IBM Finally Shows Some Growth In Sales And Profits

August 1, 2022 Timothy Prickett Morgan

We got so excited about our coverage of the new Power10 entry and midrange servers in the past few weeks that we didn’t go into Big Blue’s financial results for the second quarter ended in June. Considering the past several years, and all off the bad news on the financial front from bug players like Intel, Amazon, Microsoft, and Google, it is probably a good thing that our IBM analysis is coming a week later because we now have a better perspective of how IBM is doing relative to its peers.

It is a refreshing change to see IBM doing better, but heaven only knows how sustainable IBM’s growth trajectory is. We will have to take it one quarter at a time, as all individuals and companies have to do in the current economic climate.

In the June quarter, IBM’s sales were up 9.3 percent to $15.54 billion, gross profits were up only 5.6 percent to $8.29 billion, but through the wonders of accounting, Big Blue was able to boost net income by 1.7X to $1.39 billion in the quarter.

Sales of the “Telum” System z16 family of mainframes launched earlier this year kicked in big-time in the second quarter, with revenues up 69 percent as reported and up 77 percent when counted in all of their local currencies. Distributed Infrastructure, which is IBM’s new way of talking about Power Systems machines plus storage of all kinds, had an 11 percent bump in sales as reported, which was an increase of 17 percent at constant currency. IBM does not given any figures for Power Systems specifically, but gave the impression that a lot of this bump was due to storage sales attached to the new System z16 iron, but we also think high-end Power E1080 sales contributed some to this increase. We also think entry and midrange Power Systems sales were very likely skinny indeed with everyone and their dogs knowing that the Power10 entry and midrange machines were coming in July. The Power10 cycle – whatever it may be – really gets going starting this month, when customers and resellers have digested the announcements and come back from their vacations ready to upgrade platforms.

IBM’s overall Infrastructure group, which includes systems, storage, operating systems (minus Red Hat), and tech support, had sales of $4.24 billion, up just a smidgen under 19 percent, and had a gross profit of 53.8 percent of revenues, or $2.28 billion, up 12.1 percent. Pre-tax income was $757 million, considerably higher than the $489 million it posted in the year ago quarter.

As best as we can figure from IBM’s constant currency statements and our modeling, IBM’s Hybrid Infrastructure – meaning all hardware and operating systems – comprised $2.77 billion in sales, up 34.3 percent, and Infrastructure Support comprised $1.47 billion in sales, down 2.1 percent.

Sales of Red Hat operating systems and middleware support licenses (there is no licensing of the software as with IBM’s proprietary systems software) rose by 12.1 percent to $1.47 billion, which was a slowing of growth that IBM probably was not anticipating. Big Blue likes something closer to 20 percent growth with Red Hat.

IBM’s Software group had $6.17 billion in sales, up only 3.2 percent, but posted a gross profit of $4.88 billion and a pre-tax income of $1.38 billion, which is still pretty healthy by any modern gauge. The Hybrid Platforms and Solutions division had flat sales at $4.4 billion, but if you pull Red Hat out of this segment, the rest of this systems software stack – various kinds of middleware not including databases – had a sales slump of 4.8 percent, down to $2.93 billion. The Transaction Processing segment at IBM had sales of $1.77 billion, up 11.6 percent year on year.

According to our model, IBM’s overall systems business, including servers, storage, operating systems (including Red Hat), middleware (including Red Hat), tech support, and financing comprised a total of $8.2 billion in revenues for Q2 2022, up 11.6 percent.

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