rsd97sgn.jpg (7403 bytes)     

|Annex Research | Annex Bulletins | Quotes | Workshop | Feedback | Clips | Activism | Columns 
The copyright-protected information contained in the ANNEX BULLETINS is a component of the Comprehensive Market Service (CMS). It is intended for the exclusive use by those who have contracted for the entire CMS service.

LEASING

Analysis of IBM Credit Corp.’s 2000 Business Results

New Financing, Profit Down

“Robbing Peter to Pay Paul:” A Huge Dividend Paid to IBM!

PHOENIX, June 11 - IBM Credit Corp. (ICC), IBM’s U.S. financing subsidiary, had a mediocre year in 2000, according to its just-released 10K report.  New financing was off 8%, while net profit declined by 0.3%.  But the momentum of the deals signed in prior years lifted the revenue to $2.17 billion, up 13% over the corresponding 1999 level. 

Revenue from equipment (re)sales, income from loans and working capital financing all rose in double digits (up 30%, 22% and 13% respectively).  But the “other income” dropped sharply (down 45%), partially offsetting the above gains.  Capital and operating leases, ICC’s original business and the mainstays of its hardware financing, rose merely in single digits (up 7% and 9% respectively). 

Equipment (re)sales were particularly strong in the fourth quarter, rising by 64% over the year before to $193 million.  Related gross margins also held up very well at 20%, as compared to 11.5% for the full year.  ICC took no residual value write-offs in the fourth quarter, either, attesting to the strength of its remarketing program in 2000.  For the full year, however, the write-offs totaled $7.3 million, down from $8.1 million in 1999 (see Table 4).

The preceding is the summary of the good news items in ICC’s 2000 business results.  Far less impressive was the IBM U.S. financing subsidiary’s new business sales record.  New lease originations were off 8%, while the working capital financing, ICC’s largest segment which accounts for a whopping 71% of all new financing, was down 9%. 

ICC management attributed both of these two declines to weak hardware sales of the IBM U.S. unit.  That is what we also noted in IBM’s overall fourth quarter results (see “IBM Ends Year with a Bang,” Annex Bulletin 2001-03, Jan. 19, 2001).

Perhaps more disconcerting than a predictable slowdown in hardware financing has been a relative dearth of replacement sources of ICC revenues and profits.  Software and services, for example, two IBM business segments that account for 45% of the total Big Blue 2000 revenues, represent only 10% of ICC’s new financing deals, and an even smaller share of its revenues. 

Nor is this just a year 2000 phenomenon.  More than six years after we noted that ICC and IBM Global Services (IGS) should complement each other in global financing deals, ICC’s $1.9 billion software and services new financing is equivalent of only 3% of IGS’s new contract sales in 2000 ($56.4 billion - see the chart below).

Text Box:  In short, IGS can evidently prosper without ICC.  But the reverse is not necessarily true.  We’ve said before that in order to grow, ICC needs to transform itself from a classic hardware lessor to a more sophisticated provider of “investment banking”-type financing for large global IT services deals. 

Text Box:  During the last six years, ICC has made some progress in this direction, growing its software and services sales from $728 million in 1995, to $1.9 billion last year.  But the fact that its share of IGS new contract sales dropped (!) from 10% to 3% during the same period, doesn’t bode well for ICC’s long-term growth prospects.  Especially given that ICC’s new hardware financing volumes have been declining steadily since their 1997 peak.  Yet hardware is still bigger than the software and services financing (see the chart).

A Huge Dividend!

Remember our repeated references to IBM’s negative cashflow, caused in part by its six-year $40 billion+ splurge on stock buybacks?  Well, it appears that ICC has now become a part of Armonk’s black-hatted financial Text Box:  engineers’ white rabbit farm (see “Slam Dunk of Bunk”, Jan. 19, 2000).  Just as IBM management reached into its shareholders’ coffers to pay for the unproductive “investments,” such as stock repurchases, Armonk appears to be siphoning off some of its subsidiaries’ resources.  Such as ICC…

During the four-year 1996-1999 period, the dividends ICC paid to IBM averaged $67.5 million.  But in 2000, they shot up by more than 11-fold to $772 million.  At the same time, ICC’s pay down of its own loans with original maturity within one year dropped from $1.6 billion in 1999, to $873 million last year.

In other words, ICC’s cash was used to help offset IBM’s negative cashflow instead of reducing its own debt (as was the case in prior years).  And the figures get only bigger, and the message more negative, if one looks at IBM Global Financing - globally.  Its debt-to-equity ration shot up from 5.5 in 1999, to 6.6 in 2000, while its equity DECLINED by 16%, from $4.9 billion to $4.1 billion.

Text Box:  Armonk even acknowledges that it is deliberately increasing the debt burden of its finance subsidiaries.  “In 2000, Global Financing debt to equity ratio increased to 6.6x, which is within management’s acceptable target range,” the Big Blue leaders say in the company’s 2000 Annual Report. 

Well, while a policy of “robbing Peter to pay Paul” may be “acceptable” to the black-hatted magicians in Armonk, one wonders what the IBM shareholders would say if they found out the full truth?  What would they say about the kind of corporate leadership that tries to cover up its negative business cashflows by shifting the debt burden to subsidiaries and milking their cash?

Happy bargain hunting!

Bob Djurdjevic






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume XVII, No. 2001-12
June 11, 2001

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

P.O. Box 97100,      Phoenix, Arizona 85060-7100
TEL: (602) 824-8111        FAX:

|Annex Research | Annex Bulletins | Quotes | Workshop |

Feedback | Clips | Activism | Columns |