IBM i Turns In Good Numbers For Q3, Bolstering Power Systems

October 26, 2020 Timothy Prickett Morgan

Historically speaking, the Power Systems division, now the Cognitive Systems division officially within IBM, has its worst period of sales in the first quarter of any year and its second worst 13-week revenue run in the third quarter of any year. And true to form, the third quarter of 2020 was not a great one for sales of Power iron, according to our model. That model is derived from IBM’s financial results and other data, and we update it every quarter when Big Blue reports to Wall Street.

Thanks to the fact that the Power9 generation of machines is entering its third year of sales, a slowdown in sales of enterprise systems in general was expected. The uncertainty in the business environment caused by the coronavirus and the difficulty of physically upgrading machines at this time, it is probably not a surprise to anyone that this was the worst third quarter IBM has turned in for Power Systems sales since the Great Recession – as far back as our model for Power Systems goes. And we think it is very likely, given how much larger sales of AS/400s and RS/6000s, iSeries and pSeries, and System i and System p iron was in the past, this was very likely the worst third quarter IBM has had for its non-mainframe, non-X86 server lines in aggregate for decades.

While that sounds big, it is not unexpected. We are about a year away from the Power10 chips, so we expect for plenty of customers to sit on the sidelines and see what Power10 might have to offer. There are companies in the hotel, travel, and retail industry that are big IBM i shops who are either under tremendous economic pressure and are in no mood to invest in new iron, even if they are investing in application modernization efforts to meet the needs of their remote end users and customers.

Moreover, IBM is by no means alone in having difficulties. Intel’s Data Center Group, which sells chips and motherboards and such, took a 47 percent hit in sales to enterprises and governments in Q3, for instance. We will see how AMD does next week, and Hewlett Packard Enterprise, Dell, Lenovo, Cisco Systems, and Nvidia all have to report yet as well.

Let’s start with some generalities about IBM’s numbers, then specifics about Power Systems as we can divine from the report that IBM have to Wall Street, and then round it out with the comments at Alison Butterill, IBM i offering manager at Big Blue, offered during a webinar last week, titled IBM i — Alive and Kicking, that she hosted with IBM i chief architect Steve Will.

IBM’s overall sales for the third quarter were $17.56 billion, off 2.6 percent year-on-year, and net income came in at $1.7 billion, up 1.6 percent. IBM Systems group sold $1.26 billion of servers and storage to end users and channel partners, plus another $240 million of gear to other IBM units – for the most part to needed by outsourcing customers in the part of the Global Technology Services business that it is spinning off as Newco, but also including Power Systems machines that are at the heart of high-end DS and ESS disk arrays. There was another $330 million in AIX, IBM i, and z/OS operating system sales within System group, and it is important to remember that somewhere around half of the more than $1 billion in revenues that Red Hat drove is operating systems. But this is not counted in Systems group.

After looking at all of IBM’s numbers, which are given in a mix of reported and constant currency figures, and then putting them into our model, we reckon that Big Blue sold somewhere around $255 million in Power Systems machinery to customers and partners, down 15 percent compared to Q3 2019, and it also sold another $40 million in machinery to the Storage division. We have no idea how much Power Systems gear was sold into Global Technology Services, so the chart below doesn’t count that. It could be anything, and we have no outside data to make a good guess. But it is probably a non-zero portion of the $240 million in system sales that IBM reported it made to other groups. Add it up, you get $295 million in servers used as servers or as the basis of storage arrays, down 15.7 percent from a year ago.

Here is the trend chart since 2009, when the Great Recession began:

IBM does not, of course, report Power Systems sales, although it does talk about growth rates for Power Systems, which is how we built our model and how we maintain it. The company has long since stopped giving any sense of how OS/400 and IBM i systems are doing distinct from AIX and Linux systems, as it used to do way back when. Part of that is because of the mixing of platforms on logical partition hypervisors, and part of it is because it doesn’t want to talk about these businesses individually because they are a lot smaller than they once were. But, as we said above, Butterill gave us some color on how IBM i did last year and is doing this year so far:

“We had a very good year in our business in 2019. But 2020, while we started strong through January and February, like most of the rest of the world, we were challenged from March through about June.

I just wanted to mention that many of our clients that are IBM i clients fall into two categories. Many of them are very small clients and of course were hit hard with COVID-19. And we have a number of very large clients. Now, it’s interesting to see how the business was different on those two ends. As I said, the small clients were hit hard with COVID-19 as people were asked to stay home.

But our large clients, some of them in banking, utilities, communication companies – these ones were really actively growing. They were asking us for more capacity and more bandwidth as more and more people were staying at home.

And of course, all of the largest companies that are supporting healthcare and health insurance – we saw tremendous growth on those companies, as well

Now what is very interesting is, from a business perspective, as the world is learning to work from home, we are seeing a strong third quarter and we are hoping that that moves into our fourth quarter as well.”

So, it sounds like IBM i is doing better in some respects, perhaps, than AIX is doing. We, of course, want both to do well, and for Linux to take off on Power as well. Anything that makes Power stronger lets IBM i live longer, after all.

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