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Analysis of IBM Credit Corp.'s Final 1997 Results
Strong Finish in 4Q97
But Worldwide Customer Financing Results Disappoint in 1997
PHOENIX - "ICC's Results Improve" read the headline of the Annex Bulletin 97-47 (12/26/97) in reference to IBM leasing subsidiary's third quarter 1997 results. At first glance, the fourth quarter appears to have marked a strong finish for IBM Credit Corp. (ICC). Its revenues were up 21%, while profits surged by 43%. For the full year of 1997, this translated into a 9% revenue increase and a 5% profit rise over the year before.
But there are some worrisome indicators even in such solid results. First, ICC reflects only the U.S. market. When IBM's global customer financing results are taken into account, the revenues were down by 3%, while the net earnings dropped by 4%. This means that IBM's international customer financing, which accounts for only 54% of worldwide revenue, was actually down in double digits (-12%). The net profits from the non-U.S. financing operations also declined - by 9%.
As a result of a lackluster international performance between 1994 and 1997, the global shares of the U.S. customer financing unit's revenues and assets have gone up by 13 points (from 33% to 46% of worldwide revenues; 34% to 47% of assets). Meanwhile, ICC's global share of the profits increased by only six points during the same time frame, implying that the international financing is more profitable.
Furthermore, the interest expenses - typically the biggest single item among the costs and expenses of leasing companies - rose much faster than revenues, eroding ICC's profit margins. In the fourth quarter, for example, its interest expenses were up 38%. For the full year, they were up 23.5%, about 2.6 times the growth rate of corresponding revenues (8.9%).
Third, ICC seems to be increasing the assumed risks for its leases. The revenue from capital leases dropped by 8%, while that of the (normally higher risk) operating leases surged by 46%. As a result, the revenues from the latter leases now exceed in absolute figures for the first time those of capital leases ($324 million vs. $277 million).
Fourth, ICC's resale profits have been less than stellar. In the fourth quarter, the gross margins on resales were only 4.7% after adjusting for the $11.8 million-worth of residual value write-offs. During the same time, ICC's major competitor, Comdisco, reported resale gross margins of 21.6%, over four times higher than ICC's.
Fifth, we had hailed ICC's growth of software and services financing in 1996 as a sign of its transformation which matched the parent company's trend toward services (the latter new financing volume surged from $728 million in 1995, to $1.02 billion in 1996 - see Annex Bulletin 97-15, 4/17/97). Well, it looks like such a growth spurt was short-lived. The corresponding software and services figure for the fourth quarter, usually the year's biggest, was actually down 8% from the year before. For the full year, however, it did increase by 16% over 1996 to $1.18 billion.
Overall, after a dismal start, ICC certainly improved its business results in the second half of 1997. But it did so by at higher risk and lower profit margins. But perhaps the most worrisome sign is that ICC isn't growing as rapidly where IBM is - in the software and services segment. Which suggests that once again ICC is playing from a different sheet of music relative to its parent company.
Happy bargain hunting!
Editor: Bob Djurdjevic
5110 North 40th Street, Phoenix, Arizona
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