Hello, your old pal Deep Throat here again.
I thought I would give a brief update on the current state of affairs. Including Red Hat revenue (it’s in there somewhere, just turn over a rock or two), Q1 2021, layoffs, spin offs and whatever other “off” I can think of.
Alright, lets jump right in.
As I have mentioned, AK is a great guy to have a co-----l with, and is, as you would expect, uber smart. I also said he is NOT Lou “I have my hands around the throats of my senior execs” Gerstner.(1) I like the man personally, but I just don’t see a sense of decisiveness.
As for Jim “Hedge Fund” Kavanaugh. The fixation on the dividend to the point of panic (see earlier letters), sets us up with a pre-built-in deficit (and debt). Although it must be good to be Kavanaugh, seeing as his compensation was ~7m in 2020. I suppose there's money in being a complete fu-k-up.
Secondly, Kavanaugh has an ego the size of a small planet. Now to be fair, I can think of at least three SVP’s with a similar traits over the years. Such as yelling down the phone to fire a band B only to apologize 30 mins later with, “I didn’t mean it”.(2) Or getting in a heated argument with a sales head, and having to be separated by a (female) peer. No wonder bullying behavior became a topic of discussion at the SVP level.(3)
Much of this bad behavior can be traced to Palmisano who walked away with over 250m of IBM’s money. Sam was quite happy to yell and bully. I think it stemmed from trying to emulate Gerstner’s bulldog without quite managing it. While Rometty’s style was quite different, Kavanaugh seems to learn from the bullying tactics. Which leads to my point regarding Kavanaugh; Finance rules the roost.
Q1 2021
Interesting in that the “Analysts” yet again seem to do themselves no favors. No one asks questions that are meaningful. Sure, IBM “grew” revenue, but lets dig deep and see what really happened. First a quick reminder; 60% of IBM’s revenue is recurring. Meaning long term deals paying off. See last letter.
This time on the call, Krishna and Kavanaugh weren't as defensive, but then again they weren’t asked tough questions either. I mean come on. Less than 1% growth! So, for IBM to have .9% growth in a massively growing cloud environment is (see AMZN, GOOG, MSFT), well, is nothing to write home about. It fact it’s really pathetic. What it tells us is that transactions sucked (again) and IBM “grew” because recurring revenue didn’t fall off a cliff and the dollar was our friend. I suppose K&K will take it anyway they can get it. But little noticed, or at least not covered was EMEA and AP revenue. Europe/ME/Africa was DOWN 5%. AP down 4%. Both at constant currency. And if you take the overall .9% growth, (-2% at CC), then NA did some heavy lifting. Little known is that France was DOWN 12% at CC. Even IBM friendly UKI was down 7%.
Now as I said last time, many sales people didn’t even get their accounts (the “500”) until six weeks into Q1, now I find out that many tech sales teams in EU have been “twiddling their thumbs”(4) for the entirety of Q1 as they await assignments.
Red Hat grew 17% y2y. Even if I take the 17% growth, based in $5b run rate, then we grew RH ~800m over q1 2020. (Lets face it, if it was meaningful, we would SHOW the revenue). However, our cloud competitors, as if we needed reminding, grew 30%-50%. I am really puzzled by anyone thinking Q1 was a good quarter. In particular when you look at net profit; 995m. You read that correctly. Less than 1b in profit. Wasn’t Rometty’s strategy to “focus on high margin products” etc? Meanwhile MSFT made over 15b. IOW, MSFT made 15x what we did. To put THIS in perspective, in 2013 (after first full year of Rometty), our net profit was 3b in Q1. I must be slow or something, but doesn’t that mean our strategy didn’t work? (Go back and read what I think of our Board of Directors and the dysfunction in the IBM BoD briefings).
Even more galling, in just 15 years, AWS has become a 54b annual sales run rate business, and its growth is accelerating—up 32% year over year. IOW, soon AWS alone will be larger than (the current) IBM. I have an executive friend at AWS, and when he told me over 50b was the target nine months ago, I didn’t believe him. I even mentioned this right here all those months ago. I guess I owe him an apology.
I say it again. Until Krishna bites the bullet on Kavanaugh, ditches the dividend, (which we just raised), how can we possibly fund growth? Speaking of the dividend;
“IBM lifts quarterly dividend by a penny, as yield increases to more than triple the S&P 500”
This is a real headline that shows how tied the perceived value of the company is to it’s stock price, and why K&K are so focused on it. And so scared of doing anything to rock the boat. You can see this in Krishna’s announcement on the subject;
"Client adoption of our hybrid cloud and AI technologies, strong cash generation and disciplined financial management all enable us to invest in the business while continuing to return capital to our shareholders,"
The first line summarizes the whole situation. What K&K are really saying is, “See we CAN even raise the dividend as our strategy will (eventually) support it.” In other words raising the dividend justifies the strategy, not the other way around. Never mind profit was less than 1b, we DID NOT invest more in RD&E (same dollars as Q1 2013 BTW) and our SG&A costs (people), was down by 800m. You don’t have to be a world class finance wonk to see who’s paying for what here. Oh, and cash dropped 2.5b. If only IBM didn’t have to pay people, think how well we would be doing. Speaking of people...
Layoffs
As discussed last time, IBM has set aside 3b for 2021 and 1b for 2022 for “workforce re-balancing.” That translates to about 33,000 heads in 2021. Pretty much what I said six months ago. However, as of the Q1 announcement, we have spent only 146m, which means that another 2.84b to go in 2021. However just because this money is set aside, doesn’t mean it needs to be spent. But…
Given profit of 995m, essentially zero growth no matter how you try to pretty it up, and given this from Q1 reporting;
“The company expects to grow revenue for the full year 2021 based on mid-April 2021 foreign exchange rates”
You may need to read that twice. Let it sink in. Mull it over. Are we saying that our entire growth (or lack of) is based on how the dollar does? There’s not enough real growth in the outlook to compensate for the dollars potential fluctuations? (This is how I read this). Holy fu----g sh-t! If that’s not enough to scare the cr-p out of shareholders, (and the BoD), I don’t know what will. Oh wait I forgot. We keep supporting the dividend. Silly me.
Back to layoffs. So yes, as we didn’t spend anything in Q1 to speak of, we can expect the ax to fall later. And as layoffs are planned many months in advance, and as Q1 was a mulligan, I cannot see us not getting to the 225,000 target I mentioned nine months ago (after SpinCo). Just to be clear. I hope I’m wrong. But Magic 8 Ball says “Unlikely”.
All areas are open, although interestingly, Digital Sales which was supposed to be the future of selling, is laying off too. An SVP once told me that he could save a sh-t load of money this way. That customers knew what they wanted when they went looking for solutions, and that it is all now “self service.” This stemmed from Rometty’s fixation on sales costs. Okay then, how’d that work out? This is the same Bain/BCG nonsense that created the, “workforce pyramid is fu----g you over” and “delayering” mantra. “So fix it and all will be well”. Same cr-p they pulled at HP. Another disaster. In case you haven't noticed by now, I have a low opinion of Bain, BCG, and Kavanaugh.
Finally, as an aside, here is something of interest. Starting now, all executives have to take growth mindset training. I don’t mind spending a few hours on this, it makes sense to be up to date. However a fellow employee who has already done it nearly choked on his morning bagel when he heard some of the platitudes delivered; “teamwork”, “openness”, “candor,” etc etc. We might as well sit around the college quad debating the meaning of life the amount of good this will do. But really, we’re going “teach” this when the very top of the company itself cannot even articulate growth?
That’s it for now.
DT
- Yes he really said this. There were half a dozen of us including Lou, or Mr. Gerstner as he preferred to be called, in a small Somers office
- Yup, happened
- Yup really did
- Sales managers words