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Management discussion
International Business Machines Corporation and Subsidiary Companies

Results of operations

($ in millions)
For the year ended December 31: 2008 2007 2006

* See Return on equity for the details of the after-tax income and return on equity calculation.

External revenue $2,559 $2,502 $2,365
Internal revenue 1,892 1,482 1,527
Total revenue 4,451 3,984 3,892
Cost 1,887 1,819 1,773
Gross profit $2,564 $2,165 $2,119
Gross profit margin 57.6% 54.4% 54.5%
Pre-tax income $1,617 $1,386 $1,455
After-tax income* $1,049 $877 $914
Return on equity* 29.4% 26.1% 29.5%

The increase in 2008 revenue, as compared to 2007, was primarily due to:

  • An increase in external revenue of 2.3 percent (flat adjusted for currency), due to growth in financing revenue (up 7.9 percent to $1,939 million), partially offset by a decrease in used equipment sales (down 12.0 percent to $620 million); and
  • Growth in internal revenue of 27.7 percent primarily driven by an increase in used equipment sales to the Systems and Technology segment (up 47.2 percent to $1,148 million) and an increase in internal financing (up 6.0 percent to $744 million).

The increase in external and internal financing revenue was due to higher average asset balances and higher asset yields.

Global Financing gross profit increased 18.4 percent compared to 2007, with gross margin increasing 3.3 points. This was due to higher margins on financing and used equipment sales.

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 in 2007 versus 2006, with gross margin declining 0.1 points. This was due to higher margin used equipment sales largely offset by margin compression on financing revenue due to higher borrowing costs.

Global Financing pre-tax income increased 16.7 percent in 2008 versus 2007, compared to a decrease of 4.7 percent in 2007 versus 2006. The increase in 2008 was driven by the increase in gross profit of $399 million, partially offset by an increase in accounts receivable provisions of $159 million. 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 increase in accounts receivable provisions in 2008 was primarily due to current economic conditions. Overall accounts receivable coverage rate is 2.0 percent at December 31, 2008, an increase of 0.7 points versus 2007.

The increase in return on equity from 2007 to 2008 was primarily due to higher after-tax income, while the decrease from 2006 to 2007 was primarily due to lower after-tax income.

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