There’s something a little disingenuous about IBM’s three excuses for its very poor third quarter performance – a rush to lease rather than buy, the strength of the dollar, and transitions in the product cycle. The fact that it is IBM, not its customers or the market that are inflicting leasing pain, since IBM does not need to lease anything but can hand all the pain on to third parties has been well enough highlighted. But how about the dollar? Superficially, the excuse is reasonable enough, but only insofar as it means that IBM’s contribution from abroad is able to do less than it might to offset the company’s dismal performance in its home market. If IBM makes less profit because of the strength of the dollar, that is only because its US profit performance is so dismal: if IBM made as much profit on its US business as it does internationally, it wouldn’t matter whether the dollar soared or plummeted. Because the effect is only on translation: almost everything IBM sells overseas is made overseas, and the level of the dollar has minimal impact either way on the performance of its business in Europe or Japan, and in no way affects profitability, only the volume of its foreign profits and turnover when translated into dollars. Yet in the company’s third quarter statement, it reveals that net margins were down to 6.1% in the July to September period, from 9.1% a year ago (CI No 1,285) – so clearly a lot more is going wrong than is accounted for by IBM’s explanations. The third excuse, product transitions, again appears to be in IBM’s hands – except to the extent that if a major development project, such as the next generation disk drives, goes awry, there is no power on earth that can put it back on track overnight, and all the signs are that the things will now come out later rather than sooner. But isn’t there anything that IBM can do to give the 3380s a late-life kicker and fill the gap? IBM’s perpetual optimism, in the face of mounting evidence that its situation is still deteriorating, is having less and less effect on analysts’ forecasts: there is now widespread disenchantment with the company on Wall Street, and the latest forecasts see the company doing only $9.60 a share next year after $9 even this year, compared with the $9.80 a share IBM did in 1988.
Worst economic leasing deals
At least one analyst, Bob Djurdjevic of Annex Research, is now highlighting the way IBM has shot itself in the foot by aggressively buying leasing market share at the expense of quality, and doesn’t buy IBM’s argument that the business will bear fruit in the fullness of time: he is convinced that, as we have been saying for months, IBM must lose money on a lot of this business. To put it mildly, Bob Bardagy of Comdisco Inc told the Wall Street Journal, IBM Credit has been doing some of the worst economic deals of any leasing company we have ever seen. And the flurry – and worry – in the AS/400 reseller market in the US makes it clear that IBM is not doing nearly as well with the machine now as it was up to about April this year, and some think AS/400 sales may decline this quarter. And NCR Corp’s third quarter figures today seem to confirm fears that computer markets are slowing down worldwide: when what is probably the best-run of the large diversified computer companies shows a dip in turnover, you know times are getting harder.
