Peeling Apart IBM’s Q1 Server and Storage Sales

May 18, 2009 Timothy Prickett Morgan

Big Blue’s April Power Systems announcements hit just after IBM filed its financial results for the first quarter of 2009, and I have been too distracted by going through the announcements to do my quarterly analysis of the company’s server sales. I took some time on Saturday morning, plus some Advil and a whole lot of coffee, and came up with some revenue figures for IBM’s server and storage lines that fit the skinny bit of data IBM gives about sales each quarter.

This is a maddening process, since each successive quarter of data reveals a bad assumption made in a prior year’s data that looked perfectly reasonable at the time. Coming up with revenue figures involves a lot of head scratching and cursing, and since I am not getting help from Big Blue like Gartner and IDC get, I have to make more assumptions than they do. But I think I made the numbers work. It would be so much easier if IBM just reported sales by product category and stopped being vague about it all. I guess that would give Gartner and IDC, as well as the remaining Wall Street analysts who still tear apart IBM’s numbers to build their own models and a few wiseguys like me one less thing to do to justify their existence. So I should be happy. But I would always rather talk about what is instead of what might be.

IBM said when it reported its financials on April 20 that its Systems and Technology Group reported $3.23 billion in external sales in the first quarter of 2009, down 23.5 percent from the $4.22 billion in sales in the first quarter of 2008. Blame the economic meltdown. Gross margins on sales at STG were 34 percent, and the company sold another $176 million in gear and technology to other IBM units for their products. Shockingly, pre-tax income for STG plummeted by 80.7 percent to a mere 28 million. This is what happens when mainframe sales slump, as they did, System x and BladeCenter sales crash, and Power Systems sales go down, and storage and OEM technology hit a wall, too.

As best I can figure, here’s what the server breakdown looks like. I think System z mainframe sales were down 19 percent to $464 million, making it the worst first quarter for mainframes that Big Blue has had for years. And that was with an 18 percent increase in MIPS shipped over Q1 2008, which shows you just how far IBM is cutting the price of computing capacity. If you do the math, that works out to a 31 percent cut in the price of MIPS in the past year, and that price dive is being drive by specialty zIIP, zAAP, and Linux engines on mainframes, which cost about a quarter of a z/OS engine. IBM said that MIPS shipments for these specialty engines rose by 20 percent in the quarter across all types, and that the Integrated Facility for Linux engines saw MIPS shopped rise by 50 percent.

On the Power Systems front, I think across all operating systems–i, AIX, and Linux–Power Systems accounted for $955 million in sales, down 2 percent from the first quarter of 2008. IBM does not provide any guidance on the i-p split in Power Systems any more, but in terms of revenue I expect that the i side will be anywhere from 15 to 20 percent of revenues in a quarter. To come up with my figures for this quarter, I worked out a split that was in this range that also met the condition of having 2 percent revenue decline for both i and p sides of the Power Systems lineup. My first pass guess showed the i line with a sales increase of 2 percent in the quarter and a 3 percent decline in the i side, by the way, but I switched to this other way of slicing it up. It is a wild guess, and I know it. But assuming the numbers work out that way, then the I side accounted for $138 million in sales and the p side accounted for $817 million in revenues.

And by the way, I think that shipments and revenues of the entry servers running AIX were off sharply even as high-end AIX boxes had a sales spike of 35 percent in Q1, according to IBM. Entry p boxes must have crashed pretty hard for the high-end to not be able to counter balance it. It could be that Power Systems i sales crashed more than I think, and that was the bigger drag, but I am not hearing this from resellers that I speak to. No matter how bad the economy is, there are always some i shops that need to upgrade or buy a new box. And the i installed base is roughly twice the size of the p base, so there should be, at any given time, twice as many deals in the pipeline.

Here’s a table that gives you my best guess about the past five quarters:

	1Q 2008	2Q 2008	3Q 2008	4Q 2008	1Q 2009
System z	$569 M	$1,035 M	$775 M	$1,087 M	$464 M
System i	$142 M	$236 M	$247 M	$243 M	$138 M
System p	$833 M	$1,164 M	$919 M	$1,355 M	$817 M
System x	$997 M	$1,056 M	$939 M	$950 M	$728 M
Total	$2,541 M	$3,492 M	$2,880 M	$3,635 M	$2,147 M

Power Systems	$975 M	$1,400 M	$1,166 M	$1,598 M	$955 M

Storage	$738 M	$938 M	$842 M	$1,085 M	$587 M
Micro OEM	$536 M	$573 M	$532 M	$488 M	$342 M
RSS	$184 M	$208 M	$177 M	$205 M	$115 M

There’s something funky in the early 2007 numbers, and one of these days when I get some time, I am going to start from scratch and build a new model. I just didn’t have time to do it this Saturday.

And if you like pictures, here is a graphical representation of data going back to the first quarter of 2006. As you can see, the pattern is pretty regular, and the first quarter is generally pretty bad:

All of IBM’s server lines had their normal peaks cut off in the fourth quarter, with the Power Systems i and System x/BladeCenter parts of the server business flattening out compared to the third quarter and declining in the first quarter of this year (that’s a sequential comparison, not a quarter-to-quarter one). Compared to last year’s first quarter, the i and p are holding up OK, but System z mainframes are under pressure and Big Blue’s x64 business seems to be in free fall. If this keeps up, don’t be surprised if the high-end System x four-socket boxes and BladeCenters are all that IBM ends up selling with its own badges on it. At some point, IBM would rather be a Lenovo reseller than pay to be a manufacturer of low-end, commodity products. This is especially true with Bob Moffatt, who used to run IBM’s PCs business and then its supply chain, as general manager of Systems and Technology Group.

The x64 business went flat in the first quarter of 2008, and posted a 5 percent decline in Q2 2008, an 18 percent decline in Q3 2008, a 32 percent decline in Q4 2008, and a 27 percent decline in Q1 2009. I am figuring that IBM’s patience with this business and its partner channel is pretty close to running out, and I expect something fairly dramatic if Q2 has a double-digit decline. IBM has already outsourced manufacturing of System x boxes, so that ain’t gonna be it. I don’t think there is any way that the entry and midrange x64 boxes are profitable for Big Blue, and considering the relatively low volumes of the BladeCenter boxes, they may not be all that profitable, either.

In case you haven’t figured it out, IBM is all about the cash these days, and has been concerned with little else more than that in the past 15 years. If it doesn’t generate the cash, then it gets the boot.

To finish out the STG analysis, I reckon that across all servers, sales were down 15.6 percent to $2.15 billion. IBM’s disk and tape storage products accounted for $587 million in revenues in Q1, down 20.4 percent. IBM’s retail store solutions biz, which sells point of sale equipment, had a 37.7 percent decline to $115 million, and its OEM technology sales (mostly chips for game consoles, but including other licensed technology products) fell by 36.2 percent to $342 million in the quarter.

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