The Q4 IBM Server Drilldown: It Could Have Been Worse
February 1, 2010 Timothy Prickett Morgan
As I do each quarter two weeks after IBM reports its financial results, I diced and sliced and mished and mashed up the facts and figures that Big Blue presents to give investors an idea of how its systems business is doing. The fact is, it could have done worse, considering how many product transitions the company is juggling.
As I speculated three months ago when analyzing IBM’s third quarter results, there was no way, given the economic meltdown, that Big Blue could draw even for 2009 compared to 2008, which didn’t exactly end on a high note. Based on the information released by IBM as well as guesstimations to fill in the gaps, I calculate that IBM sold an aggregate of $3.4 billion in servers, a decline of 6.4 percent compared to sales in the fourth quarter of 2008, which was, by the way just awful, declining 8.4 percent from the $4.42 billion in server sales in the last quarter of 2007. As you can see from the chart below, the System z10 mainframe and the Power6/6+ server lines are at the end of their product cycles and awaiting a refresh, and the refresh early last year of the X64 platforms by Intel and Advanced Micro Devices clearly kicked in alongside an uptick in spending on X64 platforms (particularly among large enterprises that slammed on the brakes at the end of 2008, as best I can figure). Take a gander at the pretty picture, which shows IBM’s server sales since the beginning of 2006:
You can see why IBM had to move up the Power7 server announcements, particularly if new mainframes are not coming until the third quarter of this year, as rumors suggest.
As best I can figure, IBM had $799 million in mainframe sales, down 27 percent, and $1.3 billion in System x and BladeCenter sales, up 37 percent. That leaves Power-based platforms accounting for $1.3 billion in revenues in the fourth quarter, which I think is actually down 18 percent compared to last year. IBM said Converged System p sales were off 14 percent in the quarter, so I think there is a smattering of older Power iron that is still being unloaded to make my numbers work. (If IBM just gave investors the actual numbers, I wouldn’t have to make these estimates. There ought to be a law. . . . )
When you do the math, I figure that IBM had $1.1 billion in storage sales, up 1 percent, in the fourth quarter, with chip and related chip technology sales up 2 percent to just under $500 million and retail and store systems down 5 percent to $195 million.
If you like tables of data, here are the numbers in my model for 2008 and 2009:
IBM’s Systems and Technology Group had total external sales of $5.19 billion and gross margins were up by 3.6 points to 42.5 percent, margin levels that Big Blue hasn’t seen in any quarter since the company hit its stride with the Power6 and z10 machines and STG booked $6.8 billion in sales and 45.7 percent gross margins. IBM had another $232 million in internal sales of technology to other groups and had pre-tax income of $832 million. While not as high as the $1.36 billion in pre-tax income in Q4 2007, this is a very large improvement in pre-tax income. For the first three quarters of 2009, STG only brought in $586 million in pretax income. Basically, STG is starting to pull its profit weight. I can’t prove it, but I think IBM must be making servers and storage in factories outside of North America and Europe to make it happen.
For the year, I reckon that IBM’s mainframe revenues declined by 41.5 percent to $2.55 billion, Power Systems sales were down 12.6 percent to $4.49 billion, and System x and BladeCenter sales were off 2.1 percent to $3.54 billion. Overall server sales were down 18.5 percent for the entire 2009 year, to $10.6 billion. IBM did a little bit better than the $10.4 billion I predicted three months ago, largely because System x did a bit better than I anticipated. (Just to remind you, I had mainframes coming in at $783 million, $1.47 billion from Power, and $950 million for System x/BladeCenter in Q4, which put mainframes in my forward-looking model at $2.5 billion for all of 2009, Power at $4.7 billion, and System x at $3.2 billion. I got the larger numbers right, but the numbers for each product line wiggled more than I expected. Which is why I don’t do this predicting for a living.)
For the past three years, IBM’s annual server sales were right around $12.5 billion, despite all the product ups and downs. Clearly, IBM should be managing its product transitions so two major products are not moving to new technology at the same time.