Power Systems Sales Return To Growth

April 27, 2015 Timothy Prickett Morgan

It has been a long decline as the Unix and proprietary systems market succumbed to the double whammies of server virtualization and Moore’s Law increases in performance and decreases in price/performance, but it looks like IBM‘s Power Systems business may have found a new floor on which it can build some growth. That is a lot better than the overall IBM business can say, which has been slipping quarter by quarter, for years now and which did it again in the first quarter of 2015.

In the quarter ended in March, IBM booked $19.5 billion in revenues, down 11.9 percent as reported and flat if you take out the effects of the strengthening U.S. dollar and the divesture of the System x, IBM Microelectronics, and business process outsourcing software businesses last year. IBM’s net income was only down 2.4 percent to $2.33 billion, which CEO Ginni Rometty no doubt would say is an indication that it is making the right moves with its overhaul of the company, exiting low-margin businesses and moving into the cloud and focusing on strategic areas such as social, mobile, analytics, and security applications.

I had expected for IBM to reorganize its financials to make them more in line with the reorganization it instituted back in January, but that did not happen. The IBM Systems group, under general manager Tom Rosamilia, rolls up Power Systems and System z mainframe servers, IBM’s various tape, disk, and flash storage products, and its operating systems and middleware as a single unit. IBM Research has been spun out as its own group, and IBM has created a new IBM Cloud (including but not limited to SoftLayer) as well as a Software Group with some of its assets removed. There are a slew of cross-group divisions focused on analytics, commerce, and security along with the new IBM Healthcare and IBM Watson groups.

OK, I begin to see why IBM kept its financial reporting the same. . . .

In any event, Systems and Technology Group is now called Systems Hardware in the presentation, and it booed $1.66 billion in external sales and another $92 million in sales to other IBM units, and it posted a pretax income of $24 million. In the year ago period, when IBM still had the chip and X86 server business, this group had $2.14 billion in external sales and another $168 million in internal sales, and booked a pre-tax loss of $457 million.

IBM still doesn’t talk about specific revenue and profit figures for Power Systems and System z machines as well as for its storage and other hardware, so we don’t have any precise idea of how each of these businesses are doing. On a conference call with Wall Street analysts after the numbers were reported last Monday, Martin Schroeter, IBM’s chief financial officer, said that IBM has “closed our first substantial intellectual property deal” relating to the OpenPower effort, which seems a bit odd considering that Suzhou PowerCore, a spinoff of an existing Chinese PowerPC chip manufacturer, is already showing off a variant of the Power8 chip. Through the end of March, as far as I know, search engine giant Google had not licensed Power8 chip technology, even though Google is working on homegrown two-socket Power8 machines and testing its actual applications on it.

The Power Systems division posted a 1 percent increase in revenues, a figure that excludes the effects of foreign currency exchange rates to the U.S. dollar (which hurt IBM’s overall revenues by 8 percent in the quarter). We have no idea what the reported growth rate was for Power Systems iron, but presumably it was not larger than 1 percent or IBM would have said something. IBM’s System z mainframe business had a 130 percent revenue spike in the quarter, thanks to the launch of the System z13 machines back in January. Oddly, IBM had only been shipping the System z13 machines in the last two weeks of March, and for it to boost MIPS shipments by 95 percent compared to the year-ago period was quite a feat. If you do the math on IBM’s presentation, servers represented $1.15 billion in sales, or 69 percent of total external Systems Hardware group sales, while storage accounted for $465 million in revenues. At constant currency, IBM’s storage sales were down 2 percent, which probably means it was down something quite a bit larger than this as reported. If you do the math on Q1 2014, IBM’s overall storage, which includes disk, flash, and tape products, accounted for 28 percent of Systems and Technology Group revenues, or $669.5 million, and that looks like a 30.5 percent decline to us, and that number doesn’t make a lot of sense but there you have it. If IBM would just give revenues for its product lines, the guessing would be over.

I guess that is the point. . . .

Over in Software Group, IBM had $5.2 billion in sales, down 8.2 percent as reported, and brought a little over $1.9 billion to the pre-tax income middle line. Of this software revenue, about 8 percent, or $416 million, came from operating system sales. My best guess is that another $2 billion or so in various middleware, database, security, and development tools are sold on Power and z systems, and another $635 million in maintenance went for IBM’s own software running on its own hardware. This yields and IBM Systems business of around $4.7 billion.

Incidentally, that is almost precisely the same size as the Amazon Web Services public cloud. (Coincidence is funny that way.) IBM’s operating income is probably on the order of 50 percent of revenues, or about $2.35 billion, or about nine times greater than the operating income for AWS.

IBM’s has its own services behemoth, Global Services, but the future might look a whole lot more like AWS than it does the Global Services we have known for the past two decades. Global Services, including the technology and business services groups that IBM separates just to make the company not look too lopsided, had $12.2 billion in revenues, down 11.7 percent, and alarmingly, pre-tax income for global services fell by 19.4 percent to $1.59 billion. Profits were impacted by the SoftLayer public cloud business and also the divesture of the System x division to Lenovo Group last fall. Expect continued pressure here, but there is so much inertia in that $122 billion services backlog that IBM might be able to ramp up SoftLayer and its SaaS offerings fast enough to fill in some gaps.

Schroeter said on the call that IBM’s cloud revenue–which presumably includes a lot of kitchen-sinking on the part of Big Blue–grew at 75 percent at constant currency and has a run rate of $7.7 billion at the moment. Within that, IBM’s “as a service” cloud offerings have a $3.8 billion run rate, and presumably this includes all infrastructure, platform, and software cloudy services added up and the remainder is traditional outsourcing of systems and applications.

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