Power Systems Down A Bit, But Holding Steady In Q2

July 24, 2023 Timothy Prickett Morgan

Considering that we are over a year into the Power10 entry and midrange server upgrade cycle, and almost two years into the Power10 high-end cycle, the fact that the Power Systems server business is only down a few points in the second quarter is, well, normal. As in the old normal where things have a natural ebb and flow and the business is not just in a kind of 45 degree decline like we saw a decade ago.

This is what happens when Big Blue sticks to its enterprise computing knitting and is not distracted by the money-losing proposition of supercomputing, which IBM undertook for so many decades as a kind of research and development program for the national HPC labs more than a business with a reasonable profit and loss. To be fair, those national HPC labs did help IBM create some great technologies, and it was up to IBM to better commercialize them. We can debate how well or poorly that has gone.

What we do know is that the IBM of 2023 is a lot more focused on its existing Power Systems and System z customers, and it is not taking them for granted. Despite issues with the 10 nanometer and 7 nanometer processes from former partner Globalfoundries, which delayed the “Cirrus” Power10 and “Telum” System z16 chips for at least a year and which forced IBM to switch to Samsung as a foundry for server CPUs, IBM has been able to get new generations of CPUs out a reasonable three-year cadence. This cadence suits IBM’s customer base, which does not want to upgrade every year, and IBM’s research and development budget, which cannot sustain a faster cadence. IBM has to hang back a bit compared to what Intel and AMD are doing with X86 processors, but its systems, which are mostly NUMA database engines, have different requirements and are not driven by the needs of hyperscalers and the largest cloud builders.

And so, despite the economic jitters and a drop in revenues and shipments in the core server market, IBM’s Power Systems business is holding up pretty well. And the System z line, which Power Systems users had better root for because this is where IBM still gets most of its revenues and profits, one way or the other, is in a period of revenue decline after its initial explosive upgrade cycle but the capacity-on-demand upgrades for System z are continuous and growing and that means the revenue that IBM gets from System z is very profitable indeed. It all comes out equal in the end. . . . And as long as that remains the case for both Power Systems and System z, then we can expect Big Blue to keep investing in its two platforms.

In the quarter ended in June, IBM’s overall revenues were down four-tenths of a point to $15.48 billion, and gross profits were up 2.6 percent to $8.5 billion, pre-tax income was up 16.1 percent to $2 billion flat, and net income rose by 13.7 percent to $1.58 billion.

Within this, the Infrastructure group posted sales of $3.62 billion, down 14.6 percent as reported, with gross profits at 55.8 percent of revenue or $2.02 billion, down 11.4 percent. Pre-tax income was down 16.4 percent to $633 million. Hybrid Infrastructure – what we would call systems and storage hardware sales – were down 18.4 percent to what we estimate is $2.26 billion, off 18.4 percent, while Infrastructure Support accounted for what we believe was $1.36 billion in sales, down 7.3 percent as reported.

IBM annoyingly only talks about some of the sub categories in the Infrastructure division at constant currency (meaning before all sales are converted to U.S. dollars and currency effects either add or subtract from sales based on currency trade rates in the quarter). IBM said that System z sales, which were up percent 77 percent (CC) in the year ago quarter. In that year ago period, Distributed Infrastructure, by which IBM means revenues from both the Power Systems division and the Storage division added together, was up 17 percent thanks to the respective Cirrus and Telum platform rollouts. The fact that Distributed Infrastructure was only down 6 percent (CC) means that sales were still pretty damned good.

When we push all of these numbers into our model, and look at currency effects, we think that IBM did $379 million in Power Systems servers and another $47 million in sales of Power Systems iron to the Storage division for a total of $426 million. We also think that in this case, for this one quarter, constant currency and estimated revenue growth if IBM actually reported it were all the same rate: down 6 percent. We do not know what percent of Power Systems sales went to Kyndryl, IBM’s former outsourcing business that was spun out in November 2021.

If history is any guide, Power Systems sales will dive in Q3 and will perk back up in Q4, and there is an outside possibility that they could be flat for the whole 2023 year. Given all the things going on in the economies of the world and in the server market, that would be about as good as it gets.

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