IBM Power On Track To Get Above $2 Billion A Year

February 3, 2025 Timothy Prickett Morgan

IBM’s stock price is kissing $260 a share, and this is a level that, adjusted for stock splits, the company has not seen since before it ran up on the rocks in the early 1990s as its mainframe business and AS/400 business all shrank at the same time that RISC/Unix systems and X86 gear in the datacenter took off. What’s going on?

Well, here is the deal: IBM has customers using its Power and z servers for mission-critical back office systems, and a lot of the customers using its IBM i, AIX, Linux, and z/OS platforms are going to be looking to Big Blue to help them commercialize GenAI with its systems and platforms, which include Red Hat Enterprise Linux, OpenShift container controllers, OpenStack virtual machine controllers, and the AI frameworks and models embedded in its WatsonX AI software stack. And there is reason to believe, especially given the appetite that companies have so far for IBM consulting services and software relating to GenAI, that over the long haul of the next decade IBM will be able to build a big GenAI business from these customers much as it was able to commercialize Java programming and Web application serving in the wake of the Dot Com Boom three decades ago.

All this while selling steady incremental capacity to Power and z customers for their existing transaction processing workloads.

Big Blue is not there quite yet making billions of dollars a year with GenAI, of course. But the foundation for a business that can grow faster than what IBM has been able to do in the past several years is laid, and now it comes down to execution on the 165,000 or so unique customers that the company has worldwide across those two hardware platforms and four operating system platforms. Having integrated matrix math capabilities, which both the Power10 and z16 processors already have and which will be enhanced further this year with the Power11 and z17 generations, means that AI inference and moderate scale AI training and tuning can be done on the platforms running back office systems – where many, including us, argue this should be done for performance, security, and price/performance reasons.

On a call with Wall Street analysts going over IBM’s December 2024 quarter, Arvind Krishna, the company’s chief executive officer, said that IBM exited the quarter with more than $5 billion in cumulative GenAI bookings, up $2 billion from where it was at as Q3 2024 came to an end. IBM started giving GenAI bookings figures starting with Q3 2023, where they were a tiny $275 million. We reckon that about $100 million of that came from software and $175 million came from consulting. Five quarters later, and IBM’s total GenAI software bookings have grown to $1 billion, and its total GenAI consulting booking have crested above $4 billion.

IBM has not given out figures for how much GenAI revenue it has booked in each of the past six quarters, and perhaps it will once that revenue is material. Then again, it does not report revenues for its Power Systems and System z platforms distinct from each other, so maybe not. A lot depends, we think, on how well IBM surfs on the GenAI boom.

In the fourth quarter, IBM’s revenues we up 1 percent to $17.55 billion, but due to investments in future platforms and tailing off sales of its System z mainframes, which we were down 21 percent, IBM’s net income was down 11.3 percent to $2.92 billion.

IBM’s infrastructure business, which sells servers, operating systems, and storage created by the company as well as sometimes switching made by others, posted $4.56 billion in revenues in Q4 2024, down 7.6 percent. Bross profits were off 13.2 percent to $2.42 billion and pre-tax income was down 10.3 percent to $1.06 billion. Within this, $2.98 billion was for “hybrid infrastructure,” meaning servers and storage, down 9.8 percent, and $1.28 billion was for tech support for IBM’s installed base of systems.

IBM’s Software group, which sells all of its software other than operating systems, including databases, security, transaction processing, and other software as well as the Red Hat stack, had $7.92 billion in sales, up 10.4 percent, with pre-tax income up 17.1 percent to $3.1 billion. As best as we can figure from our model, Red Hat drove $2.07 billion in sales, up 16 percent year in year.

If you take all of the base system stuff (including the core red Hat business) and financing for all of this and roll it all up, we reckon that IBM’s “real” systems business drove $9.46 billion in sales in Q4 2024, up 2.1 percent.

What we really want to know each quarter, of course, is how the Power Systems business did, and this being the final quarter of 2024, we also want to know how the Power Systems business did for the full year.

According to our model, the core Power systems server business plus Power-based systems sold to the Storage division for DS and ESS storage arrays that are sold, respectively, to large enterprises and HPC centers, accounted for $561 million, up 3.2 percent year on year.

Here is a chart that shows quarterly Power Systems revenues from the Great Recession in 2009 through now:

The good news, as you can see, is that the core Power Systems hardware platform has been growing for the past four years, after bottoming out in 2020. You can see that the first and third quarters tend to be a lot weaker than the second and fourth quarters, a pattern that has persisted, with the exception of big server launches that hit in the first or third quarters.

This chart below shows the annual pattern of Power Systems sales, which is a little bit easier to see the swoop of:

There is a non-zero chance that the GenAI boom as well as organic growth in Linux-based Power Systems sales for SAP HANA databases and applications as well as organic growth for IBM i and AIX platforms will push the Power Systems hardware business back above $2 billion a few years hence. With IBM not selling a lot of Power-based supercomputers – and not really interested in that money-losing proposition – and core cloud and telecom service provider systems long since moving to Linux on X86 processors and increasingly on Arm processors, it seems unlikely that Power iron will ever go above $4 billion or $5 billion a year again. But if GenAI takes off natively on Power among IBM i, AIX, and SAP HANA shops, well, then $3 billion a year might sound crazy optimistic, but perhaps not.

We shall see.

As it is, our model shows the Power Systems business growing by 3.2 percent to $1.59 billion in 2024, and with Power11 systems coming later this year, we think it will probably be another growth year in 2025, too. Perhaps a lot more than a few points, too.

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