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Summary

  • The Street continues to focus on IBM's shrinking revenue but ignores a few important facts.
  • Adjusting IBM's revenue growth rates for divested businesses and foreign currency movements, the picture becomes much more favorable.
  • In spite of suffering several stiff headwinds, IBM has delivered about stable revenues over the past 3 years.

After IBM's (NYSE:IBM) Q1/14 earnings release it has been hard to find any positive comment. Investors and analysts alike are most importantly concerned about Big Blue's seemingly relentless revenue declines. A short statement made by CFO Martin Schroeter on the conference call prompted me to do some additional analysis:

We are focused on allocating our capital efficiently and effectively, which means investing in the right places, as well as moving away from areas that don't support our shift to higher value. This is an important part of our model. In fact, over the last few years, including the recently announced sale of our industry standard server business, we have divested over $6 billion of revenue. The result is a stronger, more relevant business.

A quick look at these past years' revenue development tells us that IBM's highest revenues ever were $107 billion in 2011. $6 billion have been divested. Trailing 4Q revenues are $99 billion. Moreover, there have been foreign currency losses. So maybe, after all, IBM's revenues have not been shrinking as much as everybody believes?

What I've done in the following table is a rather simple exercise: As a starting point I chose 2006. That was after the divestiture of the PC business. I took 2006 revenues and subtracted 2006 Global Financing revenues, as the financing business must be evaluated based on earnings, while revenues have little importance (as I've recently shown in my 2013 revenue analysis).

In the 2007 column I also subtracted revenue gained because of favorable currency movements and added revenue lost because of divestitures. The following columns contain all cumulative revenue losses because of divestitures and cumulative currency gains or losses. In this way, in the final row of the final column we get IBM's revenue as it would have been reported at constant 2006 exchange rates, excluding the meaningless movements of GF revenues and without any divestitures.

(Dollars in millions)

2006

2007

2008

2009

2010

2011

2012

2013

Q1/2014 (T4Q)

Total revenue as reported

91,424

98,786

103,630

95,758

99,870

106,916

104,507

99,751

98,851

Global Financing

2,365

2,502

2,559

2,302

2,238

2,102

2,013

2,022

2,035

Cumulative currency gain

3,681

6,587

3,635

4,663

8,690

6,281

3,427

2,977

Cumulative divestitures

600

1,000

1,200

1,842

2,042

2,792

2,892

3,117

Total revenue excl. GF, currency movement and divestitures

89,059

93,203

95,484

91,021

94,811

98,166

99,005

97,194

96,956

There are a few very interesting conclusions to draw from this exercise:

1) From its peak in 2011 IBM has shed 7.5% of reported revenues, but if we factor in currency movements and divested segments, the revenue lost is only 1.2%.

2) Compared to 2010 and 2008, IBM has even grown revenues on an adjusted basis, whereas they have shrunk on a reported basis.

3) Schroeter was not lying: If we add the standard server segment's annual revenues of $4.6 billion (which will be divested during this year) to our calculated cumulative divestitures we get to $7.7 billion of divested revenues over the past 7 years and to $6 billion over the past 4 years.

4) Overall, thanks to favorable currency movements, the lost revenue from divestitures could be compensated almost entirely.

Of course it would be great to see IBM growing revenues again. However, as we've seen, the Street's concerns regarding shrinking revenues are far overblown. In spite of being at the worst possible point in the mainframe investment cycle, stiff headwinds in Japan, China and other emerging markets, IBM has delivered about stable revenues over the past few years, if we adjust for divested businesses and currency movements.

At the same time, profit margins have increased strongly and shares outstanding have been reduced aggressively. As a result, revenues and earnings per share have delivered satisfactory growth rates and will likely continue to do so:

2006

2007

2008

2009

2010

2011

2012

2013

Q1/2014 (T4Q)

Shares outstanding

1,554

1,451

1,382

1,341

1,287

1,214

1,155

1,103

1,042

Revenue / share ($)

57

64

69

68

74

81

86

88

93

Operating EPS

6,06

7,15

8,89

10,01

11,67

13,44

15,25

16,28

15,82

Source: IBM: Revenue Concerns Are Overblown