Awaiting The Power10 Rollout And The New Sales Cycle
July 26, 2021 Timothy Prickett Morgan
It is difficult to be patient but before too long IBM will begin shipping Power10-based systems and the product line, which has been bumping along at the tail end of the Power9 cycle, will start growing again. With IBM having a new microarchitecture as well as a new foundry partner, Samsung Electronics, which is making its very first server chip with the Power10 and implementing its first large-scale chip with a 7 nanometer process, the stakes are high and IBM is being a little extra cautious in getting the Power10 chip out the door.
Enterprise customers are risk averse, and Big Blue knows this is no time to be cavalier about quality in engineering and manufacturing with the Power10 chip. A lot is at stake here, not the least of which would be a delay in the delivery of the entry Power10 machines early next year and a likely delay in the System z16 mainframes either later this year or early next year if there is a problem with the 7 nanometer processes at Samsung. Unbeknownst to all of us, IBM had plenty of troubles getting its own 14 nanometer processes perfected and its foundry partner Globalfoundries, which bought IBM Microelectronics and took over etching Power9 and future processors under a 10-year contract back in 2014, had its own share of issues. All of which came to light thanks to a lawsuit that Big Blue has filed against Globalfoundries for not fulfilling its chip roadmap commitments, which was filed in June just as Globalfoundries was rumored to be getting ready to go public to raise somewhere between $20 billion and $30 billion. There are two sides to every story, and we have only heard IBM’s side thus far. But as we have said, IBM’s Power processor roadmap was absolutely screwed up by Globalfoundries not delivering 10 nanometer and 7 nanometer manufacturing processes, which perhaps no coincidentally are the same two manufacturing nodes that have been giving Intel all kinds of hell, messing up its Xeon SP server chip roadmaps.
You can understand that IBM is not eager to push out Power10 too early, then. It wants to make triple sure that everything is copacetic.
In the meantime, as we said, the Power Systems line and the companion System z line are taking it relatively easy before the upgrade run begins. And consequently, IBM’s Systems group is twiddling its thumbs a bit, getting some core activation upgrades in the Power and z lines and whatever deals customers need to do right now because they can’t wait for Power10 and z16 systems. The revenues are not great, but in a lot of cases there is not much cost associated with doing capacity on demand expansions and customers needing Power9 and z15 systems today are not in a great bargaining position if IBM catches wind that they are out of computing gas. And so, the profit margins are on the rise even if the revenues are not, and this helps balance out the times when the revenue is either flat or growing but the costs are higher at the beginning of a product cycle.
We have said it before, and we will say it again. You have to look at the Systems business over three- or four-year cycles and evaluate the hardware sales and margins over the entire product cycle, and then you have to look at the incremental revenues IBM gets from software and services above and beyond the base systems and the much higher profits it derives from these products. Big Blue does not provide such figures, so we have to sort of infer them and build models to try to figure out how the real IBM systems business might be doing.
In the second quarter ended in June, IBM posted sales of $18.75 billion, up 3.4 percent and considering that currency effects from overseas sales boosted reported revenues by 4 percent, the underlying business did not grow as much as it looks like when analyzed in all of the local currencies that Big Blue conducts business in. That said, reported revenues are the test because no vendor can control the geopolitical climate and the capriciousness of markets and exchange rates. Not even the legacy International Business Machines Corporation from the 1960s and the 1970s could do that. At any rate, IBM was able to grow sales, but even with cost cutting the company saw net income decline by 2.7 percent to $1.33 billion.
In the June quarter, IBM sold $1.72 billion in systems (which means servers and storage together) to customers and its reseller channel, down 7.3 percent year on year, and Systems group sold another $241 million in iron to other IBM groups, an increase of a half point over Q2 2020. We suspect that IBM might be padding its sales by doing some deals with its managed hosting business, which is slated to be spun off as Kyndryl before the year is out and which represents about a third of IBM’s overall revenues at this point. IBM said that its pre-tax income in Systems group was up sequentially, shifting from a loss of 2 million in the first quarter as Power10 and z16 costs were starting to hit and revenues were also lower for Power9 and z15 iron to a gain of $176 million. But that is still a decline of 29 percent compared to the pre-tax income IBM had against a stellar System z quarter a year ago, when revenues were up 68 percent. The year-ago quarter was the anomaly, not the current quarter. Within the numbers that IBM presented, we reckon server and storage accounted for just a hair under $1.4 billion in sales, down 6.8 percent, while operating systems accounted for $322 million, down 9.2 percent. These numbers do not match IBM’s in the chart above because those are figures for constant currency where exchange rates to the U.S. dollar are ignored. (IBM really needs to give both sets of financials, reported and constant currency.)
Every quarter, we try to figure out how the Power Systems business is doing, and the numbers are not great, but they are not bad or unexpected, either.
Our model says that IBM had $363 million in sales externally and another $40 million for Power-based servers that are used in SAN storage and clustered storage that IBM sells alongside its enterprise and HPC systems. This does not include whatever sales IBM did to the future Kyndryl or to other parts of the Global Services behemoth. We don’t have enough visibility into this to make any accurate estimates. But it could be a big chunk of the internal revenues that Systems group reported.
Hopefully, starting in the third quarter and certainly by the fourth quarter, we will see that Power Systems revenue chart bend upwards a bit with the Power 1050 and Power 1080 system launches this fall and continue to do so as the scale-out (entry) Power10 machines come out in the spring of 2022.