Power Systems Continues Its Slight Upward Trend

August 5, 2024 Timothy Prickett Morgan

There is an old saying: No news is good news, and with a slew of medical issues in our family right now, we get that. But what is also true is that good news is good news, and when it comes to the Power Systems business this is – happily surprisingly – precisely what is happening.

The overall IBM business is doing alright as well, which is also good for Big Blue and for the customers that depend upon its systems to do their mission critical computing.

In the quarter ended in June, Big Blue’s sales were up a smidgen, by 1.9 percent to $15.77 billion, and thanks to the usual cost cutting and penny pinching that has become the usual course of things at IBM, operating income rose by 5.28 percent to $8.95 billion and net income rose even faster by 15.9 percent to $1.83 billion.

Some of this uptick is coming from IBM’s early consulting and software engagements regarding generative AI, and in the quarter the company’s cumulative bookings for GenAI projects doubled to $2 billion, with consulting gigs relating to GenAI more than doubling to $1.5 billion and software bookings growing by 67 percent to $500 million. IBM did not say how much revenue it generated from GenAI in Q2 2024, but we think it is easily hundreds of millions of dollars, and therefore accounting for a big part of the revenue growth compared to the year ago period.

The various IBM business units have their own syncopations and rhythms, and generally the trends are very slightly up as the lines move to the right.

IBM’s Infrastructure group, which sells its Power Systems and System z servers, operating systems, and technical support – but which does not include Red Hat systems software – rose by 75/100ths of a point to $3.65 billion in the second quarter. Gross profits for this core foundation of the IBM business rose by 2 percent to $2.06 billion, which represented 56.5 percent of sales, and pre-tax income was $652 million, or 17.9 percent of sales.

Within the Infrastructure group, Hybrid Infrastructure – what IBM means by sales of server and storage hardware and some small measure of resold networking for Fibre Channel, Ethernet, and InfiniBand networks – accounted for $2.35 billion, up 4 percent. Infrastructure Support, which has been in decline for years, saw a revenue slip by 4.7 percent to $1.3 billion. That is just the way it is in the support and break/fix business in all installed bases these days. As vendors raise prices, people are falling off the support wagon at a slightly higher rate, and that causes the vicious cycle to start anew. . . . There are lots of customers who are also opting for third party maintenance of IBM gear to cut costs and often as part of broader managed service provider deals. And finally, as some Power Systems customers move to cloud infrastructure, they unplug machines and their maintenance contracts.

The Power Systems business has clearly shrank by quite a bit in the past decade and a half, but it reached equilibrium a few years ago and has been trending slightly upward since that time.

IBM has not provided any details on how the Power Systems business is doing, much less how its respective IBM i, AIX, and Linux segments are doing, for a very long time. (We get snippets of insight from time to time, but never enough to get a complete picture.) But Jim Kavanaugh, IBM’s chief financial officer did have this to say about the Infrastructure group:

“Within Hybrid Infrastructure, IBM Z revenue was up 8 percent this quarter. We’re now more than two years into the z16 cycle and the revenue performance continues to outperform prior cycles. Our clients are facing increasing demands for workloads given rapid business expansion, the complex regulatory environment, and increasing cybersecurity threats and attacks. IBM Z addresses these needs with the combination of cloud native development for hybrid cloud, embedded AI at scale, quantum-safe security, energy efficiency and strong reliability and scalability. Increasing workloads translates to more Z capacity or MIPS, which are up about three-fold over the last few cycles. IBM Z remains an enduring platform for mission critical workloads, driving both hardware and related software, storage and services adoption. In Distributed Infrastructure, revenue grew 5 percent, driven by strength in both Power and Storage. Power growth was fueled by demand for data intensive workloads on Power 10 led by SAP HANA. Storage delivered growth again this quarter, including growth in high-end storage tied to the z16 cycle and solutions tailored to protect, manage and access data for scaling generative AI.”

Based on this and other statements plugged into our IBM systems revenue model, we believe that Power Systems revenues (including revenue recognized for rental capacity on the Power VS cloud as well as revenues from sales of secondhand equipment, both of which are relatively small compared to new system sales, were up by 5 percent to $448 million in the quarter, and up by a factor of 2.5X from Q1 2024 as often happens as you can see from the chart above. Sales of high end DS-class storage arrays accounted for perhaps another $75 million in Power Server sales internally, so we estimate that total Power Systems revenues for Q2 2024 came in at $523 million, up 10.4 percent.

That’s pretty darn good, given the state of the world.

As IBM has sold off its System x business in 2014 and a whole bunch of services businesses, it has refilled the gap with systems software from Red Hat that is more profitable and has become more dependent on that core systems business for its revenues and profits.

What we always want to get a sense of is the real IBM systems business, including those parts of the Red Hat business that are related to core systems software such as Red Hat Enterprise Linux, OpenStack, OpenShift, and a few other things. We estimate that the core, real IBM systems business on Power and Z platforms accounted for $7.01 billion in revenues in the second quarter, up 3.4 percent, and pre-tax income rose by 4.1 percent to $3.62 billion. If you add the systems software part of Red Hat – which means extract out database software, client software, and application development tools – we think that boosts the real IBM systems business to $8.23 billion in Q2, up 3.9 percent. (We have no way to easily reckon the pre-tax income for this business.) That core IBM systems business is growing at twice the growth of Big Blue itself.

Whether or not this is what Big Blue wants, we cannot say. But it is far better than if that core systems business was growing at half the rate of IBM. That’s all we know.

This Issue Sponsored By

Table of Contents

Content archive

Recent Posts

Subscribe

Pages

Search