Taking The Full Measure Of Power Servers
January 25, 2021 Timothy Prickett Morgan
Imagine, for a moment, that there was not a drive by the Chinese government to have more of its state-owned enterprises, which are among the largest companies in the country, adopt homegrown IT gear for their data processing needs, an effort that started in 2015 but really built up steam two years later when a trade war erupted between the United States and China. Imagine that trade war didn’t happen, either.
What, pray tell, would have happened to IBM’s Power Systems business over the past several years? Our best guess is plenty. At the very least, perhaps the Power Systems business at Big Blue would not be in the doldrums that it was experiencing in 2019 and 2020. But maybe the overall Power server business is not doing as bad as we might think based on IBM’s numbers alone.
Some history is in order. Inspur, which is one of the largest IT equipment suppliers in the Middle Kingdom, has always wanted to sell big iron, and even had its own Itanium-based systems for a while running a variant of Unix called K-UX as well as Windows Server and Linux. The big bad machine was the 32-socket Tiansuo K1 server, and in August 2014, Inspur inked a partnership with IBM that gave Inspur permission to run IBM’s DB2 database and WebSphere application server software on the K1 machine. A month later, as we reported at the time, Inspur joined the OpenPower Consortium to build servers based on Power processors; the exact details were never divulged.
In September 2017, when the trade barriers were going up and even the OpenPower Consortium could not yet get credible clone Power processors and systems designed and built in China, the two companies created a joint venture controlled by Inspur, with a 51 percent stake, and IBM getting a 49 percent stake, called ironically enough Inspur Business Machines – yes, IBM. The venture was funded with ¥1 billion, or about $150 million at then-current exchange rates to the U.S. dollar, and it was created explicitly to make Power-based servers for large enterprises to run their systems of record upon, and as best as we can figure, it has been a wild success for Inspur, which also has a booming X86 server market thanks to small and medium businesses in China as well as hyperscalers like Alibaba, Baidu, and Tencent, which also buy huge amounts of Inspur gear.
In fact, in the trailing 12 months ending in September 2020, Inspur, according to the market researchers at IDC, sold $7.71 billion in servers, which is 43 percent more iron than IBM, at $5.4 billion, sold in the same period of time.
Chew on that for a second.
It is with that in mind that we turn to IBM’s server sales in the fourth quarter of 2020, which were reported on late last week. IBM’s overall revenues continue to slide as it shrinks and it divests itself of businesses, and even as it adds Red Hat to the mix. Sales across all product lines and geographies were off 6.5 percent to $20.37 billion, and after a $2.04 billion restructuring writeoff, net income was down by 63.1 percent to $1.36 billion. By the time IBM has spun off its NewCo managed infrastructure services business, which has about $19 billion in sales later this year, it will pare down to about $59 billion in sales for the remaining company.
Overall sales of servers, storage, switching to IBM’s direct end user customers and its channel were $2.5 billion, down 17.8 percent, and internal sales of this stuff to other IBM divisions accounted for another $196 million. Total System group sales, therefore, were just under $2.7 billion, down 16.8 percent, with the hardware being $2.09 billion and operating systems being $408 million. The System group had a pre-tax income of $455 million, off 43.3 percent year on year. Not a great quarter, but there was a tough compare to the System z15 launch at the end of 2019 for one thing and a global pandemic for another. Neither Arvind Krishna, IBM’s chief executive officer, nor James Kavanaugh, the company’s chief financial officer, had much to say about the Power Systems line, although as usual they did chat a bit about the System z mainframe. Power Systems sales were off 16 percent at constant currency, and System z sales were down 24 percent, with storage down 17 percent.
I find this information insufficient, and so a few years back I built my own model of Power Systems sales, which I include below, updated for the fourth quarter:
Given what we know about constant currency and as reported sales for IBM overall, I reckon that Power Systems server sales worldwide were off 13.5 percent as reported to $395 million, and the Power Systems machines sold to the Storage division, which are embedded in the DS9000 SANs and ESS parallel file system clusters, came to another $77 million, down 14.3 percent. Thus making total Power Systems sales $472 million for these two pieces, down 13.6 percent year on year. I have no idea how much Power Systems iron Global Services might have acquired, or how much Power Systems iron Global Financing peddled, but these are non-zero figures. Setting that aside
What I want to know, as I was working toward at the beginning of this story, is how much Power Systems revenues are missing because Big Blue can’t sell iron in China but its partnership with Inspur, which is booked as Inspur revenue, can. It might look something like this:
Last year, I figured Inspur was doing maybe $500 million of sales for Power-based servers in China compared to IBM’s $1.74 billion in the rest of the world; this represented about 8 percent of Inspur’s sales. And in 2020, IBM did $1.43 billion in sales to customers and its Storage division, and I have no problem believing that Inspur has grown its Power-based server business and that it might do $8 billion in server sales in 2020 and that at least 10 percent and maybe as high as 12 percent of that might be for Power machines, which is between $800 million and $960 million in sales. If this is the case, then the overall Power server business as represented by IBM and Inspur together is back to 2015 revenue levels.
If this is true, we sure do wish IBM and Inspur would talk about that. And if Google is building Power-based machines with an ODM and deploying them, it would be good to know that, too.