IBM - International Business Machines

[oddballstocks]

oddballstocks,

 

also i think if cloud is the future, hardware becomes less important, 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.

 

hy,

 

Very true, the cloud is the wave of the future.  I'm on DigitalOcean, I have no idea what actual hardware they're using either. 

 

I'd love to see the stats on this: http://aws.amazon.com/ibm/  Of Amazon's customers how many are using this product?

 

The world is moving towards lightweight apps and integration tools.  IBM has CastIron which plugs this gap.  I've seen CastIron integrate with SalesForce and Websphere, it's a cool little tool, although the UI is stuck in 1998.  For many customers SalesForce is their new database that they want to query against and get information out of.

 

Nate

[oddballstocks]

 

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.

 

It's always nice to have a few extra reserves for those rainy-day quarters...  Wonder what else they'll find when they start to dig in the couch cushions? 

[jwfm1985]

 

It's always nice to have a few extra reserves for those rainy-day quarters...  Wonder what else they'll find when they start to dig in the couch cushions?

 

As far as I understand, they can't CHOOSE when to apply this tax audit accrual - they received the report from the revenue agency in November, it had to be applied in Q4.

[jwfm1985]

 

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

 

I'm not sure I fully understand the question, but will try. I think the answer is if you stripped out that tax accrual they would of missed estimates... BUT they would also have had a higher EPS on the previous 3 quarters where they were paying the higher, more conservative tax rate. I don't know where it all nets out to be honest. But if you look back on the conference calls in the past, this was expected, planned for and fairly transparent. They received the results of the revenue agency report in November (as expected) - the accrual was applied in Q4. Not like they had this card in their back pocket and they were waiting to play it when sh*t hit the fan.

 

 

[enoch01]

 

It's always nice to have a few extra reserves for those rainy-day quarters...  Wonder what else they'll find when they start to dig in the couch cushions?

 

As far as I understand, they can't CHOOSE when to apply this tax audit accrual - they received the report from the revenue agency in November, it had to be applied in Q4.

 

Here's where it smells fishy to me.  I'll assume what you say is true.  But then why did they continue with their EPS guidance?  If they hadn't found out they had been ultra-conservative over the past couple of years, their results would've been materially worse.

[LowIQinvestor]

My contrary indicator light just went on:

*CNBC pundits across the board hate IBM today*

[jwfm1985]

 

It's always nice to have a few extra reserves for those rainy-day quarters...  Wonder what else they'll find when they start to dig in the couch cushions?

 

As far as I understand, they can't CHOOSE when to apply this tax audit accrual - they received the report from the revenue agency in November, it had to be applied in Q4.

 

Here's where it smells fishy to me.  I'll assume what you say is true.  But then why did they continue with their EPS guidance?  If they hadn't found out they had been ultra-conservative over the past couple of years, their results would've been materially worse.

 

First off, we're talking 10%, not 50%, so I think "materially" worse is a bit extreme - but that I guess is a matter of opinion. Think of it this way - IBM encounters tax issues all over the globe. When they encounter these tax issues, they have a policy of saying "let's plan for the absolute worst case scenario, and book the higher tax rate" until we get to the bottom of this (usually through review with revenue agencies). They may think that upon legal review they have a 75% chance of being right based on their experience, but to be prudent, they plan for the worse. They also let the market know that this is their policy, and when to expect resolution (and the benefit assuming they are right). They can't however predict the exact resolution to the penny, because even though they can be incredibly confident in their prediction, the jurisdiction's revenue agency will still have the final say. I think given the sophistication of this management team, they are relatively comfortable know that they are likely going to be right on the margin in their tax assumptions, hence why they can confidentially continue with EPS guidance.

[thefatbaboon]

 

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

 

I'm not sure I fully understand the question, but will try. I think the answer is if you stripped out that tax accrual they would of missed estimates... BUT they would also have had a higher EPS on the previous 3 quarters where they were paying the higher, more conservative tax rate. I don't know where it all nets out to be honest. But if you look back on the conference calls in the past, this was expected, planned for and fairly transparent. They received the results of the revenue agency report in November (as expected) - the accrual was applied in Q4. Not like they had this card in their back pocket and they were waiting to play it when sh*t hit the fan.

 

I think you understand the question.  We can't let IBM have it both ways.  It is either one or the other.  If you are right and this is simply innocent, unexpected audits then they have missed their estimates by nearly 10% in 3 out of 4 quarters this year, and the year overall.  And, not by a couple of cents, they have missed them by a total of $1.5bn.  This wasn't something that just happened in Q4 - if you remember, their Q1 last year had a 15.9% tax rate, Q3 tax rate was 16%.  And in each quarter they were making targets for the next quarter/year using 23%.  What you say about prior "over-taxed" quarters in prior years may well have some truth to it…but it is completely irrelevant to the CFO's attempt to predict "the next quarters earnings" in January 2013, April 2013, October 2013.  What does under earning in 2012 have to do with the targets IBM laid out in all the quarterly calls last year?  Unless of course, he is thinking, "Ah, we over-taxed in 2012, we can get an audit response if needed, I'll put out this aggressive target, and if operations aren't up to it we'll do something with our tax accruals."  THAT is called managing tax accruals! 

 

That's what Enoch and I are saying:  it's all too perfect for their "Matterhorn", Loughridge is too smart…it is much more plausible that IBM is managing it's tax accruals than that it's finance department is making serial, wild EPS targets and getting them all seriously wrong.

[thefatbaboon]

oddballstocks,

 

also i think if cloud is the future, hardware becomes less important, 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.

 

hy,

 

Very true, the cloud is the wave of the future.  I'm on DigitalOcean, I have no idea what actual hardware they're using either. 

 

I'd love to see the stats on this: http://aws.amazon.com/ibm/  Of Amazon's customers how many are using this product?

 

The world is moving towards lightweight apps and integration tools.  IBM has CastIron which plugs this gap.  I've seen CastIron integrate with SalesForce and Websphere, it's a cool little tool, although the UI is stuck in 1998.  For many customers SalesForce is their new database that they want to query against and get information out of.

 

Nate

 

It was quite interesting in the call that the new CFO referred to all the hardware lines except for mainframe as having "business model issues".  It could just be a turn of phrase…but I think IBM is thinking of 2 core businesses:

 

1. a.) Mainframe, and all the associated services and software.  Mainframe is installed everywhere in big retail, finance, airlines, railroads etc.  There is a tremendous upgrade, services and software business around this, it is extremely sticky and it's been around for 40 years.

    b.) Cloud, i.e. cheap mainframe for the masses.  They're still in the process of building this out.  It remains to be seen how competitive they are with AWS. But, and I think this is the critical point for IBM: They desperately want to be able to keep their mainframe relationships intact and they want to be able to accommodate big company CTO/CIO's who want to put HRM, social, marketing etc  onto cloud (i.e. save money).  I don't think IBM is developing cloud to go after small business, they are just trying to protect the "wholeness" of existing relationships.

2.  Non-mainframe consulting, services and software.  This seems to be a typical marketing led business with massive distribtuion.  Main focus:  Buy interesting software,  push through the massive salesforce, use fancy words etc get governments and companies to cough up big bucks to instrument and analyze.  Secondary focus:  Ask for the IT budgets and guarantee some savings and take over functions.

 

x86 is obviously on the way out, and I'm not certain that they are not starting to think that way of Power too.

[fareastwarriors]

IBM must keep head above the clouds to claim glory

 

 

 

http://www.ft.com/intl/cms/s/0/7f45ff04-82f7-11e3-8119-00144feab7de.html#axzz2r3OVB2Vc

 

It falls to every new IBM chief executive to reinvent one of America’s most venerable corporate icons.

 

After Lou Gerstner countered a decline in hardware sales with a faster move into software and services in the 1990s, Sam Palmisano spent the next decade contending with the threat of Indian IT companies and open-source software.

 

Now Ginni Rometty faces her own moment of reinvention. The source of her discomfort: More computing workloads are moving to the cloud – which means that they are being farmed out to utility-type companies that do not want high-priced gear and services from the likes of IBM.

 

Even when choosing to keep their computing in-house rather than shifting it to companies such as Amazon, IBM’s big customers are copying the methods of the new cloud players. Essentially, that means buying lower-cost, standardised hardware, as well as software that automates processes that once required expensive humans.

 

One example of this will be on display next week in California at the annual gathering of the Open Compute Project. The brainchild of Facebook, this was set up to promote a basic standard model for server hardware.

 

Servers suffer the feature creep seen in many technology markets, as suppliers try to differentiate their products. Even the plastic bezels that they use to brand their machines are an unnecessary luxury, impeding airflow and increasing power costs for cooling. In the world as seen by Facebook, all such niceties will be stripped out.

 

The effect of this sort of thing goes much further than hardware revenues. If IBM’s customers move some of their computing to the cloud, they will no longer be paying for IBM services either. And the huge IT outsourcing market on which much of IBM’s revenues depend is also facing a sea change. If customers have more choices for how to manage their IT, they will no longer be as locked into the monolithic service contracts that have involved handing their entire IT operations over to companies such as IBM.

 

At least one corner of IBM’s hardware business still looks secure. Thanks to the massive sunk costs some customers have made in their existing systems, its mainframes – once written off as a casualty of the client-server revolution – are still going strong. But the future being forged by the likes of Amazon’s web services looks very different from the past.

 

This leaves two choices for the traditional IT hardware makers.

 

One is to become consolidators in a high-volume game. Some 70 per cent of the $53bn server business comprises so-called “volume”, or industry-standard, machines that command low profit margins, according to IDC.

 

This is not for IBM. Having sold out of the PC business nine years ago, it is in discussions about ditching industry-standard servers as well, according to people familiar with its plans.

 

Dell and Hewlett-Packard, with high market shares in industry-standard servers and PCs, face a tougher choice. Among the challenges these companies face is a new band of ultra-low cost white-label producers known as ODMs, or Original Design Manufacturers.

 

The other choice is to shift the discussion with customers away from the price of hardware and on to high-value applications and services that make a real business difference. Specialised hardware that serves a particular purpose sometimes still has an edge over generalised technology.

 

In IBM’s case, for instance, that looks likely to lead to a stripping back of its Unix business – the more expensive end of its server line that it does not plan to sell – to focus on the massive data handling needs of the analytics market.

 

This adds to the pressure on Ms Rometty. In her first two years on the job, she displayed the touch of a marketer rather than a technologist, as she sought to recast IBM’s portfolio of businesses in ways that appeal to a broader market.

 

That may be starting to change. Already this year, that has meant earmarking $1.2bn to build more data centres to compete with Amazon in the public cloud, as well as $1bn to build a business in what has become known as cognitive computing, or machines that answer questions posed of large bodies of data.

 

It is ironic that IBM has been a poster child of efficient cash management in the tech sector, returning a large slice of its free cash to shareholders in recent years while still maintaining an annual R&D budget of more than $6bn. To judge by the grumbling on Wall Street, it may be time for Ms Rometty to place some bigger bets.

[Guest valueInv]

IBM must keep head above the clouds to claim glory

 

 

 

http://www.ft.com/intl/cms/s/0/7f45ff04-82f7-11e3-8119-00144feab7de.html#axzz2r3OVB2Vc

 

It falls to every new IBM chief executive to reinvent one of America’s most venerable corporate icons.

 

After Lou Gerstner countered a decline in hardware sales with a faster move into software and services in the 1990s, Sam Palmisano spent the next decade contending with the threat of Indian IT companies and open-source software.

 

Now Ginni Rometty faces her own moment of reinvention. The source of her discomfort: More computing workloads are moving to the cloud – which means that they are being farmed out to utility-type companies that do not want high-priced gear and services from the likes of IBM.

 

Even when choosing to keep their computing in-house rather than shifting it to companies such as Amazon, IBM’s big customers are copying the methods of the new cloud players. Essentially, that means buying lower-cost, standardised hardware, as well as software that automates processes that once required expensive humans.

 

One example of this will be on display next week in California at the annual gathering of the Open Compute Project. The brainchild of Facebook, this was set up to promote a basic standard model for server hardware.

 

Servers suffer the feature creep seen in many technology markets, as suppliers try to differentiate their products. Even the plastic bezels that they use to brand their machines are an unnecessary luxury, impeding airflow and increasing power costs for cooling. In the world as seen by Facebook, all such niceties will be stripped out.

 

The effect of this sort of thing goes much further than hardware revenues. If IBM’s customers move some of their computing to the cloud, they will no longer be paying for IBM services either. And the huge IT outsourcing market on which much of IBM’s revenues depend is also facing a sea change. If customers have more choices for how to manage their IT, they will no longer be as locked into the monolithic service contracts that have involved handing their entire IT operations over to companies such as IBM.

 

At least one corner of IBM’s hardware business still looks secure. Thanks to the massive sunk costs some customers have made in their existing systems, its mainframes – once written off as a casualty of the client-server revolution – are still going strong. But the future being forged by the likes of Amazon’s web services looks very different from the past.

 

This leaves two choices for the traditional IT hardware makers.

 

One is to become consolidators in a high-volume game. Some 70 per cent of the $53bn server business comprises so-called “volume”, or industry-standard, machines that command low profit margins, according to IDC.

 

This is not for IBM. Having sold out of the PC business nine years ago, it is in discussions about ditching industry-standard servers as well, according to people familiar with its plans.

 

Dell and Hewlett-Packard, with high market shares in industry-standard servers and PCs, face a tougher choice. Among the challenges these companies face is a new band of ultra-low cost white-label producers known as ODMs, or Original Design Manufacturers.

 

The other choice is to shift the discussion with customers away from the price of hardware and on to high-value applications and services that make a real business difference. Specialised hardware that serves a particular purpose sometimes still has an edge over generalised technology.

 

In IBM’s case, for instance, that looks likely to lead to a stripping back of its Unix business – the more expensive end of its server line that it does not plan to sell – to focus on the massive data handling needs of the analytics market.

 

This adds to the pressure on Ms Rometty. In her first two years on the job, she displayed the touch of a marketer rather than a technologist, as she sought to recast IBM’s portfolio of businesses in ways that appeal to a broader market.

 

That may be starting to change. Already this year, that has meant earmarking $1.2bn to build more data centres to compete with Amazon in the public cloud, as well as $1bn to build a business in what has become known as cognitive computing, or machines that answer questions posed of large bodies of data.

 

It is ironic that IBM has been a poster child of efficient cash management in the tech sector, returning a large slice of its free cash to shareholders in recent years while still maintaining an annual R&D budget of more than $6bn. To judge by the grumbling on Wall Street, it may be time for Ms Rometty to place some bigger bets.

 

Hmmmm......why does this sound familiar?

 

Rewind to 15 months ago:

 

See this interesting article about what google/amazon and facebook are doing in their

data center

 

http://www.wired.com/wiredenterprise/2012/03/google-microsoft-network-gear/all/1

 

This I think is a big threat to companies like Dell. The big cloud companies get cheap, custom designed gear for themselves and don't buy from Dell. They have volumes high enough to do this and don't buy from the likes of Dell. Enterprises are shifting their data and computing to the cloud which means they don't buy as much gear as they used to. The end result - server and networking vendors get squeezed. Overall IT spending may increase, but the dollars may not go to current enterprise equipment vendors.

 

This could mean that Dell is skating to where the puck has been.

[nikhil25]

Lenovo Agrees to Buy IBM Server Business for $2.3 Billion

http://dealbook.nytimes.com/2014/01/23/lenovo-buys-ibm-server-business-for-2-3-billion/?_php=true&_type=blogs&_r=0

[fareastwarriors]

 

 

 

 

IBM: half done

 

 

 

http://www.ft.com/intl/cms/s/3/1f482f78-842d-11e3-9903-00144feab7de.html?siteedition=intl#axzz2r3OVB2Vc

 

 

There must have been a great outcry when IBM, burning cash during the Great Depression, sold its meat grinder business. Pundits (working without Twitter, poor things) surely blathered on insufferably about how the company might never again enjoy the profitability of its hamburger-making heyday. That spin-off makes sense in retrospect.

 

 

A few of IBM’s other spin-offs over the years: typewriters, copiers, printers, semiconductors, satellite communications, networking services, hard disc drives, PCs. Most of those moves look OK too. When IBM sees profit draining away, it sells, and its timing is usually good.

 

So selling its X86 server computer business to Lenovo is just IBM being IBM. The $2.3bn in cash and stock IBM gets in return will not make a big difference for a company with fourth-quarter free cash flow of four times that amount. Margins will get a boost. The X86 server business is the second-largest business (after high-performance computing) in IBM’s hardware division, which contributed a 10th of the company’s gross profit margin last year. But the hardware gross margin, at 39 per cent, is 5 percentage points lower than it was three years ago. The group’s margin is 49 per cent, meanwhile.

 

Profits, however, are earned in dollars, not percentages. IBM’s gross profits last year, at $48.5bn, were $1.8bn lower than in 2012. The group has done what it can to boost the bottom line, and investors’ spirits, with share buybacks and dividends ($34bn in the past two years). But the absence of growth from operations is starting to grate.

 

IBM’s previous divestitures look so smart now because they were followed by smart bets on the next big thing. It remains to be seen whether the company can repeat that crucial part of the trick. IBM sells well, but what it invests in is much more important.

 

[stahleyp]

http://www.valuewalk.com/2014/01/whitney-tilson-nq-mobile-vips-ibm-short/

 

Tilson is short IBM.

 

Buffett is long.

 

I wonder who will be right. ;)

[indythinker85]

http://www.valuewalk.com/2014/01/whitney-tilson-nq-mobile-vips-ibm-short/

 

Tilson is short IBM.

 

Buffett is long.

 

I wonder who will be right. ;)

 

LOL no position and I think Tilson is a nice guy but it seems he has a short in every popular short position these days (how can you even keep track of all these shorts in a one man shop)?

 

Herbalife Ltd. (NYSE:HLF), NQ Mobile Inc (ADR) (NYSE:NQ) , screw-their-own-customers – K12 Inc. (NYSE:LRN), World Acceptance Corp. (NASDAQ:WRLD), over-promoted/over-hyped – 3D printing stocks, Unilife Corp (NASDAQ:UNIS), Textura Corp (NYSE:TXTR), Opko Health Inc. (NYSE:OPK), InterOil Corporation (USA) (NYSE:IOC), Tesla Motors Inc (NASDAQ:TSLA)companies (I’m short all but 1 of these); International Business Machines Corp. (NYSE:IBM), 3D Systems Corporation (NYSE:DDD), NQ and promotions like Vipshop Holdings Ltd – ADR (NYSE:VIPS)  (I’m short both), Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V)’s handset business is in freefall (sales down 29% YOY). That’s why I was short it!

 

 

[Palantir]

http://www.valuewalk.com/2014/01/whitney-tilson-nq-mobile-vips-ibm-short/

 

Tilson is short IBM.

 

Buffett is long.

 

I wonder who will be right. ;)

 

I think Tilson might be winning right now. IMO all the large enterprise providers have major uncertainties in front of them due to the ongoing shift to the cloud, so they may not trade at high multiples, and IBM has been an exception to that as investors have been seduced by their heavy buybacks and now that WEB is in IBM, it's attracting a different sort of investor from whom they normally attract. I believe the veil is coming off and IBM is going to get the same skepticism that ORCL gets going forward.

[jwfm1985]

 

 

I think Tilson might be winning right now. IMO all the large enterprise providers have major uncertainties in front of them due to the ongoing shift to the cloud, so they may not trade at high multiples, and IBM has been an exception to that as investors have been seduced by their heavy buybacks and now that WEB is in IBM, it's attracting a different sort of investor from whom they normally attract. I believe the veil is coming off and IBM is going to get the same skepticism that ORCL gets going forward.

 

What makes you think investors are treating IBM with less skepticism than ORCL? It seems like, especially over the last 2 quarters, the general investment public (other than WEB) has been incredibly skeptical of IBM. Seems like they are trading at fairly similar multiples across most metrics (with ORCL withj a slightly higher P/E). Granted that was just from a quick morningstar pull, so let me know if I am mistaken...

[Palantir]

^Yes, I should have made that clear, that is what I'm saying, over the recent period and going forward.

[LowIQinvestor]

http://www.bloomberg.com/news/2014-01-31/ibm-s-complaint-to-twitter-leads-to-patent-purchase.html?cmpid=yhoo

 

IBM's patent portfolio.

 

Still buying IBM.

[no_free_lunch]

This should be considered good news:

 

IBM Chief Executive Ginni Rometty and her top executive team will forgo annual bonuses for 2013 due to poor results, the company said Friday.

 

Ms. Rometty and the executives had proposed the move last week after the company posted a 5.5% decline in fourth-quarter revenue amid continued hardware struggles. The computer giant said in a filing Friday that the compensation committee approved the recommendation.

 

The CEO’s base salary for 2014 will remain at $1.5 million, the company said.

 

IBM shares were down 35 cents to $177.01 in late-afternoon trading. The stock is down 13% over the past 12 months.

 

Management does seem motivated and willing to take on financial maneuvers to boost earnings but I am starting to wonder about this investment.  I think it is 7 or 8% of my portfolio but I think I will sell on the next upsurge.  They have a good brand and in some respects good management but as an IT person I just fundamentally don't like the company.  I think I should have weighed that higher before I purchased it but I think I was clouded by the Buffet purchase and the "numbers".  Ultimately though, I think a business with quality products is the way to go and I don't know if that is IBM.

 

The only part of IBM I like is Watson but it is hard to see that having a meaningful impact on revenue anytime soon.

[obtuse_investor]

but as an IT person I just fundamentally don't like the company

 

Most hardcore IT people don't like IBM. I am one of them too. However what we regard as quality isn't financially successful.

 

Case in point: Microsoft. Very horrible products but imminently successful.

 

I would recommend that you don't let your technical background cloud your financial  judgment.

[no_free_lunch]

Microsoft had a monopoly so maybe not the best comparison.

 

I think the statement of letting my knowledge of a company "cloud" my judgement is just absurd!  Think about what you are saying.  I am a big believer in bottom-up research, where possible and that is what I am talking about when I discuss the quality of their offerings.  To just throw that away as insignificant just makes no sense.  That is how you end up holding a stock like blackberry.

 

Now it's not the end of the world.  They have brand and scale and management will continue to cut where necessary.  They should do okay.  I just don't really believe in the long-term story here.  It really got called into question during this most recent drop.  I have a lot of stocks that are down but all of the others just seem like better deals.  IBM is the one stock that I am not comfortable holding in a downturn and so it has to go.

[Palantir]

Why do you feel IBM has good management? It seems to me that just because they are buying back tons of stock, investors are quick to give them a pass and mark them as "shareholder friendly", but at the same time it seems that they're depending upon buybacks to artificially raise earnings, and meet their EPS goals, which is not surprising because executive compensation is based on meeting EPS numbers. Watson strikes me as "a solution looking for a problem" as somebody put it, here or on the WSJ article.

 

Oddball pointed out that IBM used to have a great edge when they were more of a vertically aligned company, but now going forward, what's their edge over another firm such as Accenture? Perhaps one way is that they are now vertically aligned in the software sense - they originate their own technology as well as integrate it as opposed to a pure integrator like ACN. So investing in IBM seems to be a bet on that business model. That being said, as we've seen in the past, the platforms (Windows, Android, etc.) commoditize their complements, so going forward into the cloud era, it would seem that the best model would be an independent platform (Azure, AWS etc.) and pure integrators selling these solutions. Hope I'm making sense...

[no_free_lunch]

I feel they have good management in the sense that management is generally avoiding unforced errors and focusing on profitability.  Basically they are good management because they are not bad management, for instance they are not making dumb empire building acquisitions (generally).  I don't think they are great management, e.g. they are not building a visionary company (e.g. goog, aapl, amzn, tsla).

 

Their edge is still in their name and reputation.  I don't personally believe it but some do and it's enough.  That alone should be worth a few points of margin.  As they shift to doing consulting on other firms products this becomes less relevant but it's still worth something.  I just think of it as the margin shrinking back as they give up consulting on their own products.  Also worth noting that this effect of selling "best in class" consulting probably only works with larger companies.  It caters to that confluence of large budgets, bureaucracy and politics.  E.g. if you work for an IT department of a large company, do you take the cheapest bid or do you take the bid that gives you the biggest out if the project fails?  IBM is the biggest out for a manager as you can fall back on the excuse that they are "best in class".

[VAL9000]

Oddball pointed out that IBM used to have a great edge when they were more of a vertically aligned company, but now going forward, what's their edge over another firm such as Accenture? Perhaps one way is that they are now vertically aligned in the software sense - they originate their own technology as well as integrate it as opposed to a pure integrator like ACN. So investing in IBM seems to be a bet on that business model. That being said, as we've seen in the past, the platforms (Windows, Android, etc.) commoditize their complements, so going forward into the cloud era, it would seem that the best model would be an independent platform (Azure, AWS etc.) and pure integrators selling these solutions. Hope I'm making sense...

 

The first half makes sense.  IBM's value comes from hardware IP, software IP, and services excellence.  ACN's only comes from services excellence.  Software is a highly scalable business model, one that continues to be very profitable.  IBM owns a swath of IP in traditional software.  They also have very strong and significantly entrenched customer relationships.  With services if you screw up a project you can easily be ousted.  Deloitte will come in for Accenture, or Global Services for Deloitte, etc.  With software and hardware it's an ongoing relationship because of software support and maintenance fees / services.  There are also benefits from piling all of this stuff together.  The software sales cycle brings the services guys to the table, giving an advantage to IBM Global Services over Accenture for example.  No software is sold without services.  The mention for scale is that often Accenture will work on projects and identify opportunities for IBM's software to be deployed.  The massive partner/distributor/reseller network that IBM has built drives additional value due to the scalability of the software model.

 

IBM is currently working on rolling their traditional software applications over to the cloud.  They are slow to do this, but when they do you can expect IBM run data centers on IBM software, often implemented by IBM services teams.  Although less profitable when viewed from a margin perspective, the cost of switching is even higher under this model and often the revenue figure increases to account for the extra services offered on cloud.

 

The second half doesn't make sense to me.  It's the layer below the platform that is commoditized.  The layer above (business software, for example), has historically become more fragmented, niche, and profitable.  Hence no issue with IBM server business being sold, because the data center profits lie above the platform (mostly windows and unix) not below.