IBM’s Unexceptional Exceptionals; Big Blue’s reported earnings are “earnings before bad stuff.”

July 19, 2013 Leave a comment

July 17, 2013, 7:02 p.m. ET

IBM’s Unexceptional Exceptionals

A Lot of Work Goes Into Big Blue’s Earnings—but Not Necessarily the Most Inspiring Kind

ROLFE WINKLER

If International Business Machines IBM +1.77% engineered products as well as it engineers its earnings, maybe its revenue growth wouldn’t be so anemic. Never mind that second-quarter results, reported late Wednesday, showed sales declining 3% from the prior year. IBM’s stock still increased 2.6% in after-hours trading, suggesting that investors are more focused on earnings, which are still rising. IBM said earnings per share for the full year will now amount to at least $16.90, up from guidance given last quarter of at least $16.70. That figure, though, isn’t calculated according to U.S. accounting standards—in colloquial terms, it is effectively “earnings before bad stuff.” It ignores, for instance, a $1 billion charge in the second quarter for “workforce rebalancing.” Include that charge, as well as other costs like amortization of intangible assets arising from IBM’s acquisitions, and the company’s forecast for 2013 earnings per share based on U.S. accounting standards actually falls to at least $15.08 from at least $15.53. IBM is both a serial acquirer and a serial cost cutter. In other words, these charges are a regular feature of how IBM does business. This raises the question: Why are they treated as one-time items? Just because tech rivals like Oracle ORCL -0.47%also publish an earnings-before-bad-stuff figure doesn’t mean it makes sense. IBM also boosted its earnings per share in the second quarter with the help of a lower tax rate and by buying back shares. Holding those two constant with where they were the prior year would have reduced quarterly earnings by 23 cents a share, or 8%. Investors won’t complain about IBM paying lower taxes while buying back stock. But it would inspire more confidence if the company could boost earnings by boosting its business.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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