Let's Unscramble IBM's Server Sales in Q1 2008 a Little

Published: April 24, 2008

by Timothy Prickett Morgan

The convergence of the System i and System p Power-based server lines that has been taking place in gradual steps was finalized a few weeks ago. But the bean counters at IBM did not fully converge the Power platforms in Big Blue's financial reports because this merger was not yet finished when IBM ended its first quarter of 2008. But there was another reason IBM might have waited to just report on Power Systems as a single unit, too.

Because if it didn't, it might have had to show that the delays in rolling out Power6-based servers and AIX 6.1 had impacted its Unix server sales in the first quarter as customers awaited the new products.

The way IBM has carved up its reporting of the Systems and Technology Group sales in the first quarter of 2008 makes it nearly impossible to assess how the formerly distinct System i and System p lines did in the quarter. But based on the data IBM provided in its presentations, past historical trends, and some educated guesses, I have put together a model of how I think IBM did in the quarter. And based on my guesstimates, I think the news was not good for the System p business and was not as bad for the System i line as IBM's presentations showed. If this is true, you can tell where IBM's priorities are and you can also tell why IBM suddenly decided to pull the high-end of the System i line, which was selling well at the end of 2007 thanks to the Power6-based 570, into the so-called Converged System p line and left the System i 515, 520, 525, and 550 boxes in another category called Legacy System i. By doing it this way, as I reported on elsewhere in this issue in a lengthy discussion on IBM's overall sales in the first quarter, IBM could artificially pump up System p sales, which were slumping as customers awaited a high-end Power 595 box (just announced on April 8 and shipping on May 6) and new low-end Power 520 and midrange Power 550 boxes (announced on January 29 but not shipping until February 7 for the Power 550 and February 29 for the Power 520).

Here's how the server sales at IBM for Q1 2008 stacked up, according to my figures. IBM sold some $606 million in System z mainframes in the quarter, which is just a little less than half of what it sold in the fourth quarter of 2007 when everyone was expecting new mainframes in early 2008. While this represented 10 percent growth over Q1 in 2007, and was driven by strong System z10 sales at the end of the quarter, it remains to be seen how the z10 will do as this year goes forward. IBM has a long way to go to beat the $3.6 billion in mainframe sales it had in 2006 or to even match the $3.2 billion in sales it had in 2007.

As best as I can figure, IBM sold some $161 million in what I would call genuine System i platforms in Q1, and I think that works out to about $46 million in so-called legacy System i iron and $115 million in high-end 570 and 595 boxes. If you do the math on that, then the System i business was only off 12 percent, with the "legacy" portion, by which IBM really means entry and midrange products, down 21 percent from the $58 million sales level these boxes must have had in Q1 2007. Adding high-end System i machines to the System p line didn't change much in Q1 2007 (about $26 million in hardware sales I am reckoning), but it surely did in Q1 2008, when this shift moved $115 million from the System i column to the System p column. Why would IBM do this, and in doing so only show a Converged System p line with 2 percent growth? (Hey, aren't we all one happy Power Systems family?) Because that $986 million sales level for this so-called Converged System p line (really partially converged Power Systems) is a lot better than saying that true System p sales fell by 11 percent to $871 million in the first quarter of 2008 as customers awaited all that new Power6 iron and for other companies to go first on AIX 6.1.

So, System i shops, take heart. It wasn't as bad as IBM made it sound, as best as I can figure.

What this means is that aggregate Power Systems sales--System i and System p added together, which I have been tracking for more than a decade--fell by 11 percent to $1.032 billion, the lowest level I have seen for a number of years, but not egregiously so. (The first quarter of 2006 was only slightly better, for instance.) IBM sure didn't want to say that. Hence the contortions to create temporary and, to my mind, somewhat illogical, product distinctions in its financial presentation.

IBM's System x product line, which we are supposed to call Modular Systems now but which IBM's own financial presentations do not, had flat sales in the quarter at $1.05 billion, and that was with 31 percent revenue growth in BladeCenter blade servers. Across all servers, IBM sold just under $2.7 billion in gear, down 3 percent, with another $756 million in disk and tape storage, up 10 percent. Basically, z10 mainframes and X64 servers had to do a little better than they did to make up for the delayed Power6 products.

Bear in mind, these are estimates. But I don't think the shape of the data I just presented is off by much. If you have better numbers or another interpretation of what IBM is saying, I would love to hear it.

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