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  • IBM Mainframes Jump, Power Systems Drop Ahead Of Power7+ Rollout

    January 28, 2013 Timothy Prickett Morgan

    If IBM could control the situation its way, it would probably never launch new Power Systems and System z mainframe systems anywhere even close to on the same cycle because keeping them spaced would allow its Systems and Technology Group to operate more like a multi-cylinder engine, running smoothly, rather than a pile driver, sometimes up and sometimes down. But managing chip designs and system rollouts is complex–being late is normal and being on time is unusual–and companies still think on annual cycles.

    I continue to believe that IBM intended to ship the Power7+ chips back in October 2011, which would have been about a year and a half after the Power7 systems started coming out.

    Luckily for IBM in the fourth quarter of 2012, the System z12 mainframe cycle was ramping up just as the Power7 cycle was ramping down ahead of a broader rollout of Power7+ systems this year. IBM put Power7+ chips into the enterprise-class Power 770+ and Power 780+ systems in early October, and followed up with Power7+ processors for the p260+ nodes for the PureSystems line in late November. While these are important systems, they by no means represent the volume boxes in the Power Systems lineup, and they are not particularly interesting to IBM i shops, which tend to prefer Power 720, Power 740, and Power 750 tower and rack servers for the most part.

    Given the fact that everyone knows IBM will be rolling out more Power7+ systems in 2013–and that some of them will pack a double whammy with two whole processors being crammed into a single socket–it is no surprise at all that Power Systems revenues were off in the fourth quarter, but perhaps it is a bit shocking to some that Power Systems revenues dropped 19 percent even with three new Power7+ boxes available during the quarter.

    In a conference call going over IBM’s financial results for the final quarter of 2012, chief financial officer Mark Loughridge said that Power Systems machinery can take a couple of months to go through testing and certification before they are rolled out in volume at customers, and added that he did not expect for volumes of the three Power7+ machines launched late last year to ramp until the second quarter of this year. That said, the new Power7+ midrange and high-end Power7 boxes sold well in Q4 2012, Loughridge said, and one of the reasons is that some companies could quickly absorb the Power 770+ and Power 780+ boxes and others with more scalability needs know that there is not going to be a Power7+ variant of the Power 795. They won’t be doing upgrades until the Power8 generation some years hence. Loughridge said on the call that the refresh of the Power Systems line would continue in the first half of 2013.

    Given the revenue decline and the fact that the mainframe bump may only last two more quarters, you have to reckon that IBM is eager to get entry and midrange Power7+ machines into the field–and to do so well ahead of Intel‘s “Ivy Bridge” Xeon E5 v2 processor launch later in 2013 (perhaps the fall).

    Mainframes saved the day in the fourth quarter, that much is for sure. Revenues were up 56 percent against a very easy compare last year when mainframe revenues were down 31 percent. It helps to remember that the System z11 bump in the fourth quarter of 2010 saw mainframe sales spike 69 percent, and if you do the math, the sales level hit in Q4 2012 is only 7.6 percent larger than levels set in Q4 2010. This is a big spike, no question about it, and the aggregate MIPS shipped for mainframes was up 66 percent in the quarter, too. But that may be more of a function of IBM’s sales reps trying to make new CEO Ginni Rometty look like a hero than exceptional demand for mainframes. We’ll know better as we see the System z12 generation sell over the next few quarters. I think it is reasonable to think IBM pumped up mainframe sales with aggressive deals because it knew Power7 was going to be hurting in the quarter without Power7+ chips in the machines that represent the belly of the market. I also think Power Systems sales will be hurt by the fact that IBM is not offering a Power7+ bump on the Power 795 machine, and I would not be surprised if the company eventually changes its mind on that.

    IBM’s System x business was off 2 percent and there is no question that IBM is under pressure from Dell, Cisco Systems, and Lenovo when it comes to X86 servers.

    Servers represented 71 percent of sales at Systems and Technology Group in the quarter, which works out to around $4.1 billion if you do the math. (IBM only provides percentages for servers as a piece of the STG whole.)

    IBM’s tape drive, controller, and library system business continued to decline and disk sales were flat; when you add storage all up, even with high-end disk thanks to the big DS8870 arrays that launched in October selling out, overall storage revenues were down 5 percent to around $1.1 billion. OEM chip sales through its Microelectronics Division were up 4 percent to around $575 million.

    Add it all up, and Systems and Technology Group had $5.76 billion in sales, down 1 percent as reported. But if you took out the Retail Store System business that IBM sold off to Toshiba last year from the comparisons, then IBM’s hardware group had a 4 percent revenue bump. And thanks to the System z12 mainframe bump, pre-tax income for STG was up 23.2 to $974 million.

    The other part of IBM’s “real” systems business is over at Software Group, and it is operating systems. IBM said in its financial results that operating system sales were flat at $709 million.

    The rest of Software Group, which includes middleware of myriad kinds, databases, various data analytics programs, and an increasing amount of application software related to analytics and marketing, accounted for $7.21 billion. The five key software brands–WebSphere, Information Management, Tivoli, Lotus, and Rational–accounted for $5.5 billion in revenues, up 5 percent. Other middleware, mostly on IBM proprietary IBM i and mainframe platforms, accounted for just under $1.2 billion in sales and shrank a bit. WebSphere, Lotus, and Rational had 11, 9, and 12 percent growth in the quarter, respectively. Software Group had pre-tax income of $4 billion, up 4 percent from the year-ago period.

    Global Services is the revenue generator at Big Blue, but it cannot squeeze as much profit out of that revenue as the System z mainframe or Software Group can do. Global Services shrank by 2.1 percent to just a hair over $15 billion in the fourth quarter. If you do the math on the pie chart that IBM provides in its presentation, then its strategic outsourcing business fell by 3 percent to $6 billion and application and business process outsourcing fell 4 percent to just over $1 billion. IBM’s consulting and systems integration operations had $3.6 billion in revenues in the fourth quarter, down 3 percent, and its hardware and software maintenance business (which covers IBM and non-IBM products alike) had a two point downtick to $1.8 billion. The mysterious Integrated Technology Services division, which no one has ever explained to my satisfaction, had $2.55 billion in sales, up 2 percent. Add it all up, and Global Services had a pre-tax income of $2.8 billion.

    (Notice I didn’t say Global Technology Services or Global Business Services once there? I think these two divisions are largely fiction.) The Global Services backlog was $140 billion as IBM exited the year, basically flat from the year ago period.

    Global Financing, which provides financing to IBM’s vast partner channel for their inventories as well as to end user companies for the IT wares they acquire, is kept separate from Global Services. Global Financing had $37.5 billion in assets under management as the quarter came to a close, up $2.4 billion from the year-ago quarter, but it also had $24.5 billion in debt, up $1.2 billion. Global Financing had $535 million in revenues in the fourth quarter, down 2 percent, but if you include its internal financing for other IBM units (probably Global Services but maybe for chip gear at STG for all we know), then its revenues are $1.1 billion and its pre-tax income is $518 million, up seven-tenths of a point compared to a year ago.

    If you add it all up, IBM’s revenues in the fourth quarter came to $29.3 billion (down six-tenths of a percent) and its net income was $5.83 billion (up 6.3 percent). For the full year, IBM had $104.5 billion in sales (down three-tenths of a percent) and its net income was $15.86 billion (up 4.7 percent). IBM generated $18.9 billion in cash from operations and spent $18 billion on acquisitions, share buybacks, and dividends last year, and brought in $15.25 in operating earnings per share. And looking ahead, said Loughridge, Big Blue believes that it can do at least $16.70 in operating earnings per share for 2013 against whatever revenue growth or decline the company is modeling. Whatever that revenue is expected to be, IBM does not say, as it has not said for many, many years now. All IBM cares about is the cash after the bills are paid. Period.

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Volume 23, Number 4 -- January 28, 2013
THIS ISSUE SPONSORED BY:

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Table of Contents

  • Coming Soon: Entry And Midrange Power7+ Servers
  • IBM Mainframes Jump, Power Systems Drop Ahead Of Power7+ Rollout
  • Simple Business Intelligence: Fact Or Phantom?
  • As I See It: Gadfly
  • Survey Points To 3 Percent Raise For IT Pros In 2013
  • IBM Italy Helps Push Power Systems Gear With Rebate Deals
  • Avnet Saw IT Budget Flush Spending As 2012 Came To A Close
  • Execs Say New ‘Digital’ Tech Tops The Priority List This Year
  • Connect 2013 (Lotusphere) Opens; Streaming Video Available
  • Pure Systems Customer Count Breaks 2,300 While Power Takeouts Continue

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