The Windows Observer--A Little More Color on IBM's Q4 2007 Server Sales

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Volume 5, Number 3 -- January 23, 2008

A Little More Color on IBM's Q4 2007 Server Sales

Published: January 23, 2008

by Timothy Prickett Morgan

As we reported elsewhere on the IT Jungle site, the Power6 processor was the savior of the System i and System p lines in IBM's fourth quarter, particularly because both machines were selling 570-class boxes based on the new chip for the whole 13 weeks of the quarter. But other IBM products, including Linux servers using Power, mainframe, and X64 processors and Windows on X64 as well, did their part in Q4 and in 2007 as a whole for Big Blue.

By my math, for all of 2007, IBM's aggregate server sales came to $13.3 billion, only 1 percent higher than 2006's levels across all server types at Big Blue. (I can almost hear Bill Zeitler and Loughridge bragging about the joys of a balanced portfolio. . . . ) System z sales dropped by 11 percent to $3.19 billion, System i sales fell by 11 percent to $1.11 billion, System p sales rose by 9 percent to $4.16 billion, and System x sales topped IBM's charts (as they did in 2006 as well) with $4.83 billion in sales, up 8 percent. Total Power Systems sales for 2007 came to $5.27 billion, up 4 percent. All of these machines support Linux, by the way, and it would be interesting to see how much Linux drove sales. (IBM has never provided such information.)

As I did last quarter, I am using a recent report on VMware's effect on the server market put together by Citigroup Global Markets Equity Research, which is the analyst arm of Citigroup that has been separated from its Citi Smith Barney stock brokerage unit, as a baseline to figure out how much money each of IBM's server divisions made in the fourth quarter. IBM does not provide absolute sales numbers for servers and storage by brand, so someone always has to do the guesswork.

The System i did get the Power6-based 570 server selling until early September, so its rendition of the Power6-based 570 could not do much to help sales in the third quarter. But clearly something happened in the fourth quarter. In the fourth quarter of 2006, Citicorp's analysts reckoned that the System i accounted for $390 million in sales, so a 2 percent increase in sales (as reported back at IBM's headquarters and consolidated in U.S. dollars) would put System i sales in Q4 2007 at $398 million. At somewhere between a few hundred million dollars for an upgrade to a Power6-based 570 to several million for a whole new 570, it doesn't take that many boxes to make up a lot of sales in any quarter. And this is precisely what I think happened.

Of course, System p sales still dwarf those of the System i line, and that is not going to change any time soon. (It took 15 years to change their relative revenues, after all. I can remember when the AS/400 outsold the RS/6000 by a three-to-one ratio.) In the year ago quarter, the System p line accounted for $1.37 billion in sales, and 9 percent increase in Q4 2007 would put sales at $1.49 billion. That puts total Power-based server sales at $1.89 billion, up 7.4 percent. This is sure a lot better than the 10 percent decline the System i line had in the fourth quarter of 2006 and the relatively meager growth of the System p line, at 4 percent back then. As 2006 was closing, the combined Power server line grew sales by only six-tenths of a percent to $1.75 billion, according to Citicorp's estimates.

That puts the Power platform on top of even System z mainframe sales in the fourth quarter of 2007. Citicorp figures that IBM sold $1.38 billion in mainframes in the final quarter of 2006, and the 15 percent decline in sales IBM reported last week for mainframes in Q4 2007 would put sales at $1.17 billion. The important--and amazing--thing is that IBM had a huge decline in mainframe sales, but somehow managed to hold prices in such a way that it could actually expand gross margins. According to another research note put out by Smith Barney Citicorp's IBM watchers, they had been expecting a mainframe sales decline on the order of 20 percent instead of the 15 percent decline, and they were just wowed by the fact that IBM was able to expand gross margins on mainframes to 75 percent--what they said was the highest level they had seen in decades. (This is what happens when you have no competition and customers are addicted to your product, as they certainly are to mainframes.) By the way, the Smith Barney Citicorp analysts had been expecting System i sales to fall by 10 percent instead of rise by 2 points and had also expected System p to rise by 24 percent instead of 9 percent. The System i really did help save System and Technology Group's quarter against those expectations.