View all newsletters
Receive our newsletter - data, insights and analysis delivered to you
  1. Technology
May 9, 1994

FLAYING TONIGHT – BUT HOW MANY MORE WAYS CAN IBM DREAM UP TO SKIN A CAT?

By CBR Staff Writer

George Bush hadn’t made a big splash since 1992, when he suddenly left a dinner with Japanese Prime Minister Miyazawa. But there he was in all his incomprehensibility, disagreeing with the New York Times. The Times, on April 13, had said that big US firms in Singapore should object to the caning sentence passed on Michael Fay, 18, who had been convicted of vandalism and was duly flogged on Thursday. More than that, the paper named nine of these prominent corporations: Citicorp, Coca-Cola, Bechtel, General Electric, Du Pont, Exxon, Johnson & Johnson, Honeywell and IBM. A third of Singapore’s exports go to the US. That same day, Mr Bush made his reappearance as a public figure in, of all places, Singapore. He said Singapore’s laws were strictly Singapore’s affair, although caning might not be such a good idea for the USA, particularly, we suppose, if it were the punishment for taking campaign money from IBM in violation of election laws, or public vomiting. Right away, three of the American companies named by the New York Times – Citicorp, Du Pont and IBM – told the Singapore Sunday Times that they weren’t going to listen to the American paper. We try to refrain from telling them how to conduct their lives, said a Citicorp flack, according to Reuters, unless it infringes on our business operations. Citicorp had paid for Bush to come to Singapore. But the bank, Du Pont and IBM might have kept themselves and Bush out of the limelight had they thought matters over more carefully.

Pieces of skin

So, too, would the people, including some loony politicians, who said that they thought caning might not only be good in Singapore but also a perfectly wonderful way to treat delinquents in other places, for instance the United States. By April 25, New York Newsday, a paper that sometimes competes with the New York Times by doing more thorough reporting, interviewed Irving Soto, who currently teaches martial arts in Manhattan but formerly spent two decades in Asia. Soto attended three public floggings in Singapore, which he described. The first hit, Soto said, breaks blood vessels and produces a reddish colour and immediate swelling. The second hit draws blood. Not just little speckles, he added. Real spurts. After that, the lashes sever flesh. I saw it, Soto assured Newsday. Pieces of skin actually go flying as the cane hits. The only flesh flying around the stage of the Metropolitan Opera in New York 10 days earlier was sitting on plates passed by waiters. Dining on this meat, which was better prepared than Michael Fay, were the captain’s of American commerce, such as John Reed, chairman of Citicorp. The banquet, followed by dancing, at prices of $10,000 to $25,000 per table of 10, was a fund-raiser for the Met. The guest of honour was none other than IBM’s spanking new boss, Louis Gerstner. A good time, we presume, was had by all, as shown by the photo spread on the shindig that appeared in New York’s Sunday Times on April 24. An even more festive occasion took place on Wall Street on April 21, as Gerstner’s company released its financial results for the first quarter.

By Hesh Wiener

Revenue had increased $315m to $13,373m, helped by hardware sales that rose $531m, or 9.2%, to $5,737m. Some $371m came to the bottom line, a big change from the $399m loss reported for last year’s first quarter. IBM stock rose $6.375. The upturn in hardware sales was supplemented by a $62m, or 2.5%, increase in software revenue to $2,583m. IBM said it was hurt by a $73m or 3.8%, downturn in services revenue, to $1,836m. Maintenance revenue fell $36m, or 2%, to $1,768m. And revenue from financing dropped sharply, falling $169m, or 15.5%, to $918m. Analysts were very impressed by IBM’s $927m, or 22.8%, reduction in sales, general and administrative expenses, to $3,149m and the $248m after-tax profit that resulted from IBM’s sale of its Federal Systems Company. Apparently unnoticed was some information provided by IBM Credit Corporation. IBM Credit originated a smaller volume of end user leases in the first quarter, $557m, or 8% less tha

n last year’s $605m. No surprises there, with mainframe and disk shipments off last year’s mark. But the other part of IBM Credit’s business was booming. Financing for resellers and distributors jumped a whopping $512m or 48% to $1,579m. In other words, total IBM sales rose $531m while the amount of sales backed by IBM Credit climbed $512m or more than 8% of total hardware sales. We estimate that the gross profit from the sales due to the rise in dealer financing is $153m, but the product mix, which includes plenty of low-margin PCs, could have shaved it down to something like $140m. Before it hit the bottom line, this amount was reduced by taxes (at 42.8%) and whatever incremental overhead it took to pump so much product into the channels. We’ve made a couple of assumptions and came to the conclusion that IBM’s after-tax profit attributable to channel pumping is $60m to $75m. IBM’s after-tax profit if the Federal Systems sale is taken away comes to $123m, suggesting that half the money IBM made was due to stuffing equipment into the channel. Now there is a case to be made for another view of the figures, because IBM has started writing off all its capitalised software development in four years; some had been on a six-year schedule. This accounting change had an after-tax consequence of $192m.

Exaggerated

Content from our partners
Why the tech sector must embrace faster, smarter talent recruitment
Sherif Tawfik: The Middle East and Africa are ready to lead on the climate
What to look for in a modern ERP system

But we don’t accept that proposition; we think IBM has simply been taking an unrealistic accounting view of its software, which had given an exaggerated impression of its profits in the past, for instance in last year’s fourth quarter. With distributors and resellers awash in 48% more IBM equipment than they absorbed last year, IBM will have to find another hat and another rabbit for the current fiscal period. But we have no doubt IBM is up to the challenge. More importantly, by reporting a second consecutive profitable quarter, IBM has obtained the freedom to announce further restructuring later this year or in 1995. Having shown it can get into the black, the company can, if necessary, take one more dip in red ink without completely undermining the growing confidence of the financial world. The segment that might bear the brunt of major adjustments is mainframe manufacturing. While IBM will now make 10,000 to 25,000 CMOS mainframe engines a year, compared to 1,000 to 2,000 water-cooled units, production of the chip sets will require only a tiny fraction of the resources. IBM is already churning out other CMOS chips by the hundreds of thousands. These circuits come off the production lines like so many Oreo biscuits, which chairman Louis Gerstner flogged at his last job, where everyone knew which machines made dough. If optimistic shareholders can be persuaded to concentrate on the renovation of IBM’s processor business, they may not notice the pain coming from the services business or the decline in maintenance (and, probably, software) revenue that are byproducts of the shift to small engine mainframes. Sentence has been passed. There will be no clemency. And now it is only a question of how much skin is going to come off IBM’s assets.

From Infoperspectives International Copyright (C) Technology News Ltd

Topics in this article :
Websites in our network
Select and enter your corporate email address Tech Monitor's research, insight and analysis examines the frontiers of digital transformation to help tech leaders navigate the future. Our Changelog newsletter delivers our best work to your inbox every week.
  • CIO
  • CTO
  • CISO
  • CSO
  • CFO
  • CDO
  • CEO
  • Architect Founder
  • MD
  • Director
  • Manager
  • Other
Visit our privacy policy for more information about our services, how New Statesman Media Group may use, process and share your personal data, including information on your rights in respect of your personal data and how you can unsubscribe from future marketing communications. Our services are intended for corporate subscribers and you warrant that the email address submitted is your corporate email address.
THANK YOU