IBM’s Systems Group On The Financial Rebound
January 22, 2018 Timothy Prickett Morgan
We like to start with the good news here in 2018, and the good news is that IBM had a very good quarter in its systems business, so we can all start breathing a little easier and Hitachi can put that checkbook away because Big Blue ain’t going to be selling off its System z and Power Systems business any time soon.
(We are joking there. We think. . . . and hope.)
In the final quarter of 2017 ended in December, the mainframe saw sales shoot up 71 percent thanks to the System z14 refresh that started in mid-September. And, even though the initial Power Systems AC922 hybrid CPU-GPU supercomputer node started shipping late last year, it did not have much of an impact but IBM nonetheless did pretty well with low-end Power system sales and some high-end NUMA iron based on Power8 as well.
“Power revenue grew 15 percent, driven by double-digit growth in our high-end and low-end portfolio, with our cloud-enabled offerings serving new clients in deep learning and SAP HANA markets,” explained Jim Cavanaugh, IBM’s newly appointed chief financial officer, who was speaking to Wall Street analysts on the quarterly conference call going over the numbers for the first time. “We continue to shift into the growing Linux market, and our Linux-on-Power revenue grew again and gained share. For 2017, this now represents a quarter of our Power portfolio. We also delivered the first installment of our supercomputers at U.S. Department of Energy, with more to come later in 2018. There are three labs of this type, and we won two of the three, which is the most any provider is allowed to win. And this quarter, in our low-end Linux portfolio, we released our next-gen Power System with our new Power9 processor. These Power9 systems bring unprecedented speed to AI workloads and enable our clients to compete and win in the data-intensive AI era.”
There are a bunch of things to peel apart there. First, high-end boxes based on Power8, which are now more than three years in the field, were selling well. That is the best indicator that IBM’s “Cumulus” Power9 chip for machines with four or more sockets in them will be coming later in 2018 rather than sooner, or else customers would have put off upgrading until the newer iron comes. If the systems using the Cumulus chips were going to be available in April, May, or June, they might have waited to buy, and sales of high end machines and the overall Power Systems business would have been in decline. But that didn’t happen.
On the low-end, we think IBM is getting traction with its Linux-only Power Systems LC variants, and is going to be riding up the wave of CPU-GPU hybrid applications for simulation and modeling, machine learning training, and database acceleration with machines like the “Newell” AC922 and similar Power9 machines that are a little bit less aggressive on the GPU integration and more aggressive on I/O and storage expansion. That said, IBM is making way with its Power8 and Power8+ machines, with what looks like a pretty good pipeline of proofs of concept that will turn into production clusters over 2018 and into 2019 if all goes well. Those Linux systems don’t really take market share away from IBM i and AIX shops, who are by and large doing online transaction processing and some data warehousing on their systems. These Linux machines are the systems of engagement and maybe the web infrastructure, while the IBM i and AIX systems are the systems of record that are fed by these other systems.
Here is how IBM’s four quarters of 2017 worked out, by quarter and for the full year, by product category:
Thanks to slight bump in Power Systems sales and the big jump in System z sales, IBM ended the year with $6.6 billion in system sales (including server and storage hardware as well as some networking it passes through) and $1.6 billion in operating system sales, for a total of $8.2 billion. And thankfully, after posting pre-tax losses in the first quarter of 2017 and barely making any money in the second quarter, thanks to the mainframe spike and the high-end Power8 NUMA system upgrade cycle, IBM was able to pull in $1.1 billion in pre-tax income for systems – or about 13.8 percent of revenue – in as profits. In the fourth quarter, an amazing 27.2 percent of the money IBM got in systems was brought to the middle line, a level that IBM has not even come close to except way back in the fourth quarter of 2014, a million years ago.
Here is what the data, by product line, looks like over the past four years, inclusive, from 2014 through 2017, when IBM started classifying its business in the current format:
We believe that this year will be a rebound year for IBM’s Systems group, with the System z and Power Systems firing on both cylinders. IBM’s overall revenues actually grew in Q4 2017, the first time in 23 quarters, with sales up 3.6 percent to $22.54 billion. IBM has been intentionally trimming and transforming itself as well as suffering through flat spots and declines in its core businesses, particularly in systems and storage in the wake of its sale of its System x business to Lenovo in 2014. IBM’s profits took a big hit in the fourth quarter, pushing Big Blue to a loss of slightly more than $1 billion. While profits were under a little pressure here – not in Systems, but due to other product lines (particularly its vast services behemoth in its many facets – the $5.5 billion write-off for paying taxes on overseas profits ahead of time and for other tax issues in the wake of the Tax Cuts and Jobs Act of 2017, IBM is taking the whack on its profits now as it posts the 2017 books, clearing the decks for all of 2018, which should see profits improve on many fronts, particularly with currency now a help rather than a hindrance.
We should all rejoice that IBM Systems had sales up 31.7 percent (only 28 percent after adjusting for currency) and that pre-tax profits rose by 56.8 percent to $908 million. This is a good foundation on which to build a growing systems business for Big Blue.