Power Systems Stabilize in Q4 Thanks to Entry Boxes

January 24, 2011 Timothy Prickett Morgan

Let’s cut right to the chase scene. The entry systems portion of the Power Systems lineup that matters most to i5/OS and IBM i shops started to show some signs of life in the fourth quarter, according to the financial results released by IBM last Tuesday after Wall Street closed down to get home through a slushy and cold New York evening. So, like me, you can exhale and then breathe a little bit.

In the fourth quarter ended in December 31, IBM’s revenues grew by 6.6 percent to just a hair over $29 billion, and net income rose by 9.2 percent to $5.26 billion.

While those numbers were not exactly as stellar as the ones put out by Apple at the same exact time last Tuesday–the consumer electronics giant posted net income of just over $6 billion against revenues of $26.7 billion in its fourth quarter, with net income up 77.7 percent and revenues up 70.5 percent–they are as close as Big Blue is going to get at this point in its history. In fact, mainframe sales in the quarter followed a curve that rivals that of the iPhone, if you can believe it. Apple sold 16.24 million iPhones in its fourth quarter, an 86 percent increase in unit shipments. IBM’s System z mainframe line, driven by strong sales of the zEnterprise 196 mainframe launched in July 2010, saw a 69 percent revenue spike against a 58 percent increase in aggregate MIPS capacity sold compared to the year ago quarter. Granted, IBM’s prior System z10 mainframes were long in the tooth a year ago, making for an easy compare, but it is safe to say that IBM had what I would consider a reasonable fourth quarter for mainframes. (You have to ask yourself how many mainframes at Global Services were upgraded in Q4 on behalf of outsourcing customers, of course. Be careful about the assumptions you make.)

This mainframe spike, and increasing services bookings and a stabilizing Power Systems business, are good reasons to believe that the Great Recession is receding for many companies, not just the big banks.

While IBM converged Software Group and Systems and Technology Group into a single Systems and Software Group, the company’s financials still report these units separately. Ditto for Global Services, which was glommed back into a big amorphous ball back in July 2010; IBM’s books still talk about Global Technology Services and Global Business Services as if they were distinct.

Systems and Technology Group had its best numbers (in terms of growth, not absolute revenues) in more than a decade. STG revenues shot up by 21 percent, to $6.28 billion, driven by the strong acceptance of the System zEnterprise 196 mainframes. IBM even added 24 greenfield (perhaps green-screen field?) mainframe customers in the quarter, which has to be some kind of record. System x revenues, which includes BladeCenter chassis and blade server sales based on Xeon and Opteron processors, rose by 18 percent in the fourth quarter, which Mark Loughridge, IBM’s chief financial officer, said in a call with Wall Street analysts was the fifth consecutive quarter of double-digit revenue growth for the x64 lineup from Big Blue. While X64-based blade sales were only up 14 percent, high-end System x rack and tower server sales were up 30 percent, driven by System x machines with two, four, and eight sockets using Intel‘s Xeon 7500 processors and a quad-socket box using Advanced Micro Devices Opteron 6100 chips. IBM did not elaborate, but to make the math work, entry and/or midrange System x sales had to be soft for the overall System x lineup to grow at only 18 percent.

The shape of Power Systems sales was a little different in Q4, and reflective of the launch of entry and high-end Power7-based machines in August. Overall, Power Systems sales were up 2 percent, which was good news, but you have to remember that in the year ago quarter, Power Systems revenues were off 14 percent and in the fourth quarter of 2008, when the Great Recession was roaring and Power6+ machine were rocking, sales were up 8 percent. IBM has not made up lost ground, just like other RISC/Itanium server makers have been losing ground. And that is because during recessions some customers always jump to new platforms. (Why do you think the AS/400 was so successful in 1988? Because of the Crash of 1987, in part, and companies moved from other platforms to cheaper AS/400s.)

Loughridge told Wall Street analysts in the conference call that entry Power Systems sales were up 30 percent compared to the year-ago period, which is great news. And to a certain way of thinking, the fact that IBM sold out of older Power 520 systems, which are based on its Power6 and Power6+ processors, as well as Power 720 and Power 740 machines, which are based on the new Power7 chips, is great news. That kind of growth plus selling out of boxes is better than declining sales. But it is also fair to say that IBM should never sell out of boxes, and it should not have been in a place where it does not have enough machines to sell to customers who want to buy. IBM seems to have planned to conservatively.

Midrange Power Systems machines had a 7 percent revenue bump in Q4, the third consecutive quarter of growth and indicative that IBM started the Power7 rollout last February and April in the middle of the line. Loughridge did not provide a revenue compare for high-end Power Systems sales, but did say IBM sold close to 200 machines in the quarter, nearly three times as many as it sold in Q3. The Power 795s were only available in the last two weeks of Q3, of course, and if there was huge pent-up demand, you would have expected even more boxes to go out the door. But there are a lot of software issues that need to be considered with a move to Power 795s–thread and core scalability are big issues, as are system software and application compatibility with the 7.1 releases of AIX and IBM i. So it is not surprising that Power 795 sales are ramping more slowly than perhaps IBM would like. For the numbers to work out, high-end Power Systems sales had to drop pretty far considering how well entry and midrange boxes did. And that, remember, is against a very easy compare in Q4 2009 when high-end Unix sales just about stopped for all vendors and the Power6-based Power 595 was getting very long in the tooth.

I think the Power 520 sell-out is particularly interesting, and may be a good indicator that shops with vintage OS/400 machines are upgrading to newer boxes, as IBM hoped. But it may be that a lot of them are moving to Power6 and Power6+ boxes running i5/OS V5R4 instead of Power7 boxes running IBM i 6.1 or 7.1. And that, more than anything else, explains the price increase on V5R4 licenses and the extension of V5R4 sales until May 27 of this year. V5R4 was supposed to be removed from the catalog on January 7, but suddenly was given a new lease on marketing life on January 4. (See The Carrot: i5/OS V5R4 Gets Execution Stay Until May and The Stick: IBM Jacks Up i5/OS V5R4 Prices for all the details on that.)

Despite my cynicism, Loughridge thinks the Power Systems lineup is well-positioned in 2011. “We think we have a lot of momentum on all these elements,” he said during the Q&A session, referring to the small, medium, and large configurations of Power7-based machinery.

Rounding out the rest of STG, IBM’s storage hardware sales, which includes products based on disk, flash, and tape technologies, rose by 8 percent. Disk-based storage hardware rose by 11 percent thanks to high-end array and clustered disk sales. IBM added more than 200 customers for its XIV clustered arrays, and more than 975 customers have bought the XIV products since IBM bought the company in January 2008. IBM’s Microelectronics division, which makes chips for game consoles and networking devices, had a 30 percent revenue bump, and Retail Store Solutions had a tidy 26 percent increase, too.

The Global Services giant continues to drive the bulk of IBM’s revenues each quarter, with $14.9 billion in revenues, up 2 percent and representing 51.3 percent of total sales in the quarter. The main interesting thing in Global Services is that signings for new contracts were up 18 percent to $22.1 billion, and IBM’s services backlog grew by $5 billion to $142 billion by the end of the quarter. Outsourcing is starting to do better, and IBM is seeing existing customers do more things, suggesting that the economy is indeed starting to improve.

Software Group keeps on plugging along, growing modestly but steadily and raking in the profits so IBM can indulge in its hardware and services habits. Software Group posted just over $7 billion in revenues in Q4, up 7 percent, and gross margins were up eight-tenths of a point to 88.5 percent. If you ignore the Product Lifecycle Management (PLM) software business that Big Blue sold off to Dassault Systemes last year, then Software Group had an 11 percent increase in sales in the fourth quarter. WebSphere middleware was up 32 percent year-on-year, and Tivoli system management tools were up 12 percent, Rational development tools were up 10 percent, and Information Management products (including databases and other related tools) were up 10 percent. Lotus groupware sales contracted 3 percent, and other middleware sales on mainframe and IBM i platforms accounted for 17 percent of total Software Group and actually shrank a bit to make the math work.

For the full year, IBM had $99.9 billion in sales, up 4.3 percent, net income was $14.8 billion, up 1.5 percent, and earnings per share was $11.52, up 15.1 percent. That EPS number, which is all that the top-brass IBMers really care about, was well above the $10 to $11 plan the company had for 2010.

Loughridge told Wall Street that IBM was on plan to hit at least $13 EPS in 2011, but did not provide any guidance on revenues. Wall Street is no doubt going to assume some modest revenue growth in the order of what we saw in 2010.