"IBM (NYSE: IBM) posted its 21st consecutive quarter of falling revenue, a breathtakingly poor performance. IBM’s board should do now what it should have done long ago: replace CEO Ginni Rometty. Her turnaround promises proved empty again. Much of the fault for her ongoing, unsuccessful tenure sits with IBM’s blue chip board."
http://247wallst.com/investing/2017/07/19/with-ibm-earnings-another-reason-to-fire-ceo-ginni-rometty-and-blame-the-board/
Ginny has got to have the Conjoined Triangles of Success in her office
IBM Earnings: The One Major Takeaway
https://seekingalpha.com/article/4088712-ibm-earnings-one-major-takeaway
Summary
I previously estimated IBM to return to growth next year on the back of Cloud growth.
The current results have completely broken my thesis.
IBM's capital programs are a complete waste of money and do not benefit shareholders.
My first article on IBM (IBM) was cautiously bullish. I had stated that IBM should be returning to growth as early as next year -- at least provided the respective decline and growth rates remain relatively unchanged. IBM's current quarter has broken that thesis since Cloud growth slowed dramatically. That is what I believe to be the most important takeaway from this earnings release.
Stop Using Non-GAAP
I take incredible issue with the constant non-GAAP shenanigans. It's a problem that is almost impossible to fix. Analysts report according to company metrics because they need good relationships with management, and the media completely copies the analysts. Before you know it, you think a company has earned $2.97 per share but has actually earned $1.86.
Who cares about those $0.11 cents, right? That's about $100 million worth of earnings that is not there or close to half a billion dollars on an annualized basis. IBM is clearly seasoned in the Wall Street game. From the buybacks -- which I will get to -- to not mentioning something as material as a 4.5% tax rate. Of course, the reason they didn't mention it was in the hopes that the "huge" EPS beat would distract from the larger-than-expected revenue loss. The problem with that is that everyone was watching IBM's revenue. It is the leading indicator in assessing IBM's return to growth, which brings me to my next point.
Broken Thesis
So, what's the takeaway here? While my earnings prediction was indeed for a revenue beat and EPS meet/miss, I am not consistently bearish or bullish for that matter. My first article on IBM was about how I saw revenue returning to growth next year on the back of Cloud revenue growth.
I won't repeat everything I discussed previously in this article, but the crux of it was that if respective decline and growth rates held steady relative to each other, IBM would see a small 2% revenue growth next year. Based on IBM's performance, I found that a very feasible endeavor.
But IBM never fails to disappoint in disappointing. Cloud growth slowed considerably, and since my entire growth thesis was based on cloud growth continuing, the thesis can be considered broken. It is very unlikely that IBM will manage to return to growth, or at least slow the decline, by next year. Slowing growth in Cloud was also the reason for the larger-than-expected revenue decline. It wasn't that legacy businesses were declining at an accelerated pace, rather it was that Cloud was not growing fast enough to make up for the decline.
Analysts cut their price targets almost immediately -- and rightly so. The reasons cited for the cut were: "deceleration of the company's Strategic Imperatives focus, which includes cloud and mobile, and the double-digit decline in IBM's core business. "
IBM's Buybacks Are a Waste of Money
Leave it to investors to ignore business fundamentals in lieu of supposed capital gains like buybacks and dividends. Usually, buybacks are considered a positive. It signals that management believes its stock is undervalued. Of course, that's what they teach us in corporate finance theory 101. What we learn in corporate finance reality 101 is a much different narrative.
In reality, and especially in this bull market, buybacks are almost always executed to massage earnings. It should be extremely telling that management has spent almost $36B on buying back stock since 2013. In that same time period, the stock has lost $86B in market value.
To be clear, the 2013 market cap was calculated by taking the starting share price of roughly $200 and multiplying that by the number of shares outstanding in 2013, which was 1,155 million. This produces a market cap of $231B. You'll come up short if you simply take $154 (the current share price) and multiply it by the current number of shares (942 million). The reason for this is, of course, buybacks.
The buybacks have not aided in providing a positive ROE. Perhaps they have aided in not providing a more negative ROE. Not to mention that throwing $36B at a declining stock price speaks volumes regarding the company's lack of creativity and strategic insight.
Conclusion
IBM investors have seen almost $122B evaporate since 2013. For that, they have received a cumulative $19B in dividends, leaving them with a loss of $103 billion equal to 72% of the current value of the company.
While I believed that this year would mark a cautious turnaround, I am retracting that statement immediately. IBM's management continues to disappoint and a return to growth will take another two years -- that is if IBM manages not to disappoint again. Given IBM's reliability in disappointing, I wouldn't count on that. Investors should think about that the next time they salivate at a 4% yield.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
IBM investors have seen almost $122B evaporate since 2013. For that they have received a cumulative $19B in dividends, leaving them with a loss of $103 billion equal to 72% of the current value of the company. Remember they have also spent 36 billion on stock buybacks in that time frame. Doesn't business school 101 say buy back undervalued stocks NOT overvalued stocks. What would 36 billion have morphed into had it been invested in "2013 cloud companies". It's time for the entire IBM management team to work for base salary (If you don't like it, LEAVE). You have been over paid vs the results accomplished. The board should also replace the Exec compensation committee as they have obviously been sleeping for the past 5 years. 21 quarters in a row is enough The results speak for themselves. TIME FOR A CHANGE.
The people who would fire her are the very people who are profiting from her. Screw the customer, screw the employee, let the business rot - just keep the stock price and dividend up. They love her.