Power Systems Did Indeed Grow Revenues Last Year

January 30, 2023 Timothy Prickett Morgan

Back in September, when Blue Blue took a huge write-off to offload some of its pension and retirement burdens to an independent third party, it posted a pretty hefty $3.21 billion net loss. But IBM’s underlying business was functioning about as well as it could under the circumstances and it was reasonably profitable and looking ahead to pretty good Power10 and System z16 upgrade cycles. We forecast that IBM would actually grow revenues for Power Systems for 2022, and according to our model, IBM indeed has done it.

And by a much larger margin than the company has grown overall, which is nice.

But before you go and get too excited, the Power Systems line’s revenue is more a function of the upgrade cycle among its IBM i and AIX faithful, which number maybe 160,000 strong worldwide than a breakout of Power-based systems into new customers or new markets. Still up is up. We will take it. Anything that makes Power Systems stronger makes IBM i last longer.

In the quarter ended in December, IBM’s overall sales were flat at $16.69 billion and gross profits were up 1.4 percent to $9.63 billion. Thanks to lower sales and overhead costs, slightly lower research and development costs, higher intellectual property revenues, and a $443 million benefit from income taxes, IBM was able to post a $2.71 billion net income, up 16.3 percent.

Arvind Krishna, IBM’s chief executive officer, and Jim Kavanaugh, the company’s chief financial officer, said very little about the Power Systems business directly except to warn Wall Street that the upgrade cycles for these lines were going to “wrap,” which is IBM speak for run out of steam because the biggest bump in an upgrade cycle only lasts a couple of quarters these days. Given this, Kavanaugh said that revenue for its Infrastructure group – which is for servers, operating systems, storage, and tech support – would be below its average model and that pre-tax margin for Infrastructure would be in the “low teens.” Over any “mid-term model horizon,” Kavanaugh explained, IBM is modeling for revenues in the Infrastructure group to be flat. Some years will be up, some down, some flat depending on where z and Power are at in their product cycles.

In the fourth quarter, Infrastructure revenues rose by 1.6 percent to $4.48 billion. Gross profits were 54.9 percent of revenues, which works out to $2.46 billion, and pre-tax income was $1.03 billion, or 22.9 percent of sales.

IBM reports sales growth and decline in its product groups and segments in constant currency, which is annoying, and we have to do out best to reckon it backwards to an as-reported figure based on prevailing currency exchange rates used by IBM for its overall sales to massage these constant currency rates back to reported rates. (Yeah, that’s nuts.)

As best as we can figure, IBM’s Hybrid Infrastructure segment sales – the servers and storage hardware and systems software part – rose by 5 percent to $3.06 billion. (It was up 11 percent at constant currency, for reference.) The Infrastructure Support segment fell by 5.1 to $1.43 billion. (It was flat at constant currency.) IBM said further that System z revenues were up 21 percent at constant currency and that Distributed Infrastructure – where IBM lumps together Power Systems and storage – rose by 5 percent at constant currency. Our best guess is that Power Systems revenues proper – meaning machines running IBM i, AIX, or Linux – declined by 1 percent in Q4 2022 to $411 million, and storage-related Power hardware sales were down 16.3 percent to $67 million. Add it up, and Power Systems revenues were down 3.5 percent to $478 million.

However, for the full 2022 year, we believe that Power Systems revenues (including Power-based storage) rose by 6.5 percent to $1.42 billion.

We are a bit surprised that the Power10 cycle is not stronger than this, but given the uncertainty of the global economy and the dominance of small and midrange businesses, who tend to be conservative with cash because it is often the cash of the owners of the business, maybe it is not all that surprising. A long Power10 cycle that sustains revenues for two or three years is just fine, even if it is not dramatic. We don’t need drama – so long as sales are giving IBM a sustainable revenue stream with which to reinvest in the Power Systems hardware and software.

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