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.
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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.