Power Systems Posts Growth In The First Quarter

April 23, 2018 Timothy Prickett Morgan

We have been waiting for four long years for the Power9 ramp to begin in earnest, and the merest hint of it happened Big Blue finished off its first quarter. That was when the “ZZ” Power9 entry systems announced back in February finally started shipping and IBM finally started booking some revenue for this new iron.

IBM did not provide much in the way of information about the Power9 system sales in the first quarter ended in March, which was only a week and a half after the ZZ systems started shipping. Jim Cavanaugh, IBM’s chief financial officer for the past several quarters, said on a conference call with Wall Street analysts that the Power Systems business grew by 3 percent at constant currency in the period, the second quarter in a row that the line saw revenue point up and to the right.

“Power remains vital to many workloads, including artificial intelligence, high performance computing, Unix, and Linux, and we grew in all four this quarter,” said Cavanaugh. “We started transitioning to Power9 in the fourth quarter with the first installment of our supercomputers at the US Department of Energy, and late this quarter, we started shipping our Power9 entry systems designed for AIX, IBM i, and Linux workloads. These cloud-ready systems provide leadership capabilities in advanced analytics, cloud environments, and data intensive AI workloads.”

Hey, at least Cavanaugh said “IBM i” in a sentence.

As you know, IBM doesn’t breakdown sales of its System z mainframes distinct from its Power Systems line, but it did say that thanks to the System z14 upgrade cycle, the System z line had 54 percent revenue growth (again at constant currency, not as reported) and MIPS capacity shipped doubled compared to a year ago. That is what an upgrade cycle looks like, and we hope that Power9 sees a bump up like that in the second quarter when the “Summit” and “Sierra” supercomputers have passed their qualifications and are accepted by the Department of Energy and therefore IBM can book some revenue. These two machines had a combined value of $350 million, and although it is not clear how much money has already been spent, clearly this will be a good bump for Power9. The ZZ systems will have a full 13 weeks of sales, too, which should certainly help revenue grow.

For the March quarter, IBM’s systems business had $1.1 billion in hardware sales, including servers and storage together, and storage actually fell by 15 percent. IBM had, by our math, $381 million in operating systems sales and it sold another $153 million in stuff to other IBM divisions. Add that all up and there was $1.65 billion in revenues for Systems, up 6 percent as reported (not at constant currency, and yes, it is annoying that IBM keeps flipping between the two). However, due to some restructuring in the Systems business, IBM posted a pre-tax loss of $203 million in the quarter. IBM did not say what the nature of this restructuring was, except that it better positioned the company for the future. We think it was about a $25 million charge, and it is my guess that it has consolidated manufacturing for System z and Power Systems somewhere. Go figure. In any event, that was a bigger pre-tax loss than it posted in the year ago period, which was $186 million. And it would have been almost as bad without this restructuring, which is odd given the fact that mainframe sales were up. Still, System sales were less than half what they were in the fourth quarter of 2017, when IBM had $2.82 billion in hardware sales and another $509 million in operating system sales, and booked a gross profit in Systems of $1.87 billion and pre-tax income of $908 million. It is hard to reckon what the breakeven level is for the Systems business, but it is probably somewhere around $1.75 billion.

As far as we can see, the System z14 mainframe bounce was pretty big in the fourth quarter and is already losing some steam. The spikes are pretty intense, as you can see here:

IBM’s overall sales were up 5.1 percent to $19.1 billion in the quarter, and the company had a gross profit of $8.25 billion. The company had a pre-tax income of $1.14 billion, and thanks to an $810 million benefit to reverse some charges that IBM held in reserve as it was undergoing two different audits by the U.S. Internal Revenue Service, the company had a net income of $1.68 billion.

As we have pointed out before, IBM’s core systems business is much larger than it appears from its books each quarter because it puts all kinds of things that go into a base system into other product categories, and it also does a lot of financing and tech support for those System z and Power Systems boxes out there in the world. By our estimates, taking out the basic systems software but not including databases and other analytics software, IBM’s true systems business brought in about $5.64 billion in revenues in the first quarter, up 3.6 percent, and it had a gross profit of $3 billion. It is hard to say what portion of net income this true systems business brought in, because we don’t know the nature of the restructuring.

What we do know is that IBM remains committed to the System z and Power Systems lines, and seems to be intent on doing the work to get to the Power10 generation and is thinking about the Power11. Beyond that, we don’t know anything else. A lot will depend, we think, on what the next generation of exascale-class supercomputers being built for various U.S. government agencies look like, and the proposals are not even back to the Department of Energy so they can select their architectures. We think there is a very good chance that Power10 will be at the heart of at least two of the four exascale machines being proposed by the Department of Energy. And again, that is probably about as good as it gets right now. That investment means that the technology trickles downstream and is available for use in mainstream systems that support IBM i, AIX, and Linux.

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