There must be some pretty embarrassed analysts in New York this week following IBM’s teach-in on how to call its figures, but embarrassment is mixed with bafflement because so many IBM statements contradict each other. The company blames a big switch to leasing for the expected shortfalls – yet it is IBM Credit Corp itself that is encouraging the switch by offering what look to third parties like unbeatable terms – terms that are certain to require that IBM Credit will have to take big write-downs on unrealised residual values in future years. On the subject of residuals, IBM Credit was writing what looked like crazy business on 4381s three and four years ago, and those chickens have already come home to roost in the form of a substantial write-down at IBM Credit at the end of last year, and a bigger write-down is widely expected at the end of this year. Yet IBM says that the switch to leasing, while deleterious to the extent of $1,500m to $2,000m on turnover this year, will result in additional revenue and profit in future years. Not if enormous write-downs have to be taken on the business, it won’t. But perhaps IBM is really talking of a more indirect benefit, that some leasing companies will be put out of business by the fierce competition, and that Amdahl Corp, Fujitsu Ltd and Hitachi Ltd will be so hurt by the competition that they will be less able to compete in the future. Equally inconsistent is the fact that while IBM Credit is encouraging demand by the terms it is offering, IBM Corp says that while 3090 business is on target, it can’t keep up with demand for 3090s (it also said last week that demand for PS/2s was outpacing supply). But the potential trouble that IBM seems to be laying up for itself in the future has passed many analysts by: Kidder Peabody’s Bill Easterbrook in San Francisco says that IBM told the analysts that it is twice as many operating leases this year compared with last year. Three-year and four-year leases are treated as operating leases for accounting purposes, Easterbook says, while five-year leases are generally recognised as sales. And while he reckons the trend could cut this year’s earnings per share by as much as 50 cents, he thinks that the strategy will be a positive for IBM in the long run and is forecasting IBM’s long-term earnings growth at 8% compared with 7% growth for the companies that make up the Standard & Poor’s 500 index, so that IBM could be trading at a premium to the market next year and the shares could reach $140. And since many analysts had been looking for as much as $5,000m this year from the disk drives that never appeared, it is difficult to understand why they had not cut their estimates sharply before IBM nudged them and told them what they should be forecasting. And at least one analyst, Dan Benton at Goldman Sachs, is taking IBM at a lot more than its word, and says where IBM is suggesting a figure of $9.50 to $10 a share for the year, he expects that after doing his sums he’ll cut his forecast all the way back to $9 a share.
