A Little More Insight into IBM's Server Sales in Q4 and 2005

Published: January 31, 2006

by Timothy Prickett Morgan

While IBM provides a fair amount of detail concerning the growth and declines in its dozens of key product lines, it has very rarely only talked about the absolute revenue figures for any key product line--and certainly not since the Securities and Exchange Commission instituted regulations in the last decade that do not allow selective disclosure. Which means IBM never talks specifically about how any of its groups, divisions, and units are doing in terms of dollars and cents.

Like other public companies, IBM cannot tell any customer, investor, analyst, or journalist any piece of information relevant to the performance of its business that has not been disclosed in a public forum or document of some sort. The intent of the SEC regulations was to prevent some people from having insight--like Wall Street analysts who pump or pan stock for a living--while other people--customers and the investing public--do not have access to that insight. The idea was to get everyone up to speed on information that helps investors make decisions about whether to buy or sell their holdings in public companies, but the unintentional effect of the SEC regulations has been, to a certain extent, the dumbing down of the information quality available in the market. In the past, some people knew more than others, and they usually blabbed it eventually, so interested parties could find out juicy stuff.

And now, in the absence of hard numbers, we are left to make-do with the estimates of IT analysts or Wall Street analysts. Richard Farmer, of Merrill Lynch, has one of the most sophisticated models of Big Blue's business out there, and last week after digesting IBM's financial results for the fourth quarter and full year for 2005, he cranked out a new model. In that, he gives his estimates of how IBM's various server units did in 2005 and, equally interestingly, how he expects them to do in 2006 and 2007.

According to Farmer, IBM raked in about $1.39 billion in mainframe server sales in the fourth quarter, which utterly dwarfed the $448 million he thinks IBM booked for the iSeries midrange server line. The pSeries Unix server line had sales of $1.24 billion, and the xSeries line (including BladeCenter blade servers) posted sales of $1.18 billion. When you take out transfers of servers between the various IBM server divisions and add in storage and networking, IBM had about $1.1 billion in additional sales in the Enterprise Systems Group, with most of this being for storage, bringing the total for the Enterprise Systems Group to $5.36 billion in the fourth quarter. Operating system sales, which are counted over at Software Group but which probably belong on the server side of the IBM revenue sheet, came in at $646 billion in the quarter; it is unclear how much of this was for IBM's own z/OS, i5/OS, or AIX operating systems and how much was for Microsoft's Windows and either Red Hat's or Novell's Linuxes, which IBM resells on its servers.

For the full year, Farmer reckons that the mainframe line had $3.48 billion in sales, compared to the $1.47 billion in sales for the iSeries server line. That's an 8 percent decline for the mainframe from a very good year in 2004. While the iSeries had a pretty poor showing in the fourth quarter, it did eek out a 1 percent increase for the year--thanks to very good second and third quarters. IBM's pSeries business boosted its sales for the year by 14 percent to $3.83 billion, making the Unix server line IBM's second biggest breadwinner in terms of hardware sales. (But probably not in terms of profits and certainly not when examining the add-on software and services sales IBM gets from both lines, of course. The mainframe wins that contest.) Second biggest breadwinner, you ask? Yes. The xSeries server business, by Farmer's estimates, broke through $4.1 billion in sales in 2005. Storage and networking for systems accounted for another $3.34 billion in sales, giving the Enterprise Systems Group a total of $16.24 billion in sales. Operating systems accounted for $2.42 billion in sales on top of this.