Annex Research| Annex Bulletins| Quotes| Workshop| SearchClips| Activism| Columns|
The copyright-protected information contained in the ANNEX BULLETINS is a component of the Comprehensive Market Service (CMS). It is intended for the exclusive use by those who have contracted for the entire CMS service.


IBM Issues a First Quarter Revenue, Earnings Warning

Big Blue Starting to Unravel

Stock Drops Like a Rock (11%); Joyce’s “Alzheimer’s” Case

PHOENIX, Apr. 8 - When IBM announced its fourth quarter results, back in January, we warned “Big Blue Stock to Take a Dive” (that was the headline of our Jan. 18 report). 

Well, now Big Blue has taken a dive - three months later!  Some 11% or over $10 billion of the IBM stock value was erased this morning after the company issued a release warning the first quarter revenues and earnings will come in below expectations.

No surprise there, either.  Wall Street almost always seems to close the barn door after the horse has gone. 

We also said back in January that the drop in the Big Blue stock would not happen immediately, since Wall Street analysts seemed to buy the IBM "BS" lock, stock and barrel.  Here’s an excerpt: 

When Joyce pulled the same stunt two years ago, blaming the IBM woes on the Y2K that time, we called it a “Slam-Dunk of Bunk,” (Jan 19, 2000).  This afternoon, Joyce has outdone himself.  Make it a “Grand Slam-Dunk of Bunk!”

Yet the analysts bought it. At least that’s the impression one got by the meek and mild tone of their questions. So don’t look for a huge stock slide tomorrow, even though a free fall is what Armonk richly deserves.

Furthermore, we said back in January that some of the explanations IBM had given for the disappointing fourth quarter results were also bunk:

This time, Joyce blamed it on the late timing of some fourth quarter contract signings. As a result, he said, IBM could not book as much revenue as it expected in the fourth quarter. Of all the buckets that he IBM CFO used up painting coats of BS over Armonk’s truckload of trouble, this was probably the biggest. [...]

Everybody knows that service contracts are annuities; that revenues are usually earned over a five to 10 year-contract period. Everybody also knows that it usually takes six to nine months for a mega-contract to start to produce revenues and profits for a vendor. So the fourth quarter contract signings ($15 billion, according to IBM) could not have been reasonably expected to contribute much to the company’s top and bottom lines until well into 2002.

Which is why we thought that Joyce’s optimism about the first quarter 2002 results was misplaced (optimism - because those deals that IBM “missed” in the fourth quarter would be supposedly signed in the first).

Guess what?  John Joyce, yes the same IBM CFO who uttered the above utter nonsense back in January, seems to have been stricken by a case "Alzheimer’s" since then. 

In this morning’s release, Joyce said, “the first quarter traditionally is the weakest period of the year for technology purchases, and many of our customers chose to reduce or defer capital spending decisions…”

Well, perhaps now the IBM shareholders who lost $10+ billion this morning understand why we said back in January that Joyce’s comments were a “Grand Slam-Dunk of Bunk!”

We also warned at the time about IBM’s “financial engineering:”

Unless, of course, the Big Blue is into something it is not supposed to be in - such as “aggressive accounting” - booking revenue and earnings early (for more on that, check out the “Enronizing IBM?” part of this report). […]

As for “Enronizing IBM,” we also said in another report in late January that Lou Gerstner’s exit was “well timed;” that he was bailing out while the going was still good (see “Gerstner’s Legacy…”, Jan. 29).

And last month, we showed you just to what an extend “Sir Lou” and had cashed in by selling his IBM shares while talking up the Big Blue stock (Apr. 1):

An Analysis of IBM Insider Stock Trading in 2000-2001


"Sir Lou OutLayed Lay!"


Outgoing Chairman of "IBM Greed, Inc." Dumped About $238M of Big Blue’s Stock in Last Two Years While Hyping Up Big Blue’s Bright Future; Other Top Insiders Followed Suit in 2001 and Cashed In

You could also see in the above report that Gerstner was not alone, that many other insiders also bailed out last year while predicting a rosy future for the company.  As with Enron, "watch what they do, not what they say," seems to be an appropriate adage for Armonk.

On Friday (Apr. 5), we told you about the SEC chairman’s speech in which he said he wanted to tighten the rules that govern insiders’ stock option trades (see “SEC to Tighten Stock Option Rules”, Apr. 5).

Put it all together, and you will see is that the universe is unfolding as it should; that the noose of truth and justice is slowly tightening up around the necks of “Sir Lou” and his enterprising Big Blue “financial engineers.”

It is rather unfortunate that Big Blue starting to unravel on Sam Palmisano’s watch.  On the other hand, “Teflon Sam” was in the kitchen when Sir Lou’s broth was being “Enronized.”  So if he had a problem with that, Palmisano could have blown a whistle or bailed out.  But then, he wouldn't be “Teflon Sam,” would he?

Happy bargain hunting!

Bob Djurdjevic

P.S. While checking on a Financial Times (FT) of London story about IBM (IBM profit warning dashes tech recovery hopes, Apr. 9), we came across another interesting item in tomorrow's FT edition that may help explain why and how investors get duped by what they perceive to be "independent" Wall Street analysts.  

Here's an excerpt from the FT story, "Merrill ordered to overhaul stock rating system," in which the New York state attorney general is quoted as saying that this Wall Street firm displayed "a shocking betrayal of trust:"

Merrill Lynch, the world's biggest brokerage, on Monday came under fire from US prosecutors for allegedly issuing misleading stock recommendations during the technology boom of the late 1990s. 

The New York state attorney general on Monday sought a court order to force Merrill Lynch to disclose conflicts of interest between its research analysts and investment bankers.

Elliot Spitzer, New York state attorney general, said that the bank's analysts issued biased, misleading stock picks in an attempt to secure lucrative contracts for investment banking services.

"This was a shocking betrayal of trust by one of Wall Street's most trusted names," Mr Spitzer said. "The case must be a catalyst for reform throughout the entire industry."

The move comes despite attempts by investment banks to respond to criticism by imposing restrictions on analysts dealings in the stocks they cover.

The state attorney general released a number of internal e-mails sent by Merrill Lynch staff, which it said raised concerns about conflicts of interest. The e-mails indicate that analysts privately disparaged companies while publicly recommending their stocks. [...]

Merrill had no comment.


Neither do we.

Meanwhile, here's an excerpt from a Washington Post/Associated Press story about IBM's first quarter warning:


IBM Issues First Quarter Warning

By Jim Krane, AP Technology Writer

Monday, April 8, 2002; 4:30 PM

NEW YORK - Technology colossus IBM Corp. jolted Wall Street on Monday, warning investors that its first quarter earnings would come in well below analysts' expectations. Investors responded by dumping its shares. In trading on the New York Stock Exchange, IBM shares dropped $9.84, or 10.1 percent, to $87.41 a share. [...]


Annex Ed. BTW, the IBM stock set a new 12-month low today ($85.35 at its lowest point of the day). The previous 52-week low was set on Sep. 27, 2001 ($87.49), in the aftermath of the Sep. 11 events. The 12-month high was reached on Jan. 9 ($126.39).


At Merrill Lynch, analyst Steven Milunovich said IBM's revenue shortfalls must extend beyond those Joyce mentioned, if they were to account for such drastic cuts in expected earnings. Milunovich guessed that revenue earned by IBM's services, hardware and software divisions might also suffer.

"There's plenty of evidence that enterprise spending will be weak until corporate profits improve," Milunovich said.

Milunovich wondered whether IBM's warning stemmed from a more cautious attitude about earnings forecasts by new chief executive Samuel Palmisano.[...]

Palmisano took over for retired chief executive Louis Gerstner on March 1. Gerstner remains the company's chairman.

Another analyst noted that the departing Gerstner sold millions of his own IBM shares over the past two years, reaping hundreds of millions in proceeds.

"When (Gerstner) was introducing Palmisano as the new CEO, he was lauding the company and its strategy, but at the same time his actions indicated he didn't have any faith in it," said Bob Djurdjevic of Phoenix's Annex Research, a perennial IBM critic. "When you look at what he does, rather than what he says, you see that the best days of IBM are behind us."


Actually, we first said that nearly three years ago, when Gerstner et. al. at Armonk started zigging with their wallets, while zagging with their mouths. The IBM CEO and his lieutenants demonstrated their greed by selling their stock holdings while urging others (including the IBM Treasury) to buy them (see "Lou's Lair vs. Bill's Loft" - June 1999, and "IBM's Best Years Are 3-4 Decades Behind," July 1999).

Bob Djurdjevic

[For more details on "financial engineering" -- a new IBM line of business, as we put it back in 1997 -- see "Big Blue Starting to Unravel," (Apr. 8, 2002), “SEC to Tighten Stock Option Rules” (Apr. 5, 2002), "Sir Lou OutLayed Lay!" (Apr. 1, 2002), "IBM Pension Fund Vapors," (Mar. 23, 2002), Is IBM Cheating on Taxes, Annex Bulletin 99-17 (May 1999),  Fortune on IBM (June 15, 2000)Annex Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's Fudge Factory (Apr. 9, 1999)Where Armonk Meets Wall Street, Greed Breeds Incest (November 1998)Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18 (4/29/97),  "Some Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97,  Djurdjevic’s Forbes column, "Is Big Blue Back?," 6/10/97;  “Executive Suite: How Sweet!,” (July 1997), "Gerstner: Best Years Are Behind", Aug. 10, 1999), "IBM's Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's Lair vs. Bill's Loft" (June 1999),  "Corporate Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles magazine October 1998 column, "Wall Street Boom; Main Street Doom" etc.].

Or just click on and use "financial engineering" as keywords.


e-mail-spin.gif (20906 bytes)










Volume XVIII, Annex Newsflash No. 2002-03
April 8, 2002

Editor: Bob Djurdjevic
Published by Annex Research

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

Annex Research| Annex Bulletins| Quotes| Workshop| SearchClips| Activism| Columns|