Volume 15, Number 18 -- May 1, 2006

Merrill Lynch Estimates IBM iSeries and System i Sales for Q1

Published: May 1, 2006

by Timothy Prickett Morgan

Because IBM doesn't give out sales figures for its various server product lines as part of its quarterly financial results, we have to rely on the sales models developed by analysts like IDC and Gartner or brokerage houses like Merrill Lynch to try to get a sense of what happened in Big Blue's server businesses. IDC and Gartner tend to look back a quarter, but Richard Farmer at Merrill Lynch got his estimates out the day after IBM reported its financials. And the numbers are interesting.

Two weeks ago, IBM reported that System i and iSeries server sales were down 22 percent as reported and 19 percent at constant currency. IBM laid the blame for the downturn on the transition to new Power5+ servers, which were announced on January 31. According to Farmer's models, IBM did better than he expected, with $237 million in OS/400 server sales, which was 5.4 percent higher than he expected. If iSeries sales were disappointing to Farmer, imagine how the mainframe disappointed, with Farmer expecting $739 million in sales, but IBM only bringing in $555 million. pSeries Unix sales were also lower than Farmer expected at $733; he was anticipating that IBM would do $846 million in sales in the first quarter. The other surprise was that xSeries server sales were $954 million, about $69 million higher than Farmer was expecting. All told, Merrill Lynch was expecting IBM to take in $3.398 billion in server sales, but reckons that it actually brought in $3.197 billion, 2.8 percent lower than expected.

It stands to reason that IBM's own expectations were not met, either, at least as far as server sales are concerned. Mine certainly have not been, either. When I spoke at a server conference put on by brokerage house UBS last December, I sat on stage and publicly chastised Ben Reitzes, the head IT analyst who was hosting the event, for being a little too cynical about his iSeries sales estimates for 2005 and 2006. I, like many of you, saw the impressive revenue gains in the middle of 2005 as a positive--and long term--sign of change. I just hope that IBM didn't stuff the channel full of gear to get good numbers, leaving resellers with lots of inventory that they are still not able to sell down. IBM and its master reseller partners do not talk numbers, so it is hard to say exactly what is going on.

Farmer's revised sales model for IBM's servers shows that the OS/400 platform will shrink in the third quarter by 20 percent to $274 million, followed by a 26 percent shrinkage in the third quarter to $287 million. He predicts a 5 percent increase in the fourth quarter for the iSeries, which he predicts will reach $470 million, but in Q4 2005, iSeries sales were off 18 percent, so that 5 percent doesn't make up for the prior year's lost ground. What that means is that IBM will give back more ground in 2006 than it gained in 2005 with all of its efforts to promote the OS/400 platform. He also projects continuing revenue declines, putting sales in 2008 at $1.17 billion, which is $314 million lower than the level set in 2005.

There is time yet to change the game plan for the System i and do the aggressive repricing, repackaging, and marketing that is necessary to make this a competitive box that is truly aimed at the SMB market. It is IBM's job to enable the OS/400 ecosystem to prove Farmer's predictions for the future wrong. Consider them a warning.

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Editor: Timothy Prickett Morgan
Contributing Editors: Dan Burger, Joe Hertvik, Shannon O'Donnell,
Mary Lou Roberts, Victor Rozek, Kevin Vandever, Hesh Wiener, Alex Woodie
Publisher and Advertising Director: Jenny Thomas
Advertising Sales Representative: Kim Reed
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