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Analysis of IBM Credit Corp.'s Third Quarter Results

ICC's Results Improve

Surge in New Business Volumes of Software, Services Leads the Way

The third quarter of 1997 represented a rebound of sorts for IBM's customer financing subsidiary, IBM Credit Corp. (ICC). Business volumes were up not only sequentially, from a lackluster second quarter, but also relative to the third quarter or first nine months of 1996. The end user new business financing jumped 47% for the quarter, and 26% for the first nine months of 1996.

In fact, all ICC new financing segments rose in double digits or higher percentages in the first nine months except for state and local government loans, which declined 8% since a year ago.

But the biggest increase in new financing volumes was in the "Other" category, typically non-IBM equipment - up 103% over the first nine months of 1996 to $785 million. This implies a tighter linkage between IBM's outsourcing operations, carried out by Integrated Systems Solutions Corp. (ISSC), and the Big Blue's financing subsidiary. When an outsourcing vendor takes over a customer's IT facilities, that typically means managing all of its equipment, including the non-IBM gear.

Corroborating this theory was the fact that the second largest increase - 34% in the first nine months of 1996 - was in the IBM software and services category, which now accounts for over three quarters of a billion dollars of ICC's financing ($777 in the first nine months of 1997, i.e., well over a billion on an annualized basis).

The year-over-year third quarter increases were even more prominent. The "Other" (non-IBM) category was up 147%, while the software and services rose 65%. As a result, the software and services now account for 17% of all ICC end user financing, more than double the corresponding share from three years ago. To be sure, that's still quite a bit less than the 42% share of IBM total revenues which the software and services represented in the third quarter, but it is a considerable jump.

The smallest increase (5%) in the third quarter new business was in the "Working Capital" category, the largest ICC financing segment which accounted for 70% of its new business volume in the first nine months of this year. This is a short-term inventory and accounts receivable financing program for IBM dealers and resellers.

The third quarter slowdown in the growth Working Capital is commensurate with the revenue declines reported by IBM's hardware product lines which are typically sold through resellers. The PC, AS/400 and RS/6000 revenue were all down in the quarter, according to Larry Ricciardi, IBM's acting CFO (see Annex Bulletin 97-39, 10/20/97).

Remarketing Activities

ICC's remarketing results have also improved in the third quarter. After allowing for a $6.2 million write-off of residual values, the gross margin on resold equipment almost tripled since a year ago - from 3.5% to 9.4%. For the first nine months, however, the resales' gross profit is down by 7.5%, for a 6.4% overall margin.

The residual value write-offs, on the other hand, remained basically flat - at $23 million during the first nine months of both 1997 and the year before.

IBM A/R Collections

The latest ICC 10Q report did reveal one new line item on its financial statements. It's something called "Income from Factored IBM Receivables." During the third quarter, this income category accounted for about $10 million of ICC's revenue.

Two new ICC subsidiaries - IBM Credit International Factoring Corp. (ICIFC) and IBM Credit EMEA Factoring Co. (ICEFC) - acquired $1.632 billion of IBM receivables for $1.609 billion. The receivables were typically short-term in nature, and were denominated in non-U.S. currencies. The purchases were financed by ICC's issuance of short-term debt.

In other words, it appears that ICC has now joined IBM in creating some new "financial engineering"-type lines of business, international debt collection being the case in point.

Happy bargain hunting!

Bob Djurdjevic

Addtional Charts

  • ICC's new end user financing


  • ICC's equipment remarketing results
  • ICC - Financial results & new investments - 3Q97
  • ICC - Financial results & new investments - 9 months 97

Volume XIII, No. 97-47
December 26, 1997

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

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