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IBM Asian Revenues Crash, Adjusted Earnings Beat On Tax Rate Fudge; Debt Rises 20% To Fund Stock Buybacks

Tyler Durden's picture




 

IBM just released results which only a mother could love.

The bottom line beat. At least on the surface that is. The company's Non-GAAP EPS were $6.13, higher than the expected $6.00. Hurray, right? Wrong.

Because first of all, the GAAP to Non-GAAP adjustments were not something most accountants would generally  give credit for, namely "$0.25 per share for the amortization of purchased intangible assets and other acquisition-related charges, and $0.15 per share for retirement-related items driven by changes to plan assets and liabilities primarily related to market performance." The $0.15 certainly should not be added back.

Of course fudging Non-GAAP numbers is nothing new: everyone does it, even if it means that real, operating earnings for IBM (and most other companies) are substantially lower, and sure enough IBM's real EPS was $5.73.

But this is just the tip, because one has to look deep into the income statement to find just how it is that IBM, whose pre-tax income actually declined by 11% could post a 14% increase in non-GAAP EPS.

The answer: taxes. And just like Bank of America, IBM decided to crater its Q4 tax rate, which was 25.5% in Q4 2012, and in Q4 2013 dropped to... 11.2%. Seriously IBM? Actually, one can see why: if IBM had used the 25.5% effective tax rate from Q4 2012, its GAAP EPS would have been $4.80, aka - an absolute disaster.

Incidentally, this epic accounting gimmick is also why one should look at IBM's revenues which were a debacle: not only did they miss expectations of a $28.3 billion in Q4, printing at $27.7 billion, but more importantly were down 5.5%. And while most Q4 revenue items were weak, the piece de resistance was Systems and Tech revenue, which cratered 25%!

Is this another Cisco in the making. Judging by where the weakness was, the answer is a resounding yes.

Behold the geographic breakdown of revenues Q/Q:

  • Americas revenue:  $12.2 billion, -3%
  • EMEA revenue: $9.2 billion, +1%, and...
  • Asia-Pacific revenues: $5.9 billion, -16%

It appears China isn't done punishing US corporations for NSA transgressions. IBM can get in line to thank Snowden.

Judging by the after hours action, it looks like it took the algos a few minutes to calculate all of this.

What may have gotten ignored in the vacuum tube calculations is how else IBM generated its "profits."

Because looking at the cash flow statement we get the full picture: in 2013 IBM spent a whopping $13.9 billion on share buybacks, of which over 40%, or $5.8 billion was spent in Q4 alone.

And since the company did not make nearly enough cash to fund all of this buyback spending and fund operations, it had to take on debt. How much?

Well, even as cash was unchanged from 2012 to 2013, debt increased from $33.3 billion to an increasingly tender $39.7 billion, a 20% increase!

Surely IBM found something to invest excess CapEx in as it was buying back billions in stock. Well, no: Capex in 2012 was $4.3 billion. Capex in 2013: $3.8 billion.

And there you have the new normal recovery in a nutshell.

So the question remains: how much longer will shareholders accept short-term gains in exchange for levered buybacks and dividends, while the company is increasingly ignoring its long-term growth, and refuses to increase spending to boost revenue, and to invest in itself.

Somehow we think we will find the answer in 2014.

 

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Tue, 01/21/2014 - 17:40 | 4353168 Cult_of_Reason
Cult_of_Reason's picture

IBM paid fewer taxes than hypocrite Buffett’s secretary

Tue, 01/21/2014 - 17:59 | 4353238 wintermute
wintermute's picture

NSA blowback hits IBM. A shot in the foot (yet again).

 

Tue, 01/21/2014 - 18:02 | 4353251 knukles
knukles's picture

They still can't figure out what's burnt to a crisp, working or not out in Utah, so only ordered 6,000 $400 toilet seats from IBM but no Watsons.
Duuu uu h

Tue, 01/21/2014 - 18:26 | 4353357 kaiserhoff
kaiserhoff's picture

It's not a stock market.  It's a market of stocks.

Sooner or later, this shit's gonna leave a mark.

Tue, 01/21/2014 - 18:55 | 4353441 Wait What
Wait What's picture

IBM's revenue has fallen for 7 straight quarters, 4th straight miss of estimates. i think that's gonna leave a mark. where's Buffett? double down, bro! double down!

Tue, 01/21/2014 - 19:15 | 4353499 Obchelli
Obchelli's picture

Amazing when you see real companies falling all around in their reported numbers... And parasites like Financials who produce nothing for humanity and are engaged in financial engineering just pushing paper reporting blow out results on nothing to show. This is simply sickening. What is even worse -  this are the same companies which where bailed out by us and despite this if traditional accounting principles could be applied to them they would be bankrupt... Also killing me to see and listen to all this interviews on CNBC, Bloomberg, Internet media telling us how global Economy is on a clear path to recovery... For how log we let them think that we are "eating" their LIE

Tue, 01/21/2014 - 18:04 | 4353254 earleflorida
earleflorida's picture

hmmm

blowback is ok,... but, a backdraft is quite volatile with the unlimited fuel that NSA has created

Tue, 01/21/2014 - 17:44 | 4353185 you can't fix stupid
you can't fix stupid's picture

guess Watson didn't see that shit coming

Tue, 01/21/2014 - 17:45 | 4353186 Rainman
Rainman's picture

Hell no .. now they got Watson crunching up the correct numbers. These guys are good,

Tue, 01/21/2014 - 19:45 | 4353615 Emergency Ward
Emergency Ward's picture

Watson: "I am Lucy Liu."

Tue, 01/21/2014 - 17:45 | 4353190 NoWayJose
NoWayJose's picture

China does not want the NSA to have an open door into IBM computers in China - because that would let the NSA learn what data and other secrets that China has already stolen from the NSA! 

Tue, 01/21/2014 - 17:47 | 4353204 FuzzyDunlop21
FuzzyDunlop21's picture

water into wine

Tue, 01/21/2014 - 17:48 | 4353207 Cognitive Dissonance
Cognitive Dissonance's picture

You know you're at the end of the business cycle when large caps are borrowing money to fund stock buybacks.

Tue, 01/21/2014 - 18:12 | 4353298 Headbanger
Headbanger's picture

Just a "business cycle"??

Shirley you jest!

I believe there's some restraint!

Tue, 01/21/2014 - 18:18 | 4353321 Frozen IcQb
Frozen IcQb's picture

Subsidized insider selling.

and my name's not Shirley

Tue, 01/21/2014 - 21:05 | 4353883 francis_the_won...
francis_the_wonder_hamster's picture

Shirley, can you imagine what the corporate bond market is going to be like when all of the paper issued the past few years has to roll?  Shorting "investment grade" will be the easiest trade in history.

Tue, 01/21/2014 - 21:54 | 4354064 Captain Kink
Captain Kink's picture

optimal debt to equity corporate finance ratio changes as cost of capital changes.  Debt is cheap..  it is financial engineering, yes, but smart.  Where are all the grown-ups on this site anymore?  I miss the old days....

 

When they roll the paper they issue now, it will cost more to finance it...that's all.  3% bonds will be 4.5% bonds.  And you will short them on issue? Prepare to get your ass handed to you.

Wed, 01/22/2014 - 03:07 | 4354682 francis_the_won...
francis_the_wonder_hamster's picture

Love your rebuttal Captain.  I'll bite, and hope you weren't calling me a non-grown-up.  

Your assertion that 3% bonds can be rolled at 4.5% is something I would question.  We all know that the Fed can't afford to let ZIRP end anytime soon, and maybe never, until....?  However, the market, particurarly the bond market, usually sets rates where they belong.  4.5% is significatnly below the long term average rate.  The average maturity for the bonds we are discussing is somewhere in the 7 year range.  I'd argue that rates would be above long-term averages at that point.

Again, easy short, if I'm right about corporate America's ability to service what is already record debt level.  I simply can't make a case where there is demand for the debt of increasingly leveraged companies in a "new normal" world at anything less than rates above 4.5%.

Wed, 01/22/2014 - 06:32 | 4354822 Captain Kink
Captain Kink's picture

First, I was not calling you a non-grown-up, I am just tired of the level of discourse on the site spiralling downward.  It may be that the world is not going to end.  And it seems that the vast majority of folks here take for granted that their will be revolution in the streets TOMORROW! and that gold is going to the moon and that we will suffer the same fate as Japan--ALL AT THE SAME TIME!  It makes me crazy.  Why does it al have to be so f-ing dour?

As to the argument about rates and corporate finance, put 6% or 8% into my earlier statement if you like.  There will be companies that get crushed out of existence, but they will be few in number and likely not investment grade.  Most will simply issue shares if they can't sell bonds. It will depend on what is most advantageous at the time, with respect to cost of equity v. Debt.   Bond deals get spread over many and diverse maturities at the large (ie. investment grade) firms, so I dont expect there will be a day of reckoning and/or comeuppance.  Highly leveraged junk rated companies will be easy prey, but one has got to do serious homework to find the right targets.

You are correct in stating that an index (or bond fund) will suffer price declines as interest rates rise generally, but if one holds investment grade bonds to maturity, one will very likely get paid.

Wed, 01/22/2014 - 03:29 | 4354701 francis_the_won...
francis_the_wonder_hamster's picture

"And you will short them on issue?"

Who said anything about shorting on issue?  Index trades should capture the trend just fine.

Tue, 01/21/2014 - 19:20 | 4353531 Landrew
Landrew's picture

Bravo! You beat me to it! Every end of cycle the same thing. Record debt, funding stock buybacks. This too will end and not well.

Tue, 01/21/2014 - 17:50 | 4353208 Dr. Engali
Dr. Engali's picture

If only we had another continent to exploit..... Er.....I mean develope.

Tue, 01/21/2014 - 18:12 | 4353302 Crisismode
Crisismode's picture

 

 

I hear that we will be able to buy a one-way ticket to Mars soon.

That will give us a whole new planet to rape and pillage.

 

Tue, 01/21/2014 - 17:52 | 4353219 Hindenburg...Oh Man
Hindenburg...Oh Man's picture

Very nice analysis. Thank you ZH. 

Tue, 01/21/2014 - 17:53 | 4353222 frankTHE COIN
frankTHE COIN's picture

Damn Tyler ! Hilsenrath reading / analyzing / reporting speed is KinderGarten to you.

Tue, 01/21/2014 - 18:03 | 4353259 ebworthen
ebworthen's picture

Reminds me of the family Golden Retriever, he could snatch a ham sandwich off the table and eat it in the blink of an eye.

Tue, 01/21/2014 - 17:56 | 4353226 earleflorida
earleflorida's picture

and this 'eye-B-em' being the cohesion for the 'MIC'?

whose gonna program the nuke-subs, and norad with blowback from stuxnet's gone viral-- perhaps we can sub it out to china

???

Tue, 01/21/2014 - 17:53 | 4353227 css1971
css1971's picture

If you were a potential competitor to the US, you would have to be off your head to purchase US IT kit now.

Tue, 01/21/2014 - 18:02 | 4353243 ebworthen
ebworthen's picture

DOH!

"...debt increased from $33.3 billion to an increasingly tender $39.7 billion, a 20% increase!"

And all this despite fucking over retiree's spouses!

Team Amurika!

Tue, 01/21/2014 - 18:01 | 4353245 Peter Pan
Peter Pan's picture

The IRS should make them and all others like them, pay taxes based on their BS earnings.

Tue, 01/21/2014 - 18:03 | 4353261 Yen Cross
Yen Cross's picture

 I forgot to mention the possibilty of  "crashing q-4 earnings" on my MOMO sell list. { not  }

Tue, 01/21/2014 - 18:03 | 4353262 yogibear
yogibear's picture

Every few months I see more vacant storefronts. What a recovery!!!

Tue, 01/21/2014 - 18:05 | 4353267 SheepDog-One
SheepDog-One's picture

DOH!

Tue, 01/21/2014 - 18:04 | 4353268 Legolas
Legolas's picture

I wish the following report would make it to the Drudgereport website.  Paul Craig Roberts, interviewed by Greg Hunter, says there isn't anymore gold on hand in the United States. Something everyone at ZH knows already, but such a report might give alot of people a major case of the trots.

 

http://usawatchdog.com/fed-they-do-not-have-any-more-gold-paul-craig-rob...

 

 

Tue, 01/21/2014 - 18:19 | 4353331 yogibear
yogibear's picture

Seemed silly why they even annouced it or did Germany annouce it?

It goes to show =you the Federal Reserve is buying the gold on the open market. They don't want to purchase too much as it would spook the markets.

Tue, 01/21/2014 - 18:30 | 4353381 CrashisOptimistic
CrashisOptimistic's picture

Look guy, this article and comment array has nothing to do with gold.

ZH provides you all the click bait gold articles you could want to comment in.  There's no need for it here.

Tue, 01/21/2014 - 21:56 | 4354072 Captain Kink
Captain Kink's picture

+100, Crash!  Here's to maintaining relevance!  (lifts glass)

Tue, 01/21/2014 - 18:12 | 4353291 buzzsaw99
buzzsaw99's picture

Capex? IBM doesn't have the Loebs for it. [/Grand Negas]

Tue, 01/21/2014 - 18:11 | 4353295 wisehiney
wisehiney's picture

Tex Instruments just gave 1100 more a nice looooooong vacation.

Wed, 01/22/2014 - 09:54 | 4354726 matrix2012
matrix2012's picture

Even moar long vacation news here - http://www.dailyjobcuts.com/

Tue, 01/21/2014 - 18:13 | 4353306 wallstreetapost...
wallstreetaposteriori's picture

The "Big Blue" name is about to changed to "black and Blue"......  I wonder if Watson was smart enough to see this coming?

Tue, 01/21/2014 - 18:31 | 4353385 Colonel Klink
Colonel Klink's picture

Or Big Skynet Blue.

Tue, 01/21/2014 - 18:17 | 4353318 linrom
linrom's picture

It's not too late to say 'fuck you Lou Gerstner.'

Tue, 01/21/2014 - 18:29 | 4353369 CrashisOptimistic
CrashisOptimistic's picture

Well, yes, it is.

This is not what one person did.  Or two.  Or three.

This is just the reality of descent, for everyone.

Tue, 01/21/2014 - 18:27 | 4353343 Colonel Klink
Colonel Klink's picture

IBM - Income's Been Manipulated

IBM - Idiots Become Managers

IBM - India Business Machines

We all know that's been happening for quite some time.  Having spent several years working for them, I realized early they'll bleed you dry then throw away the spent shell.

Tue, 01/21/2014 - 20:05 | 4353693 Rising Sun
Rising Sun's picture

IBM = I Buy Mac's

Tue, 01/21/2014 - 18:30 | 4353378 pragmatic hobo
pragmatic hobo's picture

so, ... does this mean the dow hits new all-time-high tomorrow?

Tue, 01/21/2014 - 19:09 | 4353483 MSO
MSO's picture

Next thing you know, IBM will be doing less than $90 billion annually.

Tue, 01/21/2014 - 19:20 | 4353528 adr
adr's picture

You know if I didn't get my new job I wouldn't have made any money. I think for my taxes I'll pretend i didn't get it. Now I don't owe any taxes.

Works for the mega corps why not for me. Fuck the IRS. I'm sick of funding other people's crap.

Tue, 01/21/2014 - 20:00 | 4353669 starman
starman's picture

Kramer should we buy buy or hold? You fukkin retard!

Tue, 01/21/2014 - 20:05 | 4353689 Rising Sun
Rising Sun's picture

IBM = I'll Be in a Meeting

Tue, 01/21/2014 - 20:24 | 4353755 buzzsaw99
buzzsaw99's picture

I Bowel Movement?

Tue, 01/21/2014 - 21:32 | 4353979 Colonel Klink
Colonel Klink's picture

That would be iBM, like iPOD, iPAD, and iPHONE.

Now if you had said, International Bowel Movement it would have been a correct answer.

Tue, 01/21/2014 - 22:49 | 4354228 jon dough
jon dough's picture

NOW I get the reference to "fudge" in the headline...

Tue, 01/21/2014 - 20:24 | 4353758 q99x2
q99x2's picture

If you are an American corporation Obama and the NSA are going to wipe you out and then liquidate you.

Look out big blue the Globalists havet you in their sights and have begun firing.

Wed, 01/22/2014 - 00:56 | 4354506 Spungo
Spungo's picture

Is anyone actually fooled by this bullshit? You don't even need to do calculations. Look at the balance sheet. IBM has been shrinking since 2010. 2010 had more equity than 2011. 2011 had more equity than 2012. 2013 dipped down then recovered somewhat. The ratio of debt to assets is rising, so the company is actually digging itself deeper into debt. This looks less like a blue chip stock and more like a shitty junior mining company.
My own secret valuation calculation says IBM is worth about $139/share. Current price is $188.43. This bitch needs a good 30% correction just to get down to what it's really worth.

Wed, 01/22/2014 - 02:54 | 4354661 matrix2012
matrix2012's picture

Lenovo said to be in discussions to buy IBM's low-end x86 server business.

They turned down this offer a few years ago as being "too expensive."

This company made a go of PC's that IBM sold them. Maybe they'll get another provided price is right.

Wed, 01/22/2014 - 03:03 | 4354674 DarthVaderMentor
DarthVaderMentor's picture

Best to read this posting while listening to the Doors playing "The End" or for those that believe IBM will improve...."Love Her Madly as she walks out the door".....Oh well....the scam lasted over 20 years and made many rich.....and now many poor!


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