Power Systems Keep Growing To Finish Off 2018

January 28, 2019 Timothy Prickett Morgan

The Power Systems line, buoyed by the deliver of high-end Power E980 systems for big AIX and IBM i jobs, a steady stream of IBM i system upgrades, and some traction in Power-based Linux clusters for HPC and data analytics workloads, turned in a pretty good final quarter for 2018, and capped three prior quarters of growth during 2018 to turn in a full year of growth.

You can’t tell how much growth, of course, but in the lead story of this issue of The Four Hundred, I took my best stab at modeling the quarterly revenue stream of the Power Systems line since the beginning of 2018, and based on that model, I reckon that the Power Systems line booked just a tad over $1.6 billion in sales, up 8.8 percent compared to 2017’s figures and marking the first year of growth since 2011 and the most dramatic growth we have probably seen in a lot longer.

Jim Kavanaugh, IBM’s chief financial officer, talked briefly with Wall Street analysts about how the Power Systems line did in Q4 2018. “Power revenue was up 10 percent, driven by Linux and continued strong adoption across our new Power9-based architecture,” Kavanaugh said. “In the fourth quarter, we completed the release of our next generation Power9 processors in the high end, and we had strong adoption in both the low and high-end systems. Our Power9 systems are designed for handling advanced analytics, cloud environments, and data intensive workloads in AI, SAP HANA, and Unix markets and we now have extended HANA certification to our Power9 high end. In the fourth quarter, we had strong initial traction with our new offerings that optimize both hardware and software for AI, such as PowerAI Vision, which we introduced in the second half of 2018. And we have essentially completed the deployment of our supercomputers at the U.S. Department of Energy labs in the quarter.”

That was a $325 million deal, which IBM has been booking throughout 2018 as machines rolled in and the “Summit” machine at Oak Ridge National Laboratory and the “Sierra” machine at Lawrence Livermore National Laboratory passed stages of qualification tests.

What we would really like to know is how 2019 is looking, and this is all Kavanaugh had to say when poked that question: “We continue to bring new innovation to market to deliver value for our clients in our Power9 architecture, which is resonating well in the marketplace. And we got great acceptance, and grew 10 percent in the fourth quarter. We expect that will continue to play out in 2019. So we have got a good book of business here and some tailwinds at us.”

Tailwinds are always good, if you are trying to make up for lost time in particular, so that’s good.

So how did the rest of Big Blue fare? Let’s take a look. In the final quarter of 2018, IBM’s revenues dipped by 3.5 percent to $2176 billion and net income was $1.95 billion, which was twice as big in magnitude as the loss that IBM reported in Q4 2017 due to some write-offs. IBM pushed $2.62 billion in system and storage hardware and operating systems to external customers in the fourth quarter, down 21.3 percent, plus another $238 million in iron to other IBM units. IBM had $551 million in pre-tax income for the combined internal and external sales, which was 19.3 percent of sales. My best guess, since IBM doesn’t give out precise numbers, is that IBM sold $2.17 billion in hardware (servers and storage) plus another $447 million in operating systems.

When you add all of the base operating system, middleware, database, programming tools, tech support, and financing on top of the System z and Power Systems lines, plus external disk, flash, and tape storage, IBM has quite an impressive business. Much larger than the System hardware and operating system figures that it reports on a quarterly basis to Wall Street. Here is the breakdown of IBM’s sales across its divisions, which is the starting point for estimating IBM’s true and real systems business:

From this, I drill down into each division and estimate how much of each division’s sales is specifically for IBM’s own System z and Power Systems platforms and the related storage product sales. If you make some guesses – and I have to, as do we all outside of the company – then a feel for the real systems business emerges. And this does not include compute, storage, and networking capacity sold on the IBM Cloud, which is another animal entirely.

Suffice it to say that this is a pretty large business indeed, with gross profits across the combined platforms that are in the range of 55 percent to 60 percent of revenues typically. This is pretty good, and is a much stronger systems business than IBM itself talks about. In the fourth quarter, I reckon that this business actually declined by 11 percent or so, to $7.41 billion, but that was mainly due to the System z14 mainframe upgrade cycle running its course after five quarters of sales. IBM said in its report that System z revenues were down 44 percent year-on-year in the fourth quarter at constant currency, and that really hurt. Power Systems sales cannot, as yet, make up the difference.

That said, Power Systems sales are on the rise, and have great prospects in HPC, data analytics, machine learning. in-memory processing, and other advanced workloads as well as the steady freddy ERP applications that have been on IBM i and AIX platforms for decades. It is difficult to imagine that IBM can push sales up as high as they were back in 2010 through 2012, but it can get some of the way back there. One other thing: I have no idea what Power Systems running IBM i sales are, but what I do know is that IBM i sales have been driving revenue growth throughout 2018, and when you add in the software, services, and financing atop of this, this is still a reasonably large and definitely profitable business. Which is a good thing for the long-term prospects of IBM i.

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