As my pal @firstadopter on Twitter was first to point out:
"MULTIPLE questions from $IBM analysts "I'm confused" "I don't understand" "Sorry to re-visit" FCF/Net income/EPS guidance MAKES NO SENSE"
At first I thought he was exaggerating, but the transcript doesn't lie.
Let's start with confused. Barclays analyst Ben Reitzes gives us a twofer, given that he said both "confused" and "I don't understand":
I think investors are focused on this, of so I'm going to just try to clarify it on the free cash flow side. What I'm really confused about is that the charge was about $100 million lower than I thought, then we have the tax rate impact and the accelerated buyback, which is probably more than I think you guys probably modeled in January. With all that, you could have almost $1 billion taken out of the net income the Street had and still guide to $18.
And I wanted to know on cash flow, you said in your 10-K that you would grow cash flow by $1 billion year over year, and we just took out almost $1 billion of the net income versus where we were in January. I actually don't understand how we get to the free cash flow numbers previously guided in that -- taking it in that light. If you could just explain it that way, that would be really great. Thanks a lot.
Later in the call, David Grossman of Stifel Nicolaus, addressing CFO Martin Schroeter, was equally "confused" while apologizing his need to "revisit" the cash flow question:
Martin, sorry to revisit the cash flow question, but I'm still confused about the reconciliation of free cash flow growth and your net income growth. It seems that your EPS guide for the year, if my math is right, implies flattish, maybe even down net income this year. And last quarter, I believe you indicated that some combination of operational performance and working capital improvements would help drive that billion dollar increase year over year despite the $2 billion headwind from cash taxes.
I understand the working capital comment. I understand what happened in the first quarter. However, could you elaborate on the contribution from operation improvement, given what appears to be flat to down net income in 2014?
Reality: If the analysts are confused, and don't quite understand what the company is trying to say, what about regular investors?
There was a time, not long ago, that the only thing IBM investors cared about was the company's ability to hit its made up "roadmap" target of non-GAAP $20 a share by 2015. It was a great investor relations marketing tool, but it also put the company under the gun to pull out all stops to make a silly number.
Now, even though the company says it's still on target to get there, investors in recent quarters have become more focused on the quality of that number.
After all, last quarter's revenue of $23.5 billion is pretty much flat with March 2010. Between here and there revenue was on a roller coaster, suggesting just how much IBM is really not growing.
Just look at operating margins, which last quarter sank to 13.2% -- the lowest they've been since 2007. Put another way, just to keep the revenue from going even lower the company had to do quite a bit of wheeling and dealing with its customers, who increasingly are in the driver's seat. Schroeter pretty much said so himself, when he mentioned "substantial price pressure" in connection with IBM's global business services group.
All of which gets back to the increasing irrelevance of that $20 roadmap target. It appears analysts are finally wising up and becoming more focused not just on the number, but the quality of the number. (Funny how that happens once a stock starts falling.) As Reitzes said in a post-earnings report, "Although IBM maintained its guidance for 'at least' $18 in non-GAAP EPS for FY14, the company really lowered its operating profit forecast for the year quite materially."
In effect, he's calling out IBM for its numbers game-playing and says that IBM should "completely change its business model" and "abandon it's non-GAAP roadmap..." About time somebody said that.
-- Written by Herb Greenberg in San Diego