Storage Helps Power Systems Grow In The First Quarter

April 24, 2023 Timothy Prickett Morgan

Here is a peculiar thing: It is almost like there are two different Power Systems customer sets. Those that spend big in the second quarter and fourth quarter of every year and those that spend less big in the first and third quarters of every year.

While we understand the normal Q4 bump that happens because there are decades of traditions, founded on good budgetary and capacity planning practices, we are a bit perplexed why when it comes to the Power Systems market at least, Q2 is almost as good revenue-wise as the prior Q4. We admit fully that this could be a phenomenon that is complete inherent in our financial model of Power Systems sales, both for Power-based servers and storage arrays and storage clusters that also use Power machinery as their array or cluster controllers.

This is what happens when IBM no longer gives revenue figures for Power Systems machines and storage array sales, much less any kind of detailed breakdown of Power Systems sales by primary platform – AIX, IBM i, or Linux. We take snippets of information we get from here and there, constant currency growth rates that have to be reverse-engineered to as-reported revenue growth rates, estimates of storage growth for all IBM storage for then for Power-based arrays, and massage it all into a module that tells us what we think might be a good approximation of what IBM’s overall sales of Power Systems machinery is external to the company. And now, thanks to the spinoff of Kyndryl, what used to be internal sales to other IBM groups and divisions is now sales to another company, and probably IBM’s biggest customer for any system hardware and software, for that matter.

With all of that in mind, let’s walk through IBM’s financial results for the first quarter of 2023.

For the quarter ended in March, IBM had sales of $14.25 billion, up a meager four-tenths of a point compared to the year ago period. Gross profits for the quarter rose by 2.4 percent to $7.51 billion, thanks to cost cutting, but net income was hurt by a $260 million write-off for layoffs during the quarter. Still, net income was up against an easy compare for a pretty tough Q1 last year, and rose by 26.5 percent to $927 million.

IBM’s Infrastructure division, which is the combination of the System z and Power Systems servers, their operating systems, plus all kinds of storage (flash, disk, and tape), had a 3.8 percent decline to just a tad under $3.1 billion, but gross profits only fell by 1.7 percent to $1.6 billion and pre-tax income was up 8.5 percent to $216 million. We reckon after running IBM’s constant currency figures through our model that Hybrid Infrastructure – all of this datacenter hardware and software – accounted for $1.71 billion, up 1 percent, and Infrastructure Support fell by 9.1 percent to $1.39 billion.

Here are the results for the various IBM divisions shown graphically since 2019:

And here is a table that shows the past nine quarters of this divisional data:

As best we can figure, Red Hat had revenues of $1.52 billion, up 8 percent, and the part of Red Hat that is sold into the datacenters accounted for $1.06 billion, up by the same amount. The legacy IBM systems business – meaning the servers, storage, systems software, technical support and financing for IBM’s own System z and Power Systems customers – did $5.95 billion in business, down a half point year-on-year, which is not bad considering how whacky the world is right now and the relative jumpiness of enterprises given this. (We still have to get down to business, which is the saving grace.) Add it up, then IBM’s “real” systems business is probably somewhere slightly north of $7 billion in Q1 2023, up seven-tenths of a point and providing plenty of profits.

That brings us to Power Systems revenues, as best as we can figure from what little Big Blue says on the topic.

In the quarter, we reckon that IBM had $166 million in Power Systems server sales, down 3 percent from the year ago period as the national and regional economies are a bit cautious. But we think that Power-based storage had a very good quarter, with revenues up by 44.4 percent to $65 million, and when you add the two of them up, that works out to $231 million of total external Power Systems sales, up 6.9 percent.

If you squint your eyes at the chart above, you can see the twin parts of the Power Systems market both rising, ever so slightly. And that sure beats the alternative, don’t it? We have seen plenty of decline over the years, and if IBM keeps sticking to its AIX, IBM i, and Linux knitting and despite that it is no longer a player in the supercomputing market with Power Systems (and has left hundreds of millions of dollars in non-profitable Power Systems revenue on the table as a key systems integrator in the HPC space), there is a good chance that this business can grow organically as customers do more with their iron.

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