IBM Sinks After 18th Consecutive Revenue Drop; Margins Miss; EPS "Beats" On Tax Rate Fudge

After 17 consecutive quarters, or more than 4 years, of declining annual revenue growth, there were some whispers that this could be the quarter IBM finally breaks the trend. Alas, it was not meant to be, and just after the close, IBM reported Q3 revenues of $19.226BN, which will beating consensus of $19.0BN, was still 0.3% lower than a year ago, marking the 18th consecutive quarter of declining revenues.

The breakdown of the company's revenue by segment in Q3 was as follows:

  • Technology services & cloud platforms rev. $8.75b vs $8.54b y/y
  • Cognitive Solutions rev. $4.24b vs $4.05b y/y
  • Systems rev. $1.56b vs $1.97b y/y
  • Strategic Imperatives revenue $8.0b
  • Global services rev. $4.19b vs $4.21b y/y

But more troubling is that despite the relatively modest drop in revenue, GAAP profit dropped by a materially greater 3.2% to $2.854BN, as the company's adjusted gross margin of 48.0%, once again missed the consensus estimate of 50.1%.

Also adding to the bleak picture, Q3 fresh cash flow of $2.43 billion dropped by 27% Y/Y from $3.29 billion a year ago.

Still, thanks to Wall Street's generosity, EPS estimates which had consistently declined into quarter end, IBM beat consensus non-GAAP EPS of $3.23, reporting $3.29 in bottom line.

How did it do it? The same way it has always beaten on the bottom line for the past several years: by constantly dragging its effective tax rate ever lower rate as has been the case for the past decade, shown in the chart below. In Q3 IBM used a 12.5% effective tax rate, tied with the lowest it has used in the 21st century. Had IBM used the already depressed tax rate from Q3 2015 of 18.2%, it would have reported non-GAAP EPS of $3.09, missing consensus by 14 cents.

And while the stock is getting punished for its lack of growth, its disappointing margin, and its tax accounting gimmicks, there was one silver lining: in Q3 IBM's net debt, which last quarter posted its biggest one quarter jump since 2014, declined from $34.5 billion to $33.4 billion.


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