Let’s Take a Look Under the Hood of IBM’s Servers in Q3
November 9, 2009 Timothy Prickett Morgan
Public companies sure give the appearance of telling you lots of things about their business, but they rarely cough up any specific information about what it is selling, how much it is selling, and why. But, as companies go, IBM has some of the most detailed information available about its many products lines and businesses. Which is a good thing. But actual hard information is still lacking in many cases.
Which is why I have to go through the trouble of trying to convert IBM’s somewhat limited server, storage, and chip sales results, in terms of percent change, into actual hard dollar amounts quarter to quarter. To do this, I have a spreadsheet that I have been adding to for many years that estimates the sales of the i, p, z, and x platforms, as well as other products sold by the Systems and Technology Group. The trouble now is that there is no split for the System i and System p line any more, so none of us have any idea how the Power Systems i platform is doing compared to its AIX and Linux brethren.
Here’s what we can figure out. IBM said that it booked $3.92 billion in total sales for STG in the third quarter, down 11.6 percent. Gross margins on its hardware products fell a smidgen to 35.6 percent. IBM’s various groups and divisions bought $260 million in products from STG as well, resulting in total sales for the unit of $4.18 billion. (That’s sort of like the gross domestic product of STG.) Pretax income for STG was $225 million, or about 5.4 percent of total sales (including internal and external sales added together). While not as high as in the second quarter, where IBM had lower external sales of $3.85 billion but $333 million in pretax income, it is better than the first quarter, where STG had a mere $3.22 billion in external sales and pretax income was a tiny $28 million. Basically, STG was under water in the first quarter once taxes and other expenses were taken into account. That’s not a good place for your platform vendor to be, but then again, that was the peak of the economic meltdown and was to be expected.
Based on the rounded-up and rounded down figures in IBM’s financial presentation, and a little math and guesstimating here and there, I reckon that IBM’s server businesses together brought in $2.51 billion in sales, off 12.9 percent compared to the third quarter of 2008. My best guess is that System z mainframe sales fell 26 percent to $574 million, making it one of the worst quarters for sales in the past three years (but not as bade as the first quarter of 2008, 2007, and 2006, which were also awful by comparison). IBM Power Systems business had $987 million in sales, making it the breadwinner for the quarter. IBM said that Converged System p sales were off 10 percent in the quarter, but sales of older Power5 and Power5+ iron were substantial in the year ago quarter but were nil this time around, and this, I am surmising, is why I think overall Power Systems sales were off 15.4 percent. (If you put a gun to my head and made me take a guess at what Power Systems i sales were, based on past history, I would guess somewhere between $175 million and $200 million. But that is a wild, wild guess at this point.) System x and Blade System server sales together accounted for $948 million in Q3 2009, up 1 percent.
Here’s a graphical representation of IBM’s server sales since the beginning of 2006:
There are a lot of ups and downs in this server racket, as you can see. But this is how it has always been because of budget cycles that IBM and its customers have been mutually reinforcing for decades.
IBM’s disk and tape storage businesses, which have been hammered by the downturn just like servers have been, fell 13 percent to $725 million, while chip sales fell 1.3 percent to $525 million. I reckon that IBM’s retail store systems sales–cash registers, scanners, and specialized servers to support them–accounted for $159 million, dropping 14.8 percent.
Here’s the numbers in my model for 2008 and the first three quarters of 2009:
As I have said before, I don’t claim that my model of STG’s numbers is perfect, and in a perfect world, all vendors would have to give out precise information on major product line sales by law, as required by the Securities and Exchange Commission. And Federal Trade Commission would require that every sold product have a list price, too. But I digress.
As you can see from the chart above showing server sales, the System x and BladeCenter line has rebounded, but it is still a long way to go to get back to what looks like a normal fourth quarter peak. IBM’s first quarter was no doubt hurt by Intel‘s delay in shipping its “Nehalem EP” Xeon 5500 processors, which really didn’t appear in systems until the second quarter and were not really ramped until the third quarter.
Both the Power Systems and System z families are at the end of their product cycles, with Power7 and z11 machines expected next year (as we reported previously in The Four Hundred.) The Power7 machines are expected to have a “rolling thunder” rollout, just like the Power6 and Power6+ chips did, and the System z11s are not expected until the third quarter. The relative weakness of Power Systems and System z sales right now–at least compared to past trends–might have as much to do with those impending announcements as it does with the global economy being weak.
To put it bluntly, there is no way for IBM to have 2009 end up being anywhere as good as 2008. IBM would have to basically double its overall server sales in the fourth quarter to over $5 billion, and more importantly, it would have to sell $1.86 billion in mainframes to get the System z line to flat, $1.89 billion in Power Systems to get that business flat with last year, and $1.37 billion in System x and BladeCenter sales to pull even with a somewhat terrible 2008. This just ain’t gonna happen. If IBM averages the same ratio of sales in each 2009 quarter to the prior 2008 quarter, then I think IBM might do something on the order of $3.2 billion in overall server sales in Q4, with $783 million from mainframes, $1.47 billion from Power boxes, and maybe $950 million for x boxes (provided x bucks the trends, as it did in Q3). If that happens, IBM’s server business will still be down 16 percent for the year, to around $10.4 billion, and mainframes declining 30 percent to $2.5 billion, Power down around 8 percent to $4.7 billion, and x down around 12 percent to $3.2 billion.
With those kinds of numbers, you can see why IBM focuses so much on Power Systems, and why its chip deals with Sony, Toshiba, and Nintendo matter so much. There is a lot of revenue and profit riding on those Power chips. That said, nothing is anywhere near the profitability of the mainframe, which uses similar chip technologies and come out of the same Poughkeepsie, New York, factories as the high-end Power boxes, but which really rakes in the dough thanks to all that legacy software that companies are addicted to.
We’ll see how it all turns out in January, and rest assured, The Four Hundred will tell you all about it.