Annex Bulletin 2012-08                              October 16, 2012

A partially OPEN edition

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Updated 10/18/12, 10:00 AM HST, adds Market Update 2: Google joins IBM as another "IT Lemming" leaping off market cliff

Analysis of IBM's Third Quarter Business Results

Same Old Story: New Numbers Underscore Lack of IBM Growth

IBM revenue decline accelerates contradicting promised growth in second half of 2012

HAIKU, Maui, Oct 16 - It's the same old story with just the new numbers underscoring the lack of IBM growth.  So we won't waste your time repeating what we have already said before (see Big Blue Feet of Clay, Apr 2012 and Lack of Growth: IBM's Achilles Heel, July 2012).  There's just one new observation...

Wonder what Wall Street was smoking when it pushed up the IBM shares from $185 to $211 in the last three months? Did corporate investors run out of ideas about where to park their vast cash reserves? So they needed a large vessel in which to store them?

I can't think of any other reason why they would ignore the obvious warning signs and keep pumping money into a declining business. You see, only Google shares among the top global IT leaders outperformed Big Blue's in that time frame. Which can be perhaps explained by the fact that Google stock had been depressed before then.  Not so in IBM’s case. IBM stock seems to be going up and up even faster than its revenue is declining.  Which is an anachronism.

When Big Blue first stubbed its toe with flat first quarter revenues, Mark Loughridge, the IBM CFO, promised a return to growth for IBM hardware businesses in the second half (see see Big Blue Feet of Clay, Apr 2012). That would be now.

Well, it isn't happening. In fact, like a bad cold, revenue declines are accelerating and spreading beyond just the initial segment - hardware.  Check out the chart (right).

As for the hardware -  Systems Technology Division in IBM nomenclature - far from rising as the IBM CFO predicted, it is now down in double digits (-11% - left chart). 

So once again, Loughridge resorted to an optimistic forecast in today's teleconference with analysts lieu of real results. He said they can expect about a 5% hardware growth in the fourth quarter. The sale of the Retail Store Solutions (RSS) will eat up about 4% of that.  In other words, the fourth quarter will bring little or no hardware growth again at best, despite the launch of a new mainframe product last month.  Which means that the chances of Loughridge's forecast coming true for hardware growth to occur in the second half are between slim and none.

Hardware not only declining segment, services, software "growth markets" now drop, too

IBM's largest business segment - services - which accounts for more than half the company's revenues, has now also joined the hardware shrinkage.  Services revenues are down 5% in the latest quarter.  And if you take a look at that chart on the right, you will see that all of its business segment lines are now pointing south, just as in the case of hardware.

That includes what IBM calls the "growth markets." Their revenues are down 1% in the latest quarter despite the fact that major "emerging market" countries - Russia, India and China - reported double digit grown (up 11%, 13% and 19% respectively). But Brazil was down 3% and the rest of the "growth market" must have shrunk even more in order for overall revenues to be down 1% (right chart).

This is also reflected in the fact that "General Business," IBM's euphemism for small and medium size companies, is down 2% in the third quarter (right chart).  It was the first time this year that the GB revenues headed south as well. So the "revenue eating virus" is spreading throughout Big Blue's business.

So it is no wonder that the overall IBM revenue trend lines are down, too (left chart).

Summary & outlook

IBM revenues were flat back in April when we first sounded an alarm. Then they declined 3% in the second quarter.  Now, they are down 5%.  Sure, foreign currency translations was a negative factor. But then this has also boosted IBM's growth in the past when the US dollar was dropping against the Euro or other currencies.  So what goes around comes around.

At $211, Big Blue shares were evidently trading on pure on emotions. In after hours trading, the stock took a first big hit since August.  IBM shares plummeted over seven points to $203.80 (7.20; -3.41%) in after hours trading.  It's a step in the right direction.  Some of the hot air is coming out of the Big Blue balloon.

Eventually, Wall Street will get it right.  It usually does (see this old chart from the last decade - Wall Street Knows Which End Is Up by Looking at Companies Upside-Down, Mar 2005). When it does, you may not want to be the one holding a lot of overpriced IBM shares.  That is also the same old story just being told now with new numbers and in a different setting.

Happy bargain hunting

Bob Djurdjevic

MARKET UPDATE

IBM Stock Takes Belated But Well-deserved Beating

HAIKU, Maui, Oct 17 - IBM stock took a belated but well-deserved beating today, the first day of trading after the company released its third quarter business results.  Big Blue shares plummeted over 12 points at one stage of today's trading, before settling down for a 10.4 point or 5% loss at the end of the session.

It was interesting to watch the Wall Street mice scamper around trying to close the barn door after the horse was gone. Typical behavior for mice and sheep and lemmings who tend to herd together seeking safety even when standing on the edge of a precipice.

Check out this excerpt from this morning's BARRON's report on IBM:

"On Wednesday morning, Joseph Foresi, an analyst with Janney Capital Markets, downgraded IBM to Neutral, while Société Générale analyst Richard Nguyen cut his rating to Sell."

"There is nothing new under the sun," as King Solomon said some 3,000 years ago. 

MARKET UPDATE 2

Google joins IBM as another "IT Lemming" leaping off market cliff; Who will be next: Facebook?

HAIKU, Maui. Oct 18 - Two days after Big Blue disappointed investors with its third quarter results, Google joined IBM today as a second "IT Lemming" to jump off the market cliff. Google shares are down 8% after the company reported its latest results.  That's about how much hot air came out of Big Blue shares as well in the last two days.

Like IBM, Google had led all major global IT companies in stock resurgence during the last three months (see the chart in the initial IBM story).

Google plummeted almost $80 per share, more than 10%, and trading in the stock was halted 2.5 hours on Thursday after a disappointing earnings report was published ahead of schedule and surprised investors.

Bleak figures in the report about online advertising dragged down Facebook stock, too, and the Nasdaq composite index skidded 1% on a day when the broader stock market was mostly flat.

Google was trading at $754 per share at 12:30 p.m. EDT, then fell almost $20 in a minute after investors saw the report, a draft. It dropped as low as $676, and Google halted trading at 12:50 p.m., with the stock at $687.

The stock was halted until 3:20 p.m. When trading in Google resumed, the stock climbed slightly, but it still finished down $60.49, or 8 percent, at $695.

The higher they fly, the steeper they fall.

Meanwhile, broader markets are relatively calm today (see chart), bolstered by a report that said Consumer confidence rose to a six- month high and an index of U.S. leading indicators climbed as a nascent housing recovery started to ripple through the world’s largest economy (see Housing Revival Boosts Outlook for U.S.: Economy, Bloomberg).

Which should actually bode well for consumer-driven IT companies, like Google, Facebook or Apple. Now that Google has stubbed its toe, it remains to be seen if  Facebook and Apple fared any better in the latest quarter.

Whatever their actual results, one thing is becoming clear: It is the Corporate market that's a "sickie" here, not the wider economy.

Volume XXVIII, Annex Bulletin 2012-08
October 16, 2012

Bob Djurdjevic, Editor
e-mail: annex@djurdjevic.com

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