Power Systems Slammed by Power7 Transitions in Q1

April 26, 2010 Timothy Prickett Morgan

IBM may have announced new Power Systems iron based on Power7 processors in the middle of the first quarter, but because they didn’t ship until a few weeks later, the new machinery did not do all that much to help Big Blue’s finances during the first quarter. But IBM is, by design, an engine with multiple cylinders, and luckily even while the Power Systems and mainframe pistons were sticking a little, X64 servers and software were firing nicely and helped fill in some gaps.

In the quarter ended in March, IBM’s overall sales rose by 5 percent to $22.9 billion, but were flat if you reckon the sales in local currencies and leave the money where it was made instead of bringing it on home to Armonk, New York, and converting it to U.S. dollars. Through the sustained efforts IBM makes in cost cutting–including layoffs, er, excuse me, workforce rebalancings that it never admits to any more–IBM managed to grow net income by 13 percent, to $2.6 billion in the quarter. IBM generated $1.4 billion in cash, used $4 billion of its existing cash hoard to buy up boatloads of its stock, spent another $700 million on dividends, and still had $14.1 billion in cash on hand at the end of the quarter.

Everything was as hunky-dory as could be, just short of calling a recovery in the economies of the world, which Mark Loughridge, IBM’s chief financial officer, was careful not to do when he talked to Wall Street. As if they didn’t have enough of their own business to clean up downtown, Wall Street is worried that IBM’s services signings were weak and is concerned a bit about the Power Systems and mainframe transitions, too. Loughridge confirmed that IBM would ship high-end Power Systems machinery and a new mainframe line, presumably to be called the System z11, in the second half of this year. Which means a bunch of things. Such as continuing weakness for mainframe sales and related system software upgrades, and continuing weakness at the high-end of the Power Systems range. This is where a lot of revenue–and profits–come from.

In the first quarter, IBM’s Power Systems revenues fell by 17 percent, but Loughridge said the company believes it held market share, presumably meaning only the Unix market because Power Systems people are, generally speaking, focused on AIX and Linux, often to the detriment of the i For Business platform. (Well, that is the name on the logo, so I have started using that because “IBM i” is a silly name for an operating system. Unlike OS/400 or even OS/710 would have been. But I digress.) IBM said that it took market share in the entry and midrange markets where the Power Systems compete–presumably meaning RISC/Itanium Unix–and added that the company had over 170 competitive wins against the likes of Hewlett-Packard and Oracle, which now owns the Sun Microsystems server business, generating $125 million in sales in Q1. IBM added that it gained two points of market share against its midrange Unix rivals, but did not say what data this assertion was based on.

Loughridge said not one word–no, not even a single vowel–about anything relating to the i platform.

System z mainframe sales were down 17 percent in the first quarter, and MIPS shipments fell by 19 percent. Loughridge said that this was consistent with what IBM expected at this point in the mainframe cycle, and that means probably two more quarters of declining revenues. If IBM can ramp up the new Power System 700, 701, and 702 blades and be ready in volume on June 4, and can push a lot of Power 750, 770, and 780 boxes, which have been shipping for a month or two, depending on the model, Power Systems could do alright in the second quarter, helping the numbers a bit.

Overall, the Systems and Technology Group posted 3.4 billion in sales in the first quarter, up 5 percent as reported and up 2 percent at constant currency. So there was some real growth here, and IBM can thank a recovery in the System x and BladeCenter product lines and a nice rebound for storage for that. System x sales (which include BladeCenter products because IBM doesn’t use its own Modular Systems brand it announced two years ago) were up by 36 percent in the quarter, albeit against a first quarter of 2009 that was down 27 percent thanks to the economic meltdown. IBM said that X64-based blade servers had a stunning 55 percent growth, and I am wondering just how awful they must have been a year ago for this to happen. (IBM did not elaborate a year ago about how the BladeCenter line did or did not do.)

IBM’s storage business, which includes disk arrays, tape drives, tape libraries, and the software that runs these devices, bounced up 11 percent in the first quarter, with disk array sales up 18 percent and double-digit gains across enterprise, midrange, and low-end disk arrays. Tape product sales fell by 5 percent, but IBM believes it grew market share. IBM said that its Microelectronics unit had a 16 percent increase in revenues, which is good because without that the Power Systems roadmap is in jeopardy, and added that the 300 millimeter fab in East Fishkill, New York, was running at near full utilization and that the 45 nanometer output at the factory was sold out this quarter as it was in the final quarter of 2009.

In an even brighter note, Loughridge said that IBM expected growth at constant currency in the middle single digits in the second quarter and that high-end Power Systems and mainframes would accelerate STG growth through the second half of 2010, yielding double-digit growth by the fourth quarter. That should get things back to more or less normal, considering how awful 2009 was. The fact that IBM was making revenue projections at all publicly is significant. One wonders why the Power7 and mainframe products are not shipping already.

IBM’s Software Group had the best growth in the first quarter, with sales up 11 percent to $5 billion. The key branded middleware quintet–WebSphere, DB2, Tivoli, Lotus, and Rational–accounts for $2.8 billion in sales, growing by 13 percent all together. IBM’s other middleware products–including mainframe and AS/400 stuff–accounted for $1.2 billion, and fell slightly. Operating systems accounted for a little more than $500 million in sales, and the rest was a grab-bag.

Global Services continues to define IBM, unless you have an understanding of the company as readers of The Four Hundred do and Wall Street generally does not. Take away that hardware, operating system, and systems software revenue stream, and there ain’t gonna be a Global Services. But, Global Services had $13.7 billion in sales, the biggest category by far at IBM, which is why the company breaks it arbitrarily into two pieces, Global Technology Services ($9.3 billion) and Global Business Services ($4.4 billion). GTS is where outsourcing, systems integration, and maintenance get lumped, and GBS is wishy-washy things like business process re-engineering and other bits IBM should not know how to do better than you do, but claims to. Global Services ended the quarter with a $134 billion services backlog, which is really just astounding and up by $8 billion compared to the first quarter of 2009. IBM signed $12.3 billion in new services contracts in the quarter, and was quite pleased that consulting signings were up 18 percent in Q1 since, as Loughridge explained, this is a leading indicator for an improving IT economy.

Wall Street was a bit annoyed that Global Services didn’t do better and that IBM did not more emphatically declare an end to the Great Recession. And the fact that IBM raised its earnings guidance by 20 cents to $11.20 per share didn’t really change analysts’ minds much, either.

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