- The IBM story has dozens of moving parts and can't be understood based on headline figures.
- In this article, I present a deeper analysis of IBM's segmented revenue data, which will reveal several surprising facts.
- Both the bull and the bear camps are wrong in at least one part of their analysis.
- Finally, we will understand why the usual focus on top line growth totally misses what's really going on inside Big Blue.
- IBM is undervalued at 8.7X its expected 2016 operating EPS.
- IBM abandoned its insane Roadmap 2015 program which pushed for breakneck EPS growth at the expense of growing and building its business.
- IBM generated solid revenue growth (16%) from its strategic product, service and solutions offerings.
- IBM has institutional support: Warren Buffett, Prem Watsa and Loomis Sayles' Dan Fuss own IBM shares.
- Hewlett-Packard split itself up and IBM should consider doing the same if it can't revive its growth momentum.
IBM Earnings: Revenues And 2015 Guidance Disappoints As Restructuring Continues
- IBM continued to report a marked slowdown in business due to weak client spending, anemic demand in the software sector and divestitures of sizable businesses.
- The company reported 12% a year-over-year decline in revenues to $24.1 billion.
- We are in the process of updating our IBM model. At present, we have a $204 Trefis price estimate for IBM.
Why IBM Is Better Than I Thought, But I'm Still Bearish
- Early in the fourth quarter, I went bearish on IBM because the constant declines in revenue were simply too much.
- Management states it is transitioning to a higher-value business, but I was not convinced.
- I discounted FCFE to establish PV of the firm using the LIBOR forward rate curve.
- The results were different from my expectations.
- IBM has repurchased over $100 billion in its own shares since 2004 (about two-thirds of its own market cap).
- Given the large size of IBM's share purchases, it's worthwhile to examine whether the buybacks have created value for IBM shareholders.
- My analysis suggests that IBM's buybacks neither created nor destroyed value from 2004 to 2013.
- A flood of special charges makes it hard to understand IBM's underlying business performance.
- A detailed cash flow analysis shows that IBM does somewhat better than it seems at first sight.
- However, it is also more clear than ever that Big Blue's transformation has still not ended.
- IBM's Q4 and full-year earnings were horrible, to say the least, showing declines in just about every large area of the business.
- The company also gave investors two reasons to believe a turnaround might actually occur.
- While IBM's stock might suffer short-term, the long-term benefits from these two factors could create a good long-term investment opportunity.
IBM: Attractive Entry Point Despite Weak Earnings And Guidance
- IBM reported worse than expected Q4 earnings and the full-year guidance for 2015 was below consensus as well.
- Given IBM's poor operational and financial performance in the past years, investors should be conservative with the company's future growth prospects.
- Using a DCF valuation model, I find that IBM trades below its fair value based on a non-growth scenario.
- Even a small upward revision of the growth scenario leads to a decent upside potential for this stock.
- IBM sold off after another disappointing earnings report. Investors sold the stock because the company missed analyst estimates on revenue and handed in a weak outlook.
- But it's foolish to play the expectations game. IBM is making important progress that analysts are not giving it credit for. IBM's turnaround looks to be for real.
- IBM is back to earnings growth, and assuming continued progress in high-growth areas, IBM offers a lot of value at such a cheap valuation.
- IBM's Q4 report saw an impressive EPS beat, but really very few other bright spots.
- Buybacks were virtually halted as the stock tanked, an incredible development from a company that has made its living retiring shares.
- I still think IBM is a short as the business continues to shrink and there is no direction from management.
- IBM announced full-year 2014 earnings results.
- The lack of revenue growth continues to be the central theme.
- However, if you believe in the company’s ability to start growing – even slightly – the investment thesis remains reasonable.
What The Whisper Number Indicates For IBM Earnings
- The whisper number is $5.42, in-line with the analysts' estimate.
- IBM has a 67% positive surprise history (having topped the whisper in 40 of the 60 earnings reports for which we have data).
- The overall average post earnings price move is 'positive' (beat the whisper number and see strength, miss and see strength) when the company reports earnings.
- Analyzes IBM for both the conservative as well as the more aggressive/buy & hold investor.
- Performs a complete historical free cash flow analysis (1990-2015) using our "Scorecard System".
- Expects IBM to miss and guide lower for 2015 and explains why.
- IBM is a value play.
- The shares have under performed the market for the past two years.
- To further compound matters, the shares lost ground in 2014, angering many investors.
- I have decided to reinvest in the shares as will be outlined below.
- IBM has worked hard to save both its company and stock over the last few years.
- Unfortunately, a rapid decline in free cash flow will prevent the company from buying back stock and making acquisitions at a pace investors have come to expect.
- The outcome will be accelerated stock losses in 2015.
- If IBM doesn't change the way it operates, the stock might perform OK this year, but long-term losses could be very significant.
- IBM's mainframe - system z - revenue is cyclical, peaking after periodic upgrades, then tailing off.
- The company has just introduced the z13, touting it as the most powerful and secure system ever built.
- A review of the prior cycle provides insight into the current possibilities.
- If results parallel the previous cycle, IBM may resume growth.
- IBM now sells for less than 10 times earnings and 1.5 times sales.
- HP shareholders have prospered under Meg Whitman despite a lack of growth. Why can't IBM do the same?
- The militarization of cyberspace could move a lot of business Big Blue's way this year.
Apr. 10, 2014, 11:36 AM
- IBM (IBM +1.1%) is acquiring Silverpop, a developer of cloud-based marketing automation software to 8K+ clients, for an undisclosed sum.
- Big Blue praises Silverpop's ability to enable personalized interactions with potential clients, and to provide "sophisticated automation capabilities more commonly applied in lower volume B2B scenarios to complex B2C environments."
- Its software will be leveraged by IBM's 140 Ready for Smarter Commerce marketing partners, and integrated within a new IBM cloud marketing suite - details for the latter are due in May.
- Silverpop competes to varying degrees against Oracle-acquired Eloqua and Responsys, Salesforce-acquired ExactTarget, and Adobe's Marketing Cloud platform. It also competes against Marketo (MKTO -7.5%) and Constant Contact (CTCT -4.5%), which are selling off hard today amid a tech rout. Both companies have been lifted by M&A speculation in the past.
- The companies are all looking to profit from a shift in IT spend towards CMOs. IDC has observed IBM's efforts in this area could lead it to face off more against ad agencies such as WPP and Omnicom.
- Past marketing-focused IBM acquisitions: DemandTec, Xtify, Unica
Apr. 3, 2014, 4:43 PM
- Private Globalfoundries is "the lead candidate" to acquire IBM's (IBM -0.4%) struggling chip manufacturing/foundry ops, sources tell the WSJ. Market leader TSMC (TSM -0.5%) is said to have dropped out of talks, and though Intel is said to be involved, Globalfoundries is showing more interest.
- Sources add a deal isn't imminent, and that price remains an issue: IBM originally wanted $2B+ for the business, whose sales tumbled 33% Y/Y in Q4 (evidence of share loss) and is in the midst of seeing layoffs, but initial bids have only been north of $1B.
- The business was first reported to be on the block in early February. Bernstein has estimated it had 2013 revenue of $1.75B, and an op. loss of $130M.
- Though presenting integration challenges, acquiring IBM's chip unit would give Globalfoundries more scale as it battles against TSMC, which is estimated to have nearly 50% of the foundry market and claims a long list of blue-chip clients.
- TSMC shares slipped yesterday after Globalfoundries announced a wafer supply deal with ex-parent AMD that includes GPU and console processor manufacturing (thus far handled by TSMC). Nonetheless, Digitimes has reported TSMC's capacity is booked through the end of Q3 thanks to strong mobile/PC chip demand.
Mar. 10, 2014, 4:32 AM
- IBM (IBM) CEO Ginni Rometty tells it like it is, acknowledging in a letter to investors that the company "did not meet our expectations."
- IBM will continue to alter its focus to cloud services and data analytics while modifying its hardware products. "While we continue to remix to higher value, we must also address those parts of the business that are holding us back," said Rometty.
- Declining demand for hardware and soft sales in growth markets have hit revenue for almost two years, prompting IBM to offload assets and reduce staff.
Mar. 7, 2014, 5:52 PM
- After falling 3.5% Y/Y in Q3, external disk storage system sales rose 2.4% in Q4, says IDC. The growth came even though sales of the servers that interact with these systems fell an estimated 4.4%.
- Total disk storage sales, which include storage subsystems found within servers, rose 1.3% in Q4 after dropping 5.6% in Q3. IDC attributes the turnaround to "traditional year-end budget flushes, improved economic sentiment, and a strong desire to address long-standing storage infrastructure inefficiencies."
- Market leader EMC, which posted strong Q4 numbers to go with light guidance, saw its external disk share rise 220 bps Y/Y to 32.9%, and its total disk share rise 200 bps to 25.8%. The gains largely came at the expense of restructuring IBM, whose shares respectively fell 190 bps and 200 bps to 13% and 14%.
- H-P's (HPQ) external disk share rose 30 bps to 9.6%, and its total disk share 40 bps to 16.3%. NetApp (NTAP), which delivered nearly in-line revenue and soft guidance last month, saw its external share fall 10 bps to 11.5%, and its total share stay flat at 9%. Private Dell's total share fell 140 bps to 9.9%.
- Hard drive/assembly suppliers: STX, WDC, HTCH
Feb. 28, 2014, 12:36 PM
- A source tells CNET IBM's (IBM +0.3%) layoffs involve up to 25% of employees in its hardware/chip unit (i.e. the Systems & Technology Group).
- The division saw a 26% Y/Y sales drop in Q4, bleeding share to rivals ranging from from H-P to EMC to TSMC. Since then, IBM has announced it's selling its x86 server business (sales -16% in Q4) to Lenovo for $3.2B, and the WSJ has reported Big Blue is thinking of unloading its chip manufacturing ops (believed to be losing money).
- IBM expects to record a $1B workforce rebalancing charge in Q1.
- Previous: Major IBM job cuts reportedly set to start
Feb. 27, 2014, 7:07 PM
- With enterprise server sales under pressure and the cheap white-label servers used by the Googles and Amazons of the world gaining more ground, IDC estimates global server revenue fell 4.4% Y/Y in Q4, a decline steeper than Q3's 3.7%. Gartner estimates revenue fell 4.5%.
- IDC thinks market leader H-P (HPQ), which posted relatively healthy enterprise hardware numbers for its January quarter, saw its share rise 260 bps Y/Y to 26.9%. #2 IBM, whose hardware ops had a brutal Q4, saw its share drop 910 bps to 26.8% in what's typically a seasonally strong quarter for the company.
- #3 Dell is assigned a 14.5% share (+30 bps). #4 Cisco (CSCO), whose UCS server unit remains a bright spot, is given a 4.5% share (+130 bps). Following many quarters of share losses, engineered systems growth allowed #5 Oracle's (ORCL) share rose 10 bps to 4.1%.
- White-label server sales, referred to by IDC as ODM Direct, soared 47% Y/Y, and now make up 6.4% of industry revenue. "Density-optimized" server sales, which include white-label gear and OEM offerings, soared 70%. H-P has a 34.9% share.
- A positive for Intel (INTC): x86 server sales rose 7.8%, up from Q3's 2.8% clip. A positive for Red Hat (RHT): Linux server sales rose 14.4% vs. 5.6% in Q3, and now make up 28.5% of industry revenue. Windows server sales (45.7% of revenue) were nearly flat, Unix sales (13.6% of revenue) fell 20.2%.
Feb. 25, 2014, 11:32 AM
- Citing sources within the company, IBM (IBM +0.1%) workers group Alliance@IBM says the IT giant will begin notifying employees affected by a major round of job cuts tomorrow.
- Big Blue has already said it expects to record a $1B workforce rebalancing charge in Q1, as it tries to improve its cost structure in the face of ongoing revenue declines.
- Bernstein's Toni Sacconaghi thinks it costs IBM ~$70K, on average, to let an employee go. He previously forecast at least 13K of the company's 434K employees could be laid off.
- IBM, still maintaining a 2015 EPS goal of $20, has promised to keep 3,100 jobs in its home state of New York through 2016. That's up from a prior pledge of 2,350.
Feb. 24, 2014, 11:36 AM
- IBM (IBM +1%) is acquiring Cloudant, provider of a distributed cloud database platform for app developers. Terms are undisclosed.
- Cloudant's customer base includes Samsung, Microsoft, Adobe, and Fidelity. The company already relies on IBM-acquired SoftLayer's cloud infrastructure platform to deliver its services, which compete against Amazon Web Services' DynamoDB and solutions based on the open-source MongoDB.
- All three solutions rely on NoSQL, a database architecture that differs from the age-old SQL (used by IBM's DB2, as well as ORCL's bread-and-butter database) through its support for semi-structured and unstructured data.
- This feature, along with NoSQL's superior performance and scalability for certain apps, is leading the technology to be widely adopted for handling Web/cloud services and big data projects.
- Separately, IBM is promising to invest $1B to bolster SoftLayer's cloud software/app platform offerings. Last month, Big Blue, increasingly looking to cloud services to halt its ongoing revenue declines, said it would invest $1.2B to build 15 new data centers for SoftLayer.
- IBM/SoftLayer rival Rackspace (RAX +2.4%) owns a piece of Cloudant.
Feb. 12, 2014, 2:40 PM
- Reuters reports IBM (IBM +0.3%) CEO Ginni Rometty is traveling to Beijing to meet with government officials in an effort to "restore trust with Chinese regulators and reverse slumping sales."
- Like many U.S. enterprise IT peers, IBM's sales to the Middle Kingdom (and more broadly, to the Asia-Pac region) have nosedived; they dropped 23% Y/Y in Q4. All signs suggest the NSA spying uproar is a major culprit.
- Also hurting IBM in China: Its sales within the country disproportionately depend on a hardware business that saw an eye-popping 26% Y/Y global revenue drop in Q4.
- Big Blue recently partnered with data center owner 21Vianet (VNET +1.5%) to begin offering cloud infrastructure services within China.
Feb. 7, 2014, 4:38 AM
- IBM (IBM) is considering a sale of its semiconductor manufacturing operations, which produces chips for its high-end servers and for external customers, the WSJ reports.
- However, IBM would keep its chip-design operations; alternatively, according to an earlier FT article, IBM could keep the whole business and seek a partner with which to create a joint venture. The FT reported about the prospective sale but didn't distinguish between the production and design parts of the division.
- There was no word on the value of the business, although Bernstein reckons it earned revenue of $1.75B in 2013 and made $130M in pretax losses.
- The reports come after IBM said last month that it had agreed to sell its low-end server division to Lenovo for $2.3B.
- Evisioneering analyst Rick Doherty said he'd be "shocked" if IBM did sell the semiconductor operations. "Take away the Silicon part, and IBM may not be the tech giant it is 10 years from now," Doherty said.
- However, the business has become a less important part of IBM’s operations in recent years, as the company has expanded its software and services activities.
Jan. 31, 2014, 9:37 AM
- Twitter (TWTR -1.2%) has bought 900 patents from IBM (IBM -0.9%) for an undisclosed sum. The sale, along with an attached cross-licensing agreement, ends an IP dispute between Twitter and IBM related to patents the latter believed the former was infringing.
- In prior years, IBM has sold 750 patents to Facebook, and over 2K patents to Google. The company has consistently topped U.S. patent grant rankings for two decades, and is believed to generate ~$1B/year in patent licensing revenue.
- The deal shores up Twitter's relatively paltry IP portfolio, a portfolio that some have considered a business risk. Twitter, through its Innovator's Patent Agreement, has promised it won't use patents created by its own engineers/designers for "offensive litigation" without their creators' consent.
Jan. 28, 2014, 4:01 PM
- Sources tell re/code IBM (IBM -0.5%), fresh off selling its x86 server unit to Lenovo, is thinking of selling its software-defined networking (SDN) unit.
- Big Blue is reportedly asking for as much as $1B, a figure one exec calls "pretty optimistic." The company is said to have informally approached Cisco, Dell, H-P, Juniper, and Fujitsu "to gauge interest." Cisco, Juniper, and H-P have each already launched a slew of SDN-related products.
- SDN, a relatively new technology/concept. shifts network intelligence and provisioning capabilities to software-based controllers. By doing so, it aims to improve provisioning times and resource efficiency, and allow proprietary switches to be replaced with commodity/white-label gear; that last feature has many Cisco investors on edge.
- Back in 2012, VMware paid ~$1.2B for Nicira, widely considered the early leader in the SDN software space.
Jan. 28, 2014, 12:46 PM| Comment!
Jan. 24, 2014, 7:27 AM
- What was the CEO of a company you're an owner of up to this week? An index of companies whose execs regularly attend Davos has vastly underperformed the market since 2009.
- Attendance at the gathering tends to be dominated by the financials, with GS, C, HSBC, JPM, LAZ, MS, SCBFF, BAC, ITUB, and UBS leading the way to prove their bona fides as thought leaders. Also spotted were the heads of DOW, and PEP.
- Notably absent: Buffett (BRK.A, BRK.B) , Tim Cook (AAPL) (Jobs never attended either), Jeff Immelt (GE), and Virginia Rometty (IBM). Google's (GOOG) founders and Mark Zuckerberg (FB) stopped going a couple of years ago.
Jan. 23, 2014, 4:10 AM
- As flagged, IBM (IBM) has agreed to sell its low-end x86 server business to Lenovo (LNVGY) for $2.3B, of which $2B will be in cash and the rest in stock.
- IBM and Lenovo will also form a partnership that will include a global OEM and reseller agreement for various IBM products, including its entry and mid-range Storwize disk storage systems.
- Around 7,500 IBM employees will be offered jobs at Lenovo.
- "This divestiture allows IBM to focus on system and software innovations...such as cognitive computing, Big Data and cloud," says IBM's Steve Mills.
- The deal comes after IBM's hardware division suffered another wretched quarter in Q4, with x86 sales dropping 16%.
- The question is whether U.S. security concerns will cause a delay to the transaction or cause it to be blocked. (PR)
Jan. 22, 2014, 7:58 AM
- "Disappointing" is the theme as the sell-side comments on IBM's Q4 results from last night.
- "No near-term relief" is the title of Deutsche's note (and Deutsche is a bull on the stock). The company is likely to remain in the "penalty box" until it can show evidence of stability in hardware and improved execution in emerging markets and China.
- Investors will likely mull over whether IBM will need to reset the 2015 Roadmap this spring, says JPMorgan, expecting shares to be under pressure near-term and lowering the PT to $175.
- Credit Suisse reiterates its Sell rating and $160 price target on the weaker-than-expected numbers.
- Shares -3.2% premarket
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