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  • A Little More Color on IBM’s Q4 2007 Server Sales

    January 21, 2008 Timothy Prickett Morgan

    Whatever IBM did to stop the eight-quarter decline in sales of System i servers, my advice is to keep doing more of that. (Unless it pumped the channel full of iron to get good numbers, as vendors are sometimes tempted to do, particularly in the fourth quarter when the bonuses of their employees and partners, as well as their own, are at stake.) The Power-based server line was one of the saviors of Big Blue’s ending quarter of 2007, and for once, the System i product line was helping out instead of hurting.

    As we reported in the lead story in this issue that goes over IBM’s results for the fourth quarter, the Power6 processor was the savior of the System i and System p lines in the fourth quarter, particularly because both machines were selling 570-class boxes based on the new chip for the whole 13 weeks of the quarter. The System i division didn’t start selling the Power6-based 570 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.

    I can’t help imagining how much less red ink would be on this chart below if IBM had put the Power6 server line in the field in late 2006 or early 2007, with user-based pricing on all entry and midrange boxes. But, alas, that didn’t happen. But, IBM did get user-priced i5 515 and 525 boxes out in April and has been fixing pricing issues throughout the summer, which has apparently helped push up System i volume shipments. (IBM has hinted, but not given out any figures.)


    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.

    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.

    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.

    RELATED STORIES

    Weak Dollar, Services, and Power6 Give IBM a Solid Fourth Quarter

    IBM Gives Wall Street a Present: More Profits Than Expected

    IBM Hit by Financial Services Slowdown in Q3

    System i Sales Drop Again in Q3, IBM Says Little

    Shearer Talks About System i Sales, Server Reorganization

    IBM Turns In Its Best Second Quarter in Six Years

    Slowing U.S. Sales Hurt IBM’s First Quarter

    Merrill Lynch Takes a Closer Look at IBM’s Server Sales in Q1



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    Tags: Tags: mtfh_rc, Volume 17, Number 3 -- January 21, 2008

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    Admin Alert: Before You Buy That New System i, Part 1 AURA Equipments Beats IBM to the Punch with DB2/400 Engine for MySQL

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TFH Volume: 17 Issue: 3

This Issue Sponsored By

    Table of Contents

    • Weak Dollar, Services, and Power6 Give IBM a Solid Fourth Quarter
    • IBM Aims for Server Expansion in 2008, Including System i Reincarnation
    • Readers Riff on the 2008 System i Wish List
    • Sun Casts a $1 Billion Net to Catch MySQL
    • The Rumor Mill on IBM’s Impending Platform Announcements
    • Some Info on i5/OS V6R1 and V6R2 Support
    • A Little More Color on IBM’s Q4 2007 Server Sales
    • Microsoft Rises to Sixth on Patent List for 2007
    • BEA Systems Finally Says Yes to an Oracle Buy
    • Gartner Predicts Strong Outsourcing, Weakening Business Intelligence Markets

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