IBM blames the cloud for its dismal results, but the fact is that IBM should own the cloud outright (figuratively, of course). If the business has changed so much in the past few years due to customer shifting, then why wasn’t IBM leading that process? Why are they now actually admitting what amounts to a dereliction of managerial duties?
Since the end of the Great Recession and the turn to what looked like more prosperous times, which company management assured at the beginning of 2010 was all but certain, IBM has paid out $68.2 billion in share repurchases on total free cash flow of $69.7 billion. For that amount they probably would have had a front and leading place to engineer the cloud trend rather than be enfeebled and captured by it. However, that would have meant less EPS as R&D is an “expense”, treated in the same respect as the CEO’s salary, and there was “enormous” pressure to “beat” by a penny or two every time.
The whole cloud affair is more than just changing industry, it is a misdirection in the same sense that retailers have taken to blaming online shopping for abysmal same store sales. They hope that investors don’t notice the correlated timing of all these “sudden industry changes” (judging by the stock bubble, investors don’t or don’t care). With now eleven quarters having passed since IBM saw its last revenue expansion, its executives are finally beginning to admit there is more there.
“We are disappointed in our performance,” Chief Executive Virginia Rometty said. “We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry.”
While still managing to blame the cloud, that is an intense statement toward brutal reality. If it was just the cloud that was causing internal dyspepsia at IBM then there would still be hope for a better future since IBM might end up turning it around by aligning resources with new industry trends. Yet, here we are almost three years later and still revenue is not forthcoming, so for all the worrying about the cloud they seem to have accomplished very little towards it. If IBM were to admit a lack of real economic growth, as they may finally be doing, that would totally undermine any hope in the stock because that is totally outside management’s abilities. The “next year” narrative is as vital to the corporate stock focus as the FOMC’s rational expectation theory policy stance.
So instead of pitching resources toward offering products and services in that direction (which was never realistic outside of major acquisitions) they instead opted for the extend and pretend version in corporate America – buyback shares to keep the stock price up until that robust recovery actually shows up. With three years rapidly approaching, it’s getting harder to sell the distraction.
The intensity of repurchasing has actually heightened as revenue, and thus Net Income, has been pressured during this malaise. While IBM averaged more in repurchases per quarter in 2010 and 2011, as a proporiton of Free Cash Flow the company has gone from 83% to 103%, leaving nothing for working capital and dividends (thus, “free money” balance sheet degradation as debt levels have exploded; the company is consuming itself in much the same manner as the US economy).
What we see from IBM’s results are more about the first part of CEO Rometty’s quote above than the second; more due to “marked slowdown in September” than “unprecedented change in the industry.” Don’t get me wrong, the flatfooted nature of IBM’s strategy about any industry realignment sets a very poor baseline to be sure, but when the services backlog descends by 7%, or about $10 billion in anticipated revenue for next year, there is a decided element of customer “over managing” costs yet again. That is a macro indication almost totally detached from whatever trends are apparent.
If you compare revenue growth with UPS, for example, a company with no exposure to cloud computing or “unprecedented” industry changes, the pattern is nearly identical. There is a post-2011 malaise that is unmistakable in both companies’ hard dollar results – where revenue growth in 2013-14 is worse than revenue growth in the first three quarters of 2008 (even with expected better results from UPS lately). Maybe the cloud accounts for IBM’s difference between slightly positive revenue and slightly but persistently negative revenue, but it really doesn’t matter in the bigger economic picture. Both situations end up as slowly eroding fortune, made all the worse by how these companies are responding to it.
If the economy were actually growing rather than stagnating (at best, given that stagnation is really attrition hidden by statistical shortcomings) there is a very good likelihood that IBM doesn’t pay much attention to the cloud at all. Businesses focused on actual capex growth would see much use for IBM services and even hardware – it is only in the low-growth (or no-growth) environment that these setbacks look so potentially devastating. That is the commonality in almost everything we see right now, where low- to no-growth magnifies shortcomings that would otherwise be minor worries.
Stay In Touch