IBM - International Business Machines

[Guest valueInv]

Does IBM Love or Hate Itself?

 

Look deeper at IBM and dozens of mature U.S. companies, and you can sketch a different, more ominous, story: That CEOs are in fact stuck, reluctant to build new plants, launch products or pursue an acquisition.

 

By rote and by fear, they are pitching their billions into buybacks, nearly $1 trillion from the 100 largest companies in the S&P since 2008. In the 12 months ending in September, the total dollar amount of all corporate buybacks increased by 15% from a year earlier, according to S&P Dow Jones Indices.

 

http://online.wsj.com/news/articles/SB10001424052702304027204579334081811064124?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304027204579334081811064124.html

 

Broadly, I agree with this.

 

Really?

 

http://blogs.wsj.com/cio/2014/01/16/ibm-commits-1-2b-to-cloud-stack/?mod=WSJ_business_cio

[thefatbaboon]

IBM really looking stretched to make the 2014 $17 in GAAP EPS with a normalized 23% tax rate.  They're going to have to buy a heck of a lot of stock this year to hit that.  But if they make the 2014 target, 2015 targets should be doable with the servers coming back on cycle.  But damn I really don't see how they can get the pretax income in 2014 to get $17 of GAAP EPS if, as they said, the accrual tax rate will be 23% - unless they go into the market this year and spend $20bn on stock. 

[LowIQinvestor]

Hope this goes sub $180.

 

9 PE on 2015 earnings, 2% dividend, large buyback, growing earnings 11% annually?

 

Seems like a good place for me to park some cash until better opportunities arise.

[Palantir]

When did IBM grow earnings by 11% annually?

[tombgrt]

When did IBM grow earnings by 11% annually?

 

He means per share and you know it. ;) Get over it, IBM has done a good job these last few years on a per share basis and that is what counts.

[Guest valueInv]

Hope this goes sub $180.

 

9 PE on 2015 earnings, 2% dividend, large buyback, growing earnings 11% annually?

 

Seems like a good place for me to park some cash until better opportunities arise.

 

I'm hoping for $150 ::)

[LowIQinvestor]

Over the past decade they have had 11% annualized EPS growth ( I believe)....working without the data in front of me at the moment.

[Palantir]

When did IBM grow earnings by 11% annually?

 

He means per share and you know it. ;) Get over it, IBM has done a good job these last few years on a per share basis and that is what counts.

 

No it really doesn't. He said IBM trades at a PE of 9, and then talks about growing earnings on a per/share basis. If you're buying back stock to juice up EPS growth, the real PE should be adjusted higher. Growth due to buybacks is not free growth.

[zarley]

I always feel uneasy about second guessing Buffett, but IBM looks like a company that peaked in 2011 and has been using every accounting trick in the book to fake the appearance of forward momentum.  Shrinking the share count is all well and good, but I'm pretty sure an 11% tax rate shouldn't be the long-run expectation. 

[enoch01]

I always feel uneasy about second guessing Buffett, but IBM looks like a company that peaked in 2011 and has been using every accounting trick in the book to fake the appearance of forward momentum.  Shrinking the share count is all well and good, but I'm pretty sure an 11% tax rate shouldn't be the long-run expectation.

 

I decided not to piggyback for this same reason.  I read somewhere that Microsoft should hire IBM's accounting department.  $10 billion would probably be a steal.

[frommi]

Its easy, software sales are growing and hardware sales are shrinking, at some point revenue growth comes back just because hardware revenues are near 0. They are doing the right things but it takes patience until the changes can be seen in the numbers.

[thefatbaboon]

Yeah these tax gimmicks have been wild.  I remember on last Qs conf call Loughridge was saying that average tax for the year would come in around 23%, and that as the first 3 Qs were running under that, the Q4 tax would be higher than average (>23%) so that the overall average for the year would come in at 23%.  And what do we get instead: 11% in Q4 and 15% for the year!  IBM's finance department is certainly resourceful.

 

I've been sitting here today trying to puzzle out the 2014 target they just announced.  Again, on the conf call they said that 2014 is budgeted at a 23% tax rate.  But at the same time they've said 2014 GAAP EPS of $17.

 

Let's say they've budgeted to buy back 100m shares (pretty aggressive).  They closed 2013 with 1.05bn shares, so that would mean they close 2014 with 0.95, i.e. a weighted average of 1bn shares.  So, $17 EPS means $17bn net income.  Which if tax is at 23% implies a Pre Tax Income of $22bn.  This year they got Pre Tax Income of $19.5.  Where the hell are they going to get $2.5bn of growth from?

 

They've budgeted $150m from selling customer care, they're doing the workforce rebalancing in Q1 so maybe they'll get $500m incremental from that earlier in the year.  Last year software and services growth added about $600m in incremental PTI…Total, and given that they've said hardware is going nowhere in 2014, I can get to $1.5bn in PTI growth for 2014 - at a stretch.  But that's still $1bn short.  I don't get it.  Either they're going to be buying back 130m-140m shares or they're going to be "surprising" us with more low tax rates.

 

Is there something I'm missing?

 

 

 

 

[enoch01]

Its easy, software sales are growing and hardware sales are shrinking, at some point revenue growth comes back just because hardware revenues are near 0. They are doing the right things but it takes patience until the changes can be seen in the numbers.

 

Yes, the easy part to see is that they are trying to replace "low margin" business with "high margin".  Simple.

 

But other questions remain:

 

1.  How are they able to pay such little tax?  And how come other global IT firms are complaining about an inability to repatriate cash?  Maybe IBM should open a consulting group to advise on repatriation.

 

2.  How much more leverage is a good idea?  Their free cash flow available for the all-important buybacks is shrinking (way down YoY).

 

Just asking questions, I have no position.

 

Jeff Matthews has a good post up today:  http://jeffmatthewsisnotmakingthisup.blogspot.com/2014/01/ibm-ive-been-manipulated.html

[oddballstocks]

I've had a lot of experience as an IBM customer over the years, directly and indirectly.

 

IBM sold their Thinkpad business, and now they're looking at selling the server business.  From a financial perspective that makes sense.  I'm wondering what their business aim is?  A better way to put this is what will IBM be known for?

 

In the past they were known for having vertically integrated solutions that worked well.  They sold services around this.  I remember we had an issue with a particular IBM server, a tech came out, this guy knew the ins and outs of the servers.  He had some tricks he used to replace parts of a circuit board.  His knowledge of the hardware was deep.  They had deep knowledge of the software they built that ran on top of the hardware.  They would sell the whole package, a bank wants a new information system, they get the servers, the developers to build it and then follow-on services.

 

Now they're selling a LOT of software.  Most of it is from acquisitions, some interesting stuff for sure.  They will buy small companies and grow them which seems to work pretty well.  I feel like they're starting to hit the wall with some of this stuff.  They already have the enterprise locked up with WebSphere and the like.  There is only so much you can add onto this.  What I'm seeing in the space is that companies are moving away from the fat stuff to hosting more services in the cloud where possible. 

 

They also have a lot of legacy software, things like DB2.  I have yet to run into a client that runs DB2, but I heard they exist out there somewhere.  In terms of services if they get rid of their hardware they're at risk of becoming just another software consultancy company.  There's nothing wrong with that, except that IBM has so much overhead their rates are a lot higher.  They also won't take on smaller projects because it won't move the needed.  A few million dollar deal isn't worth it to them, they need the $10-100m deals. 

 

They used to have an incredible moat, their expertise, their hardware.  Now they've been hiving off these things piecemeal.  They're selling down their moat.  Why contract with IBM in the future rather than Ernst & Young, or Accenture or a local firm at a lower cost that can provide the same service?

 

I work with a lot of former IBMers.  They all loved their time there but have a universal opinion that the ship has sailed for the company. 

 

I see a lot of discussion about their financial engineering, and admittedly it's brilliant.  I'm just seeing the industry and clients moving in a different direction.

[jwfm1985]

 

But other questions remain:

 

1.  How are they able to pay such little tax?  And how come other global IT firms are complaining about an inability to repatriate cash?  Maybe IBM should open a consulting group to advise on repatriation.

 

http://jeffmatthewsisnotmakingthisup.blogspot.com/2014/01/ibm-ive-been-manipulated.html

 

There seems to be a lot of confusion around the tax rate - I'll try to add my 2 cents. Bottom line is, it is not some nefarious scheme IBM has concocted to juice their earnings. In late 2011, the company started the process of a global tax audit. Over the last 2 fiscal years ('12/'13), they company accrued tax for "uncertain tax matters". IBM is a complex business operating in many different tax jurisdictions - the willingly chose to be ultra-conservative and in any questionable situation paid a higher tax rate until further clarification. In November, the received the revenue agent report concluding the audit, basically confirming that they were over conservative (i.e. they overpaid) on their taxes over the last 2 years, and therefore were entitled to a credit. The bottom line is they didn't just magically reduce their tax rate, they overpaid on taxes over the last couple years, underwent an audit to confirm what their actual rate should of been, and now that the revenue agent has got back to them they have booked that tax return therefore reducing their overall rate. Not sure if that is clear, but I'd highly recommend listening to the conference call and not just reading headlines of journalists that don't do their research

[hyten1]

oddballstocks, good points

 

but one thing to consider when you compare to the likes of E&Y and Accenture etc., these guys are more true consultancy, they use technology from others (they have some of their own, but mostly they are  integrators)

 

IBM is an integrator and they have their own technology (websphere, watson, etc etc.)

 

Also if hardware is "truely a commodity", why does it matter if they own that or not? (note the key is if its truely commodity, at lease the current set of hardware, doesn't  mean future breakthrough are not possible) its like saying the gas you get does it matter if its from exxon or bp? now if you don't believe hardware is a true commodity, now that is whole other discussion.

 

hy

 

I've had a lot of experience as an IBM customer over the years, directly and indirectly.

 

IBM sold their Thinkpad business, and now they're looking at selling the server business.  From a financial perspective that makes sense.  I'm wondering what their business aim is?  A better way to put this is what will IBM be known for?

 

In the past they were known for having vertically integrated solutions that worked well.  They sold services around this.  I remember we had an issue with a particular IBM server, a tech came out, this guy knew the ins and outs of the servers.  He had some tricks he used to replace parts of a circuit board.  His knowledge of the hardware was deep.  They had deep knowledge of the software they built that ran on top of the hardware.  They would sell the whole package, a bank wants a new information system, they get the servers, the developers to build it and then follow-on services.

 

Now they're selling a LOT of software.  Most of it is from acquisitions, some interesting stuff for sure.  They will buy small companies and grow them which seems to work pretty well.  I feel like they're starting to hit the wall with some of this stuff.  They already have the enterprise locked up with WebSphere and the like.  There is only so much you can add onto this.  What I'm seeing in the space is that companies are moving away from the fat stuff to hosting more services in the cloud where possible. 

 

They also have a lot of legacy software, things like DB2.  I have yet to run into a client that runs DB2, but I heard they exist out there somewhere.  In terms of services if they get rid of their hardware they're at risk of becoming just another software consultancy company.  There's nothing wrong with that, except that IBM has so much overhead their rates are a lot higher.  They also won't take on smaller projects because it won't move the needed.  A few million dollar deal isn't worth it to them, they need the $10-100m deals. 

 

They used to have an incredible moat, their expertise, their hardware.  Now they've been hiving off these things piecemeal.  They're selling down their moat.  Why contract with IBM in the future rather than Ernst & Young, or Accenture or a local firm at a lower cost that can provide the same service?

 

I work with a lot of former IBMers.  They all loved their time there but have a universal opinion that the ship has sailed for the company. 

 

I see a lot of discussion about their financial engineering, and admittedly it's brilliant.  I'm just seeing the industry and clients moving in a different direction.

[jwfm1985]

 

 

They used to have an incredible moat, their expertise, their hardware.  Now they've been hiving off these things piecemeal.  They're selling down their moat.  Why contract with IBM in the future rather than Ernst & Young, or Accenture or a local firm at a lower cost that can provide the same service?

 

 

I would argue that their moat is from their expertise, and not their hardware. They are strengthening their moat by getting out of the commoditized hardware business, and focusing on where they can really add value (and hopefully in some new growth areas)

[thefatbaboon]

Its easy, software sales are growing and hardware sales are shrinking, at some point revenue growth comes back just because hardware revenues are near 0. They are doing the right things but it takes patience until the changes can be seen in the numbers.

 

Yes, the easy part to see is that they are trying to replace "low margin" business with "high margin".  Simple.

 

But other questions remain:

 

1.  How are they able to pay such little tax?  And how come other global IT firms are complaining about an inability to repatriate cash?  Maybe IBM should open a consulting group to advise on repatriation.

 

2.  How much more leverage is a good idea?  Their free cash flow available for the all-important buybacks is shrinking (way down YoY).

 

Just asking questions, I have no position.

 

Jeff Matthews has a good post up today:  http://jeffmatthewsisnotmakingthisup.blogspot.com/2014/01/ibm-ive-been-manipulated.html

 

They don't actually pay such little tax - as implied by their 15% 2013 GAAP tax rate.  Cash taxes last year were significantly higher, and they said on the conference call that cash taxes in 2014 are going to be even higher.  IBM seems to play a game between their accrual tax rate and their cash tax rate.  If they don't need the accrual tax to hit EPS targets then they accrue; if they do, like last year, then the announce "tax audit settlements" and accrue at a much lower rate.  I think there must be so much flexibility to do stuff like this in a large multinational company.  It's almost certainly legal - but it stinks.  I'm sure when (if) we see better earnings we'll get a few quarters of "tax audit settlements" skewing accrual taxes back up - probably in 2015, if they're running ahead of the $20 target, or some time after.

 

They bought back $5.8bn in stock last quarter - that's 30m shares or so.  They're not going to have any meaningful FCF in Q1 - will be interesting to see when and how much they tap the debt markets for in the coming months.

 

 

[jwfm1985]

Its easy, software sales are growing and hardware sales are shrinking, at some point revenue growth comes back just because hardware revenues are near 0. They are doing the right things but it takes patience until the changes can be seen in the numbers.

 

Yes, the easy part to see is that they are trying to replace "low margin" business with "high margin".  Simple.

 

But other questions remain:

 

1.  How are they able to pay such little tax?  And how come other global IT firms are complaining about an inability to repatriate cash?  Maybe IBM should open a consulting group to advise on repatriation.

 

2.  How much more leverage is a good idea?  Their free cash flow available for the all-important buybacks is shrinking (way down YoY).

 

Just asking questions, I have no position.

 

Jeff Matthews has a good post up today:  http://jeffmatthewsisnotmakingthisup.blogspot.com/2014/01/ibm-ive-been-manipulated.html

 

They don't actually pay such little tax - as implied by their 15% 2013 GAAP tax rate.  Cash taxes last year were significantly higher, and they said on the conference call that cash taxes in 2014 are going to be even higher.  IBM seems to play a game between their accrual tax rate and their cash tax rate.  If they don't need the accrual tax to hit EPS targets then they accrue; if they do, like last year, then the announce "tax audit settlements" and accrue at a much lower rate.  I think there must be so much flexibility to do stuff like this in a large multinational company.  It's almost certainly legal - but it stinks.  I'm sure when (if) we see better earnings we'll get a few quarters of "tax audit settlements" skewing accrual taxes back up - probably in 2015, if they're running ahead of the $20 target, or some time after.

 

They bought back $5.8bn in stock last quarter - that's 30m shares or so.  They're not going to have any meaningful FCF in Q1 - will be interesting to see when and how much they tap the debt markets for in the coming months.

 

This is really misleading. Again, the tax isn't some cushion they build up and use when needed. If you listen to previous conference calls, they have always said there was an ongoing tax audit which would reduce the tax rate for Q4. The tax rate was expected to drop - the point it dropped to somewhat surprised analysts. They are not tax experts, so what a surprise. Honestly, this talk of some big bad tax cushion scheme is right out of the pages of ZeroHedge

[thefatbaboon]

 

But other questions remain:

 

1.  How are they able to pay such little tax?  And how come other global IT firms are complaining about an inability to repatriate cash?  Maybe IBM should open a consulting group to advise on repatriation.

 

http://jeffmatthewsisnotmakingthisup.blogspot.com/2014/01/ibm-ive-been-manipulated.html

 

There seems to be a lot of confusion around the tax rate - I'll try to add my 2 cents. Bottom line is, it is not some nefarious scheme IBM has concocted to juice their earnings. In late 2011, the company started the process of a global tax audit. Over the last 2 fiscal years ('12/'13), they company accrued tax for "uncertain tax matters". IBM is a complex business operating in many different tax jurisdictions - the willingly chose to be ultra-conservative and in any questionable situation paid a higher tax rate until further clarification. In November, the received the revenue agent report concluding the audit, basically confirming that they were over conservative (i.e. they overpaid) on their taxes over the last 2 years, and therefore were entitled to a credit. The bottom line is they didn't just magically reduce their tax rate, they overpaid on taxes over the last couple years, underwent an audit to confirm what their actual rate should of been, and now that the revenue agent has got back to them they have booked that tax return therefore reducing their overall rate. Not sure if that is clear, but I'd highly recommend listening to the conference call and not just reading headlines of journalists that don't do their research

 

j,

 

Perhaps you are right.  But I've been listening to the calls - and while I grant you that they always seem to have a plausible reason - it happens often, it always seems to come as a surprise and contradict something explicitly stated in the prior call, and they are always convenient in that the alternative would have broken their EPS target.  Maybe Loughridge said tax rate was going to be high in Q4 because he was being conservative and didn't know when the agent would give a ruling.  But, he also stated he was targeting with high confidence an operating EPS of $16.20 (on the basis of that assumed 23% tax rate).  If IBM had had that tax rate them Operating EPS would not have been $16.20, it would have been less than $15.

 

IBM can't have it both ways - the finance department is either completely delusional and has spent the year targeting after tax numbers that they've been serially disappointing on in a massive way (i.e. not 1 or 2 cents), or it is managing these "unpredictable" tax events to hit it's numbers.  There is NO other alternative.  Having watched Loughridge for years, and knowing him not to be a complete incompetent, my money is on the latter.

[oddballstocks]

 

 

They used to have an incredible moat, their expertise, their hardware.  Now they've been hiving off these things piecemeal.  They're selling down their moat.  Why contract with IBM in the future rather than Ernst & Young, or Accenture or a local firm at a lower cost that can provide the same service?

 

 

I would argue that their moat is from their expertise, and not their hardware. They are strengthening their moat by getting out of the commoditized hardware business, and focusing on where they can really add value (and hopefully in some new growth areas)

 

Interesting perspective, have you ever worked with IBM on a project?  My experience has been exactly the opposite.  They added a lot of value with their hardware and system integration knowledge.  They are apt at their own software, but even then expertise ends there, sometimes a little early.  Documentation is absolutely terrible, and if you need support beyond surface level things it means calling an old IBM colleague to get the name of a true expert buried inside the organization.

 

Even simple things like getting a price quote on something requires knowing people inside the company and being able to work magic.  I know companies who have hired former IBM sales people just so they can have that knowledge of how to work the IBM system on their staff to get reasonable prices.

 

Case in point on their software.  I went to an IBM hosted training on one of their flagship products a few years back.  There was an IBM "expert" there for the product.  During the training a few users, who were participants started disagreeing with the instructor because in their experience with the product it didn't work like IBM thought it would.  One user ended up explaining a number of advanced features, workarounds etc.  At the end the instructor asked the expert if he had any comments, he said "I'm glad I flew up here, I learned a lot I didn't know about the product." 

 

Maybe this is just one tiny anecdotal story.  I've heard probably close to 100 similar stories about different products.  Like I said, this is just my experience.  They continue to earn more money and grow so that growth is coming from somewhere..

[oddballstocks]

oddballstocks, good points

 

but one thing to consider when you compare to the likes of E&Y and Accenture etc., these guys are more true consultancy, they use technology from others (they have some of their own, but mostly they are  integrators)

 

IBM is an integrator and they have their own technology (websphere, watson, etc etc.)

 

Also if hardware is "truely a commodity", why does it matter if they own that or not? (note the key is if its truely commodity, at lease the current set of hardware, doesn't  mean future breakthrough are not possible) its like saying the gas you get does it matter if its from exxon or bp? now if you don't believe hardware is a true commodity, now that is whole other discussion.

 

hy

 

I've had a lot of experience as an IBM customer over the years, directly and indirectly.

 

IBM sold their Thinkpad business, and now they're looking at selling the server business.  From a financial perspective that makes sense.  I'm wondering what their business aim is?  A better way to put this is what will IBM be known for?

 

In the past they were known for having vertically integrated solutions that worked well.  They sold services around this.  I remember we had an issue with a particular IBM server, a tech came out, this guy knew the ins and outs of the servers.  He had some tricks he used to replace parts of a circuit board.  His knowledge of the hardware was deep.  They had deep knowledge of the software they built that ran on top of the hardware.  They would sell the whole package, a bank wants a new information system, they get the servers, the developers to build it and then follow-on services.

 

Now they're selling a LOT of software.  Most of it is from acquisitions, some interesting stuff for sure.  They will buy small companies and grow them which seems to work pretty well.  I feel like they're starting to hit the wall with some of this stuff.  They already have the enterprise locked up with WebSphere and the like.  There is only so much you can add onto this.  What I'm seeing in the space is that companies are moving away from the fat stuff to hosting more services in the cloud where possible. 

 

They also have a lot of legacy software, things like DB2.  I have yet to run into a client that runs DB2, but I heard they exist out there somewhere.  In terms of services if they get rid of their hardware they're at risk of becoming just another software consultancy company.  There's nothing wrong with that, except that IBM has so much overhead their rates are a lot higher.  They also won't take on smaller projects because it won't move the needed.  A few million dollar deal isn't worth it to them, they need the $10-100m deals. 

 

They used to have an incredible moat, their expertise, their hardware.  Now they've been hiving off these things piecemeal.  They're selling down their moat.  Why contract with IBM in the future rather than Ernst & Young, or Accenture or a local firm at a lower cost that can provide the same service?

 

I work with a lot of former IBMers.  They all loved their time there but have a universal opinion that the ship has sailed for the company. 

 

I see a lot of discussion about their financial engineering, and admittedly it's brilliant.  I'm just seeing the industry and clients moving in a different direction.

 

I'm split on whether hardware is a commodity or not.  In the past IBM's software was optimized for their hardware.  Things like using different compilers and tuning for their chipsets.  I believe this is still the case with their mainframe business.

 

I know the same used to be true with Sun as well.  For a long time Oracle ran best on Solaris on Sun hardware, that was its optimal setup.  I don't think that's true anymore.

 

When I see IBM's future plans it seems they're drifting more into a straight consultancy role.  This doesn't make sense to me when their expertise wasn't in that. 

[thefatbaboon]

Its easy, software sales are growing and hardware sales are shrinking, at some point revenue growth comes back just because hardware revenues are near 0. They are doing the right things but it takes patience until the changes can be seen in the numbers.

 

Yes, the easy part to see is that they are trying to replace "low margin" business with "high margin".  Simple.

 

But other questions remain:

 

1.  How are they able to pay such little tax?  And how come other global IT firms are complaining about an inability to repatriate cash?  Maybe IBM should open a consulting group to advise on repatriation.

 

2.  How much more leverage is a good idea?  Their free cash flow available for the all-important buybacks is shrinking (way down YoY).

 

Just asking questions, I have no position.

 

Jeff Matthews has a good post up today:  http://jeffmatthewsisnotmakingthisup.blogspot.com/2014/01/ibm-ive-been-manipulated.html

 

They don't actually pay such little tax - as implied by their 15% 2013 GAAP tax rate.  Cash taxes last year were significantly higher, and they said on the conference call that cash taxes in 2014 are going to be even higher.  IBM seems to play a game between their accrual tax rate and their cash tax rate.  If they don't need the accrual tax to hit EPS targets then they accrue; if they do, like last year, then the announce "tax audit settlements" and accrue at a much lower rate.  I think there must be so much flexibility to do stuff like this in a large multinational company.  It's almost certainly legal - but it stinks.  I'm sure when (if) we see better earnings we'll get a few quarters of "tax audit settlements" skewing accrual taxes back up - probably in 2015, if they're running ahead of the $20 target, or some time after.

 

They bought back $5.8bn in stock last quarter - that's 30m shares or so.  They're not going to have any meaningful FCF in Q1 - will be interesting to see when and how much they tap the debt markets for in the coming months.

 

This is really misleading. Again, the tax isn't some cushion they build up and use when needed. If you listen to previous conference calls, they have always said there was an ongoing tax audit which would reduce the tax rate for Q4. The tax rate was expected to drop - the point it dropped to somewhat surprised analysts. They are not tax experts, so what a surprise. Honestly, this talk of some big bad tax cushion scheme is right out of the pages of ZeroHedge

 

This is a direct quote from the Q3 conf call:

 

"Jim Suva -Citigroup

Thank you very much Mark and Patricia for your details. I have a quick clarification, you’d mentioned tax rate of 23%, is that what you mean going forward for every quarter or it’s kind of for the full year which means that Q4 they have to go up to something like 30%. Now the bigger question is following up on the last question about the Federal Government. Does that also impact your signings and booking in new businesses coming in, also as I would imagine there is kind of big pause there of new business being handed out?

 

Mark Loughridge - Senior Vice President and Chief Financial Officer, Finance and Enterprise Transformation

Yes, let’s take the bookings issue first. If you look at the business unit that would be most impacted by that exposure, it would be our GBS business. But I have nothing but very positive observations of their performances both on driving performance on a global basis generating profitability from that growth and increasing their backlog. So though that would be the area most exposed you sure wouldn’t see it in the results.

 

As far as the tax rate, what I’m referencing is the average tax rate that we would assume before discrete items and that tax rate would be the tax rate for the year and for the quarter. Going forward for 2013 as well as 2014, but again that’s tax rate before discrete items.

 

So let me now just take the opportunity to wrap up or thank you for the questions and the time on the call. Obviously this was a tough quarter for us, especially in the STG and the growth market, but we’re on track to deliver at least $16.25 for the year on an all-in basis and we believe with the actions we are taking, we’ll have stronger operational performance as we go into 2014."

 

Seems pretty clear to me.

 

So, J, which is it?  Are they missing their EPS estimates by 10% OR are they managing their tax accruals?

 

[hyten1]

oddballstocks,

 

also i think if cloud is the future, hardware becomes less important (from end customer perspective), its all software (obviously you need hardware, but as an AWS user i have no clue what hardware are being use, and i don't care, obviously this is not true all the time).

 

hy

 

oddballstocks, good points

 

but one thing to consider when you compare to the likes of E&Y and Accenture etc., these guys are more true consultancy, they use technology from others (they have some of their own, but mostly they are  integrators)

 

IBM is an integrator and they have their own technology (websphere, watson, etc etc.)

 

Also if hardware is "truely a commodity", why does it matter if they own that or not? (note the key is if its truely commodity, at lease the current set of hardware, doesn't  mean future breakthrough are not possible) its like saying the gas you get does it matter if its from exxon or bp? now if you don't believe hardware is a true commodity, now that is whole other discussion.

 

hy

 

I've had a lot of experience as an IBM customer over the years, directly and indirectly.

 

IBM sold their Thinkpad business, and now they're looking at selling the server business.  From a financial perspective that makes sense.  I'm wondering what their business aim is?  A better way to put this is what will IBM be known for?

 

In the past they were known for having vertically integrated solutions that worked well.  They sold services around this.  I remember we had an issue with a particular IBM server, a tech came out, this guy knew the ins and outs of the servers.  He had some tricks he used to replace parts of a circuit board.  His knowledge of the hardware was deep.  They had deep knowledge of the software they built that ran on top of the hardware.  They would sell the whole package, a bank wants a new information system, they get the servers, the developers to build it and then follow-on services.

 

Now they're selling a LOT of software.  Most of it is from acquisitions, some interesting stuff for sure.  They will buy small companies and grow them which seems to work pretty well.  I feel like they're starting to hit the wall with some of this stuff.  They already have the enterprise locked up with WebSphere and the like.  There is only so much you can add onto this.  What I'm seeing in the space is that companies are moving away from the fat stuff to hosting more services in the cloud where possible. 

 

They also have a lot of legacy software, things like DB2.  I have yet to run into a client that runs DB2, but I heard they exist out there somewhere.  In terms of services if they get rid of their hardware they're at risk of becoming just another software consultancy company.  There's nothing wrong with that, except that IBM has so much overhead their rates are a lot higher.  They also won't take on smaller projects because it won't move the needed.  A few million dollar deal isn't worth it to them, they need the $10-100m deals. 

 

They used to have an incredible moat, their expertise, their hardware.  Now they've been hiving off these things piecemeal.  They're selling down their moat.  Why contract with IBM in the future rather than Ernst & Young, or Accenture or a local firm at a lower cost that can provide the same service?

 

I work with a lot of former IBMers.  They all loved their time there but have a universal opinion that the ship has sailed for the company. 

 

I see a lot of discussion about their financial engineering, and admittedly it's brilliant.  I'm just seeing the industry and clients moving in a different direction.

 

I'm split on whether hardware is a commodity or not.  In the past IBM's software was optimized for their hardware.  Things like using different compilers and tuning for their chipsets.  I believe this is still the case with their mainframe business.

 

I know the same used to be true with Sun as well.  For a long time Oracle ran best on Solaris on Sun hardware, that was its optimal setup.  I don't think that's true anymore.

 

When I see IBM's future plans it seems they're drifting more into a straight consultancy role.  This doesn't make sense to me when their expertise wasn't in that.

[enoch01]

 

But other questions remain:

 

1.  How are they able to pay such little tax?  And how come other global IT firms are complaining about an inability to repatriate cash?  Maybe IBM should open a consulting group to advise on repatriation.

 

http://jeffmatthewsisnotmakingthisup.blogspot.com/2014/01/ibm-ive-been-manipulated.html

 

There seems to be a lot of confusion around the tax rate - I'll try to add my 2 cents. Bottom line is, it is not some nefarious scheme IBM has concocted to juice their earnings. In late 2011, the company started the process of a global tax audit. Over the last 2 fiscal years ('12/'13), they company accrued tax for "uncertain tax matters". IBM is a complex business operating in many different tax jurisdictions - the willingly chose to be ultra-conservative and in any questionable situation paid a higher tax rate until further clarification. In November, the received the revenue agent report concluding the audit, basically confirming that they were over conservative (i.e. they overpaid) on their taxes over the last 2 years, and therefore were entitled to a credit. The bottom line is they didn't just magically reduce their tax rate, they overpaid on taxes over the last couple years, underwent an audit to confirm what their actual rate should of been, and now that the revenue agent has got back to them they have booked that tax return therefore reducing their overall rate. Not sure if that is clear, but I'd highly recommend listening to the conference call and not just reading headlines of journalists that don't do their research

 

Thanks.  It's a good thing they found out they had been ultra-conservative, otherwise I don't see how they'd be close to on-track with their EPS roadmap.