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Management discussion
International Business Machines Corporation and Subsidiary Companies

Global Financing

Results of operations

($ in millions)
For the year ended December 31: 2007 2006 2005

* See “Return on Equity” for the details of the After-tax income and Return on equity calculations.

External revenue $ 2,502 $ 2,365 $ 2,401
Internal revenue 1,482 1,527 1,506
Total revenue 3,984 3,892 3,907
Cost 1,819 1,773 1,648
Gross profit $ 2,165 $ 2,119 $ 2,259
Gross profit margin 54.4% 54.5% 57.8%
Pre-tax income $ 1,386 $ 1,455 $ 1,583
After-tax income* $ 877 $ 914 $ 1,032
Return on equity* 26.1% 29.5% 33.2%

The increase in 2007 revenue, as compared to 2006, was primarily due to:

  • Growth in external revenue of 5.8 percent (2 percent adjusted for currency) primarily driven by increased used equipment sales (up 12.7 percent to $704 million); partially offset by
  • A decline in internal revenue of 3.0 percent, due primarily to lower used equipment sales to the Systems and Technology segment (down 15.7 percent to $780 million), partially offset by an increase in internal financing revenue of 16.6 percent to $702 million. The increase in financing revenue was due to higher average asset balances and higher asset yields.

Global Financing gross profit increased 2.2 percent compared to 2006, with gross margin declining 0.1 point. This was due to higher margin used equipment sales largely offset by margin compression on financing revenue due to higher borrowing costs.

The decline in 2006 revenue, as compared to 2005 was primarily due to:

  • A decline in external revenue of 1.5 percent (2 percent adjusted for currency) primarily driven by an 8.3 percent decrease to $625 million in used equipment sales; partially offset by
  • Growth in internal revenue of 1.4 percent driven by an increase in financing revenue of 10.6 percent to $602 million due to higher average asset balances and higher asset yields.

Global Financing gross profit decreased 6.2 percent and gross margin declined 3.3 points in 2006 versus 2005. The decrease in dollars and gross margin was driven primarily by lower financing margins due to higher borrowing costs related to the interest rate environment in 2006, and a decrease in equipment sales.

Global Financing pre-tax income decreased 4.7 percent in 2007 versus 2006, and 8.1 percent in 2006 versus 2005. The decrease in 2007 was driven by an increase of $90 million in accounts receivable provisions, partially offset by the increase in gross profit of $46 million. The decrease in 2006 versus 2005 was primarily driven by the decrease in gross profit of $140 million. The increase in accounts receivable provisions in 2007 was primarily due to the increasing size of the receivables portfolio. Overall coverage rate is 1.3 percent, down 0.2 points versus 2006. (Also see the “Financial condition” section for an additional discussion of Global Financing receivables and allowances.)

The decrease in return on equity from 2006 to 2007, and from 2005 to 2006 was primarily due to lower pre-tax income.

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