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Trading  | July 18, 2017

Last quarter, IBM almost fooled the market when it “beat” but only thanks to using the lowest (until then) effective non-GAAP tax rate in recent history (excluding one charge-filled quarter when the rate was negative and thus N/M).

Fast forward one quarter when IBM has done it again: in the three months ended June 30, IBM reported GAAP EPS of $2.48, below the expected $2.75. Of course, when it comes to IBM it is all about non-GAAP results, which in Q1 were $2.97, “beating” estimates by 22c. How did IBM “beat” again, on a non-GAAP basis that is? By applying the lowest non-GAAP tax rate in company history, a paltry 9.2% (and just 4.5% GAAP). To wit:

IBM’s reported GAAP and operating (non-GAAP) tax rates of 4.5 percent and 9.2 percent, respectively, include the effect of discrete tax benefits in the quarter, which contributed $0.18 to the company’s earnings per share.

And visually:

Amusingly, while both GAAP EPS and margins declined Y/Y, non-GAAP EPS was the only thing that was magically higher (with even non-GAAP net income down):

At this rate IBM will soon need a negative non-GAAP tax rate to make its negative non-GAAP earnings turn positive.

Although for some reason IBM is confident it won’t need to:

The company continues to expect a full-year ongoing effective operating (non-GAAP) tax rate of 15 percent plus or minus 3 points, excluding discrete items.

Good luck.

However while IBM is truly a wizard when it comes to fudging the bottom line, there was nothing it could do about the top line, and it was here that IBM’s troubles emerged, because not only did IBM once again not beat modest estimates of $19.47 billion, instead generating $19.3 billion in revenue…

but this was also the 21st consecutive quarter of declining revenues for the company which lately can’t seem to get any traction on the top line.

Revenue in IBM’s technology services and cloud platforms business — its largest — fell 5.1% to $8.41 billion, below consensus expectations of $8.58 billion. Total revenue was down 4.7%, the steepest fall in five quarters. IBM has not posted growth in annual revenue since 2011.

Away from the top and bottom line, IBM reported that in Q1 it generated net cash from operating activities of $3.5 billion, and free cash flow of $2.6 billion. What is amusing is that IBM returned more than all the cash it generated to shareholders in the form of $1.4 billion in dividends and $1.4 billion of gross share repurchases. At the end of June 30, IBM had $2.4 billion remaining in the current share repurchase authorization, which means that in two more quarter IBM will have to authorize another $5BN or so in stock buybacks.

“We finished the first half of the year where we expected, including continued strong free cash flow generation,” said Martin Schroeter, IBM senior vice president and chief financial officer. “This allowed us to continue our strong R&D investment levels and return more than $5 billion to shareholders through dividends and gross share repurchases during the first half.”

IBM ended the second quarter with $12.3 billion in cash, an increase of $1.6 billion from Q1. And since it burned more cash than it generated, debt logically swelled to $45.7 billion, up from $42.8 billion in Q1 and from $42.2 billion at the end of 2016.

The stock, just like last quarter, appears to have grown wise to IBM’s endless non-GAAP/tax shenanigans and is down 2% after hours.

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