A Closer Look at IBM’s Q2 Server Sales

August 24, 2009 Timothy Prickett Morgan

I haven’t forgotten that I promised some kind of deeper analysis into IBM‘s second quarter sales in its Systems and Technology Group. As you well know, Big Blue’s financial reports leave as many questions unanswered as replied to when they come out each quarter, leaving us all scratching our heads and wondering how much money the various server lines actually brought in. I wrestled with my spreadsheet model of IBM’s server sales last Friday, and here is what I came up with.

I make no promises about the accuracy of the numbers I put forward. All financial models start out with basic assumptions, and working with the growth or shrinkage numbers IBM talks about each quarter for various server lines, you try to fit the numbers to the data. It is an annoying process, and the numbers don’t always cooperate.

As we reported back in July, when IBM reported its financial results for the second quarter ended June 30, it was not a great quarter for the server racket in general or IBM in particular. Sales in the Systems and Technology Group, which manufactures and sells servers, storage, chips, retail systems, and other technologies cooked up by IBM, fell by 26 percent to just under $3.9 billion. IBM said that System z mainframe sales fell by 39 percent, System x servers fell by 22 percent, and that the Converged System p product line (which includes Power6 and Power6+ boxes) fell by 13 percent. Storage (including disk and tape) fell by 20 percent, retail store system plummeted by 41 percent, and Microelectronics OEM chip and intellectual property sales fell by 23 percent.

IBM added that it had total STG sales of $4.1 billion, including $244 million in sales and other eliminations between STG and other IBM groups. Because of tighter controls on costs and the deals that IBM is doing–I think IBM is not fully engaging in the X64 server price war just to get market share–STG posted pretax profits of $333 million. In the first quarter, STG only had $3.23 billion in external sales and only had $28 million in pretax profit. That was bad, and it did not bode well for STG, which has tended to have a pretax income of between $200 million and $250 million each quarter. (And which used to have a lot more than that in years gone by.)

That’s pretty much all that Big Blue said.

If you don’t go through the pain of making some estimates, you can’t see how things are changing sequentially, quarter after quarter, which is perhaps more significant when the economy is on the skids. Year-on-year growth or shrinkage numbers don’t tell you how big the server lines are compared to each other, and how they change quarter to quarter in a given year. That’s why you keep me around, I guess. And let me tell you, I have to make a few big guesses to come up with these numbers each quarter.

Here’s how I reckon the past six quarters for IBM’s system sales racked up:

	1Q 2008	2Q 2008	3Q 2008	4Q 2008	1Q 2009	2Q 2009
System z	$569 M	$1,176 M	$775 M	$1,087 M	$464 M	$713 M
System i	$142 M	$205 M	$247 M	$243 M	$138 M	$215 M
System p	$833 M	$1,133 M	$919 M	$1,355 M	$817 M	$1,032 M
System x	$997 M	$724 M	$939 M	$950 M	$728 M	$562 M
Total	$2,541 M	$3,238 M	$2,880 M	$3,635 M	$2,147 M	$2,521 M

Power Systems	$975 M	$1,338 M	$1,166 M	$1,598 M	$955 M	$1,247 M

Storage	$738 M	$949 M	$842 M	$1,085 M	$587 M	$771 M
Micro OEM	$536 M	$594 M	$532 M	$488 M	$342 M	$439 M
RSS	$184 M	$193 M	$177 M	$205 M	$115 M	$123 M

What is immediately obvious from my estimates–and which you would not know if you didn’t make estimates like this–is that server sales seem to have been up sequentially for the System z and Power Systems lines, even though on a year-on-year basis sales were slammed. System x sales (which includes BladeCenter boxes) were down sequentially 27.7 percent, to $562 million, and have probably rolled back to levels that IBM hasn’t seen since 2003 or 2004. I figure that System z sales were up 53.7 percent sequentially to $713 million, and that Power Systems sales rose by 30.6 percent sequentially to $1.25 billion. The sequential rise in Power and mainframe server sales no doubt improved the profit picture for STG a great deal. I took a stab at guessing how Power Systems might have split along the old i-p divide, but this is really anybody’s guess. Excepting IBM, of course, which knows damned well how the AIX-i split works out on its Power Systems machinery.

If you like to take in your data visually, as I do, here’s a pretty picture that shows the past six quarters.

As this chart makes clear, IBM’s quarter-to-quarter server sales are choppy, but sort of regular. The global recession has grabbed the curves and bent them toward the X axis a bit, and in the case of the X64 server products, they have been in decline since this time last year. It is hard to say why, but I think the real reason is that IBM’s machinery is not being picked up as aggressively by the X64 channel or its enterprise customers as it has been in the past. When IBM says that it is seeing consolidation of X64 workloads on Power and mainframe iron, I have no doubt this is true, but I also think something else is going on for IBM’s System x business to have been hit so hard. It could just be that Hewlett-Packard and Dell are just that much more aggressive these days.

The i-related Power Systems business, if my numbers are correct, has also had its peaks knocked off, and it struggles along. The vast 200,000-strong installed base using AS/400 and successor platforms just doesn’t need to add capacity as often as they used to, given the huge performance gains of Power5 and Power6 machines relative to earlier iron and their moderately growing (if they are growing at all) workloads. This is just Moore’s Law and the normal price/performance curve at work on an established installed base, particularly one that is using virtualization to consolidate boxes.

And now that I think of it, virtualization might be hurting IBM’s System x sales, too, as it takes off. Maybe IBM, whose customers have been on the bleeding edge of server virtualization for decades, is feeling the virtualization crunch ahead of HP, Dell, and others.

As best I can figure, IBM also saw decent sequential growth in its storage, chip, and retail store businesses in the second quarter, given the difficult state the economy is in. Obviously, STG wants to do better than this and really show quarter-on-quarter growth, but I don’t expect that until the fourth quarter, and maybe not even until the first quarter of 2010. We’ll see.

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