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Summary

  • Q2 earnings release sell-side analysis continues to focus on revenues.
  • As stated in my Q1 analysis, revenues should be considered after adjustments for currency movements and divestitures.
  • As shown by my updated table, 1-2% changes of revenues are almost meaningless for IBM. Adjusted revenues have stayed roughly flat for many years.
  • What ultimately counts are earnings per share and profit margins, which continue to grow nicely.

Quarterly report after quarterly report, the analyst community continues to focus on IBM's (NYSE:IBM) falling revenues. The recent Q2/14 earnings release made no difference in this respect.

IBM reported Q2 EPS of $4.32, which narrowly beat consensus estimates, similarly to reported revenues of $24.36 billion, which however represented yet another shrinkage of -2.2% Y/Y.

The company nevertheless reiterated its full-year EPS guidance of at least $18.

After the Q1/14 release I published an analysis of Big Blue's revenue stream, which clearly showed that most of these concerns were overblown, as the Street continues to focus on IBM's shrinking revenue but ignores a few important details. In fact, adjusting IBM's revenue growth rates for divested businesses and foreign currency movements, the picture becomes much more favorable and we have to recognize that IBM has delivered about stable revenues over the past years, in spite of suffering several stiff headwinds.

Here is the updated table, including Q2/14 results:

(Dollars in millions)

2006

2007

2008

2009

2010

2011

2012

2013

Q2/2014 (T4Q)

Total revenue

91,424

98,786

103,630

95,758

99,870

106,916

104,507

99,751

98,291

Global Financing

2,365

2,502

2,559

2,302

2,238

2,102

2,013

2,022

2,052

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

3,397

Total revenue excl. GF, currency movement and divestitures

89,059

93,203

95,484

91,021

94,811

98,166

99,005

97,194

96,659

Shares outstanding

1,554

1,451

1,382

1,341

1,287

1,214

1,155

1,103

1,005

Revenue / share ($)

57

64

69

68

74

81

86

88

96

My conclusions stated in the original article don't need to be changed. In addition, I would like to highlight a few figures.

Charlie Munger famously teaches investors to "invert, always invert". So let's take a look at the good old days, when revenues were of no concern to the analyst community. From 2007 to 2011 revenues grew by a bit more than $8 billion (slightly over 8%). Now let's look at currency gains over the same years: Surprise! $5billion out of 8 were due to more favorable currency conversion!

In 2007 IBM's revenues stood at only $500 million more than today. Until 2011 IBM gained about $5 billion from favorable currency movements, which were more than lost in the three years afterwards, as currency conversion cost Big Blue a whopping $5.7 billion in revenues between 2011 and Q2/2014. During the same period, another $1.4 billion was lost because of business units sold off. So all in all, IBM lost $7.1 billion from its highest revenues ever recorded until today, which had nothing to do at all with its operating performance. Hence, if we adjust our figure accordingly, we see that the real revenue loss from 2011 until today is only a bit more than 1% or $1.5 billion. And the real revenue gain in the good old days was far less than what it seemed.

I continue to be disappointed by analysts' sole focus on revenues. As the above table clearly shows, over the past decade or so the IBM investment case has certainly never been based on revenue growth. It has all been about EPS growth and increasing profit margins.

Source: Are Flat Revenues Really IBM's #1 Problem?