Power Systems Not Quite Rebounding Yet in Q3

October 25, 2010 Timothy Prickett Morgan

The hoped-for big bounce in Power Systems sales is going to have to wait until the fourth quarter, it looks like. With IBM only shipping high-end Power 795 and entry Power 710, 720, 730, and 740 systems for two weeks in the third quarter, these new machines, which were announced in the middle of August, probably did more damage to the quarter than they helped in terms of Power7-based server sales. Now, all eyes are turned to the fourth quarter, where IBM will have a complete Power7 systems lineup and perhaps the normal server bump to help it post some good numbers.

In the quarter ended September 30, IBM’s overall revenues and profits were exactly what the company had been telling Wall Street it could and would do. (And yet, IBM was slammed in the wake of its earnings with a 3.3 percent haircut to its stock price because Wall Street is like a mother-in-law, in that you can’t do anything right even when you did.) IBM’s total sales were $24.3 billion, up 3 percent, and thanks to cost cutting and licensing of intellectual property, the company was able to boost net income by 11.7 percent, to $3.59 billion. What has Wall Street thinking, among other things, is that in Apple‘s fourth quarter of 2010 ended September 25, the company had $20.3 billion in revenues, up a staggering 66.7 percent, and net income of $4.41 billion, up 70.1 percent. And just because nothing makes much sense in the world, Apple’s stock is getting slammed because Wall Street expected Apple to do better. The important thing as far as I am concerned is that Apple is smaller than IBM, but more profitable. And, given current growth rates, it won’t be long before Apple will be larger than IBM and a lot more profitable.

For years, I have been joking–well, half joking–that IBM should buy Apple. Wouldn’t it be funny if Apple, with its $51 billion cash hoard and maybe another $37 billion in its stock, took a controlling stake in IBM? Imagine the user interface and integrated database and programming tools Apple could buff up for IBM i . . . .

But seriously. Let’s talk about IBM’s Systems and Technology Group as if it were still a separate unit of Big Blue, as IBM’s bookkeepers still do even though IBM merged Software Group and Systems and Technology Group, under general manager Steve Mills, back in July. IBM’s server, storage, and chip unit had revenues of $4.33 billion, rising 10.4 percent and notching up the best growth that this unit has seen in six years, according to Mark Loughridge, IBM’s chief financial officer, who went over the numbers with Wall Street last week.

Power Systems did show some spunk in the midrange, as it did in the second quarter, with Power7 boxes pushing the midrange of the line up 11 percent in the quarter. IBM didn’t talk about how well (or rather, how poorly) entry and high-end Power7 machines did in the quarter, but overall Power Systems revenues were down 13 percent in the quarter. Loughridge said that Big Blue had 250 competitive displacements among HP-UX and Solaris Unix shops, which generated $225 million in hardware, software, and services revenues for the company in Q3.

IBM’s System z mainframes and System x blade, rack, and tower machines (yes, the BladeCenter is mostly still an X64 server sale) were the big revenue drivers in the third quarter for IBM. Loughridge said that System z mainframe revenues were up 15 percent, with aggregate MIPS shipped in the quarter rising by 54 percent, the highest growth this line has seen in six years. (Funny how STG sales and mainframe sales are so tightly linked, eh?) The new System zEnterprise 196 machines announced in July were the big driver, and it is reasonable to expect an even bigger bump in revenues in the fourth quarter. That’s also when IBM will start shipping its zEnterprise zBX blade extensions, which sport Power and X64 blades tightly coupled to mainframes. System x server sales were up 30 percent, and Loughridge said he believed that IBM gained market share in the X64 racket. IBM’s high-end System x server sales rose less fast at 27 percent, but that is nonetheless phenomenal growth and a testament to the engineering in the BladeCenter HX5 blade and System x eX5 rack machines using Intel‘s Xeon 7500 processors.

IBM’s chip sales were up 28 percent in the third quarter, and storage sales (including disk and tape products) rose by 7 percent. Disk array sales were up by 14 percent, with the DS8000 monolithic and XIV clustered disk arrays leading the pack. Loughridge said that IBM added 130 XIV customers and nearly doubled its sales in the quarter and called the XIV acquisition one of the best ones that IBM has ever done. Tape product sales declined by 8 percent, but IBM believes that it gained market share.

In the 32 growth markets where IBM is targeting its sales efforts, STG sales were up 25 percent at constant currency. In Brazil, Russia, India, and China–the so-called BRIC countries that are the backbone of the growth markets–STG sales were up over 40 percent, according to Loughridge. Storage revenues were up 23 percent in these growth markets.

Over at Software Group, IBM’s revenues in the third quarter hit $5.15 billion, up only seven-tenths of a percent, but Loughridge told Wall Street that the company expected to see some acceleration in the fourth quarter, and not just because of a server rebound in the System z and Power Systems product lines. If you take out the PLM software business that IBM sold to Dassault Systemes earlier this year, then IBM’s Software Group would have shown a 4 percent boost in sales. The key branded middleware products–WebSphere, Information Management, Tivoli, Lotus, and Rational–had a collective 7 percent revenue boost, while other middleware (mostly on mainframes) must have declined because overall middleware sales were up only 7 percent. Operating systems sales might have fallen as well, but IBM didn’t say.

In software, the WebSphere product line, which has had a tremendous amount of products from acquisitions tossed into its bucket in the past couple of years, saw 14 percent growth, helped by the ILOG products and soon by the Sterling Commerce, Coremetrics, and Unica deals. IBM’s database and related tool sales rose by 5 percent, and relational databases overall were up 5 percent with distributed databases (including DB2 and Informix) on Windows, Unix, and Linux growing 7 percent. There was no mention of either IBM i or DB2 for i sales, of course. Bolstered by storage management and security software, the Tivoli systems management product line saw a 9 percent bump, and Lotus groupware and Rational development tool sales were flat.

IBM is a services company, so I hear, which means we cannot ignore the Global Services gigantosaurus. In the quarter, Global Services raked in $14.1 billion, up 2.1 percent, but the backlog of services deals was up only $5 billion sequentially, to $134 billion, and that was flat compared to last year’s third quarter. And signings of new services deals in the third quarter were down 7 percent, to $11 billion, which no doubt is what has Wall Street a bit jumpy about Big Blue’s future performance. Outsourcing signings (including hardware and application outsourcing) were down 15 percent to $5.7 billion, which is what really made Wall Street stop and think on Tuesday. IBM’s Global Technology Services division, which does outsourcing, systems integration, and maintenance services on IBM and non-IBM gear, only had seven-tenths of a percent growth in Q3, to just under $9.5 billion, while Global Business Services, which does process re-engineering and outsourcing and other fancy-schmancy consulting services not precisely related to iron, saw a 5.4 percent bump to $4.57 billion.

On the call, IBM raised its earnings per share guidance for 2010 by 15 cents, to at least $11.40 per share, which was meant to make Wall Street run up the stock. But that 15 cents is coming from lowered estimates for tax payments IBM will make this year. So it really doesn’t have much to do with the business being any more healthy than expected. And thus, investors reacted exactly as you would expect.

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