ought to read the transcript courtesy of the indispensible Seeking Alpha, here.
  If you didn’t know any better, you’d think that IBM is swimming in gold, that its cloud offerings are taking the world by storm (“We’re the largest,” they declare, without mentioning that their internal measure includes low-margin IBM hardware), and that Watson, which as they always remind us won Jeopardy in 2011 (or was it 2010?  Or was it actually Wheel of Fortune during Kardashian Week?) is the next Amazon Web Services, which it is not.
  In reality, IBM’s revenues are down—even in the not-falling-apart Americas—its cash flows are down, its share repurchases are down (even though the stock is down, and presumably more attractive than the last time they spent billions propping it up), and the only reason it “beat the number” was, naturally, the tax rate, which IBM plays like Duane Allman played “Whipping Post.”   (See “Bring Out the Belgian Waffle!” here.)
  Oh, and never forget that IBM always makes sure to exclude the negative impact of currency and divestitures on these calls and in their press releases, but does not exclude the positive impact of acquisitions.   And IBM made seven cloud acquisitions alone in 2015.
  Altogether, it is, as we started at the top, literally incomprehensible.   
  And if you don’t believe us, try this answer from the CFO on for size, about the miss in IBM’s super-high-margin software business:
  Sure thank you, thanks Toni. A few comments on software, so as we said in our prepared remarks, the deceleration third to fourth really was driven by this – by the mix shift and the continuation of the transaction closing rates that we saw in September. So we talked about – coming out of September we talked about a slower rate of closing in some of our larger deals and that’s what we experienced as well in the fourth quarter. And as I mentioned in my prepared remarks, because of the mix shift alone we see an improvement and as you point out the weather company another acquisitions by the way to the extent that they are – have software in them they will obviously bolster that growth rate.
  A few things, I think are important to note within software. First, as we said in our prepared remarks and the phenomena is really no different in the fourth and what we’ve seen all year, our annuity business within the software business. So that’s about 70% of our overall software stream. Our annuity business continues to grow. So that has a service in it, it has our subscription and support business in it as well, so that continues to grow.
  And then outside of our largest clients and this is a phenomena that we’ve been talking about, outside of our largest clients where they don’t have as broad access to our software portfolio, we continue to see growth as well, both transactionally and they’re obviously part of the asset service stream. Within the large clients as I mentioned earlier and as we talked about in our prepared remarks, we provide flexibility, it gives them – it gives our clients an ability now to manage their projects and they deploy maybe differently than they anticipated at the beginning of the year. From my discussions with our clients, a lot of that depends on the visibility they have both of their demand patterns and the visibility they have to sort of the – kinds of projects they might have to implement in the near-term.
  So I don’t think that’s any different than what we’ve experienced in the past…
 If you can make anything of that—and we’re pretty sure even Warren Buffett, the largest IBM shareholder, couldn’t make anything of that—let us know.
  Meantime, don’t mention the revenue drop, the earnings decline or the cash flow shortfall.   I mentioned them once but I think I got away with it


Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2015)    Available now at Amazon.com

© 2016 NotMakingThisUp, LLC



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. The content herein is intended solely for the entertainment of the reader, and the author.

1 comment:

Unknown said...

Thinking of Warren, Ginny might want to borrow Basil's line, "A satisfied customer. We should have him stuffed."