IBM "Beats" Thanks To Record Low Tax Rate

Last quarter, IBM - once again - almost fooled the market  when it "beat" but only thanks to using the lowest (until then) effective non-GAAP tax rate in its history (excluding one charge-filled quarter in which the rate N/M). Fast forward to the last quarter of 2017 when IBM did it, or at least tried it, yet again: in the three months ended Dec. 31, IBM reported Non-GAAP EPS of $5.18, barely above the expected $5.17, a clear and brazen exercise in goalseeking.

How did IBM "beat" again? By applying the same tired shtick it has used every quarter for years now: an ever lower  effective (non-GAAP) tax rate, which in Q4 dropped to an all time low of 6.1%, down from the already laughable 11% in Sept 30, 2017. This is after the company announced it would incur a one-time charge of $5.5 billion due to tax reform (including that, IBM's effective tax rate was 123.6%). Of course, had IBM used even last quarter's 11% tax rate, it would have missed.

 

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At this rate IBM will soon need a negative non-GAAP tax rate to make its negative non-GAAP earnings turn positive, or some other double negative. That, or IBM is hoping that Trump tax reform passe another 4-6 times.

 

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Amusingly, readers will recall that last quarter IBM boldly said that it "continues to expect a full-year effective operating (non-GAAP) tax rate of 15 percent, plus or minus 3 points, excluding discrete items."

Well, as we jokingly predicted last quarter, it was minus: IBM's full year non-GAAP effective tax rate was 12%.

Yet while IBM is an undisputed wizard when it comes to fudging its bottom line, there was finally some good news on the top line, where after 22 consecutive quarters, IBM finally posted an increase in Y/Y revenue, the first time it did so in 22 consecutive quarters.

 

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And while IBM beat on the top line, it still missed its Q4 adjusted gross margin of 49.5%, which came in well below the estimate of 50.8%

Away from the top and bottom line, IBM reported that in Q4 it generated free cash flow $6.8 billion. And, as has been the case every quarter, IBM returned $1.4 billion in dividends and $0.7 billion of gross share repurchases to shareholders. At the end of December 2017, IBM had $3.8 billion remaining in the current share repurchase authorization having expanded it in the last quarter. We expect the company will soon authorize another $5-10 billion or so in new buybacks.

As usual, Ginni Rometty had some pep talk for shareholders...

"Our strategic imperatives revenue again grew at a double-digit rate and now represents 46 percent of our total revenue, and we are pleased with our overall revenue growth in the quarter," said Ginni Rometty, IBM chairman, president and chief executive officer. "During 2017, we strengthened our position as the leading enterprise cloud provider and established IBM as the blockchain leader for business. Looking ahead, we are uniquely positioned to help clients use data and AI to build smarter businesses."

... although judging by the stock price after hours, the shareholders were not impressed.

Finally, IBM ended the fourth quarter of 2017 with $12.6 billion of cash on hand. Total debt rose by $1.2BN to $46.8 billion, up from $45.6BN at the end of Q3 and up from $42.2BN one year ago.

As noted above, neither the stock, nor shareholders are happy with the company's results, as it now appears that everyone can see past IBM's feeble attempts at tax accounting 101 gimmickry.

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Comments

Crazy Or Not Thu, 01/18/2018 - 16:49 Permalink

I've seen IBM try to sell to credible multinationals IT systems that it was pushing (unchanged) from ten years ago. One has the sense that they're desperatly trying to shift inventory with a garage sale of old crud to databases of failed leads. 100% laughable - they're gone - and no-one will miss their passing.

Tim Knight fro… Thu, 01/18/2018 - 17:01 Permalink

I built and sold a business (Prophet) back in 2005. After we were acquired, they brought in IBM (of all people) as consultants to integrate us into the company. I think they spent like $2 million, and we got this big-ass binder at the end of the project. I, umm, think we could have handled things fine without them. I had to explain to one of their project leads that on most web sites, when you click the logo, it goes to the home page. This was a revelation to them.

itstippy Thu, 01/18/2018 - 17:06 Permalink

"During 2017, we strengthened our position as the leading enterprise cloud provider and established IBM as the blockchain leader for business."

Is IBM really the leading enterprise Cloud and business Blockchain provider?  Anyone know?

deev Thu, 01/18/2018 - 18:00 Permalink

Warren Buffet should use this opportunity to sell all his remaining IBM shares before the company goes bankrupt and he loses the lot.

nostops4me Thu, 01/18/2018 - 19:55 Permalink

Big Blue has been running on fumes for quite some time.  When I joined them 10 years ago, I was told during orientation in Armonk that 50% of IBMers had less than five years experience with the company.  That was quite a surprise for me.  Over the next four years, I observed an ongoing erosion in the brand, though it was nice while it lasted.  I also observed the trend to replace high-cost American labor with foreigners who rarely spoke decent English in support and outsourcing roles, and while short-term numbers were hit, the long-term after-effects are seen today.  I suspect they still suffer from an over-abundance of dead-wood mid-level management, so their goose be cooked.

Had to jump off that wallowing beast before the water was washing away the deck chairs.

g1n3k Fri, 01/19/2018 - 05:49 Permalink

A bunch of incompetent losers (has IBM sacked you?) are commenting again. Compared to IBM, no other IT company does true scientific level research in such big scope - there is still huge research business unit in IBM (including some nobel laureates). Look at Quantum computers for example, totally new computing paradigm. Who has the leading edge?