Power Systems Turns In A Full Year Of Growth

January 25, 2016 Timothy Prickett Morgan

There have been worse years in the Power Systems business than 2015, and in fact, 2014 was one of them. In its latest financial reports, IBM said that that it has turned in four quarters of revenue growth for the Power server unit, no doubt helped by an uptake of Power8 systems as customers do their inevitable upgrades. As the year wound down, IBM was running on its entry and high-end cylinders, the first time in a while when that happened.

IBM Systems, the hardware unit of the company that sells servers and storage and is responsible for operating system and middleware sales as well (even though it doesn’t get to report them in its numbers), had $2.37 billion in hardware revenues in the fourth quarter of 2015 and, with another $131 million in sales to other IBM units, brought in a little more than $2.5 billion in sales. The Systems group had $349 million in pre-tax income, about 13.9 percent of revenue. While not a huge level of profit, it is better than losing money, as IBM had been doing when it was still peddling System x Xeon-based servers and making its own chips. Those hardware sales were down four-tenths of a percent as reported, and operating profits were down 10.1 percent, but a lot of this decline has to do with currency as the U.S. dollars continues to strengthen against other currencies, particularly in Europe and Asia. If you look at things at constant currency, as IBM likes to do when grading itself, then the Systems group actually turned in 3 percent of revenue growth in the fourth quarter.

IBM does not provide specific revenue figures for the Power Systems business, but it does give out a nice pie chart that shows server and storage revenues each quarter as reported (instead of in constant currency), and if you do the math then you will find that server revenues rose by 9.6 percent to $1.65 billion. IBM’s legacy disk array and tape subsystems business continues to decline, and even with flash sales going up, it was not enough to counteract that legacy drop-off and so its overall storage business fell in the quarter by 11.5 percent to $801 million. Other revenues for other gear is pretty much immaterial at this point. If you add up servers and operating system revenues, which is kind of an indication of IBM’s base system sales, then revenues in the quarter were up 3.8 percent to $2.18 billion. For the full 2015 year, IBM’s hardware business had a 24.5 percent decline to $8.03 billion, mostly due to the divestitures of the X86 server and chip manufacturing businesses to Lenovo Group and GlobalFoundries, respectively. IBM’s classifications for servers changed last October, so the compares are not apples-to-apples in our model. But the server business brought in $5.33 billion for all of 2015 and with operating systems that came to $7.41 billion. Storage brought in another $2.49 billion. The point is, even without the System x division, IBM is still a large provider of systems. And if you add in middleware, databases, and other systems software, plus maintenance and financing for its own gear, then IBM Systems–as I am talking about them, not as IBM’s financial reporting group–probably accounted for $8.3 billion in the fourth quarter compared to $22.1 billion for the company as a whole, and for the year, IBM Systems was probably $29.8 billion, of a total of $81.7 billion.

Whether IBM wants to admit it or not, it is still International Business Machines.

The interesting bit for the IBM i community is that Big Blue’s Power Systems business had 8 percent growth at constant currency in the fourth quarter, bolstered by both Power E870 and E880 big iron and the new scale-out Power Systems LC series that IBM created in conjunction with original design manufacturers Wistron and Tyan, both of whom are OpenPower Foundation partners. (As I have complained in the past, these LC machines cannot run IBM i because they do not support the PowerVM hypervisor, but IBM should port IBM i to the new OPAL hypervisor it created along with Google for Linux.) IBM has grown the Power Systems business in all four quarters of the 2015 year, at least based on constant currency figures. (The real reported revenues, however, are more important, and IBM has to find growth at this level, too.)

IBM’s chief financial officer, Martin Schroeter, did not have much to say about the IBM i business in his conference call with Wall Street analysts last week going over the numbers, but he did talk about Power Systems with regard to Unix and Linux.

“In Power, we are serving a high value market, while adding capabilities and finding new economic models to grow over time,” Schroeter said. “Unix is a declining market, but we continue to address it because it is very a high value space. At the same time, we introduced low-end Linux-based Power systems to capture the growing Linux market, and are building an IP stream through the OpenPower ecosystem. Even though the Unix market is declining, by delivering innovation and repositioning the platform, our Power systems have grown four quarters in a row. This is a good example of how we transform ourselves.”

You could probably global replace “Unix” with “IBM i” in that paragraph and get the same feel for what is going on, and it would be nice if once, just once, IBM would say something nice about IBM i on these calls.

As far as IBM i is concerned, the fact that Power Systems grew all four quarters and turned in the best growth IBM has seen on an annual basis since 2011 is good news. As we have said before, anything that makes Power Systems stronger makes IBM i last longer.

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