Power Systems Grows For The Second Year In A Row

January 29, 2024 Timothy Prickett Morgan

Here at The Four Hundred, we take good news very seriously, and so we will just cut to the chase scene and tell you that IBM’s Power Systems business has grown for the second year in a row.

Take that in for a second. Savor it.

Think about the dozen years of dramatic decline we saw in the RISC/Unix and IBM i parts of the Power Systems business in the wake of the Great Recession in 2009, when the X86 platform from Intel finally got enough features – as did Windows Server and Linux – to compete effectively against IBM’s biggest iron. The Power platform and its older sibling System Z mainframe still have significant reliability and scalability advantages compared to X86 machinery, and so it has been possible for Big Blue to not just maintain but expand its revenues in the core transaction processing and relational database workload that has been the hallmark of both of these machines.

We told you three months ago that we thought that in the wake of the Kyndryl spinout of a big chunk of IBM’s services business that we thought we might be undercounting the Power Systems revenue stream, and we have rejiggered it a bit to meet the kind of growth that the scuttlebutt coming out of the Power Systems organization suggests. Our old model saw growth, but not as much as what IBM has experienced starting with the spike during the coronavirus pandemic. Some of that is due to deliberate obfuscation by IBM’s bean counters, who have thrown the Power Systems division and the Storage division into a single division called Distributed Infrastructure. This is not only a bad name for what are mostly shared memory systems, it makes it very challenging to figure out how the servers within Distributed Infrastructure are doing.

As best as we can figure, the Power Systems server business, which includes new and used servers and operating systems for them after the Kyndryl spinout reorganization that moved IBM’s Global Asset Recovery Solutions business into the division where it always belonged, posted sales of $474 million in the fourth quarter of 2023, up 12 percent year on year. We estimate that IBM sold another $70 million in Power servers to its Storage unit to build big disk and flash arrays, an increase of 4.5 percent compared to Q4 2022. If you add those together, then you get $544 million in sales for Power machinery and operating systems, up 11 percent for 2023. These numbers do include revenue streams from Power iron sitting in the IBM Cloud (which is till nominal with only 600 customers running workloads in production). We think the investment has been on the order of several tens of millions of dollars to date to build the PowerVS cloud, which is noise against the $7.5 billion in Power Systems revenues IBM booked selling Power gear to external customers from 2019 through 2023. IBM launched its first serious Power cloud offerings in 2019, and has gotten more serious with that and subscription pricing across cloud and on-premises systems as the years have passed.

For all of 2023, we think IBM had $1.53 billion in external Power Systems sales, including the revenue from the PowerVS service, which we think is a very small slice at this point, but growing fast.

We don’t know it for sure, but we think that the IBM i on Power Systems business grew even faster than the overall Power Systems business, albeit the revenue stream coming from the worldwide IBM i installed base is still smaller than that being driven by AIX and certainly by AIX and Linux together.

Here is what Power Systems sales look like on a quarterly basis from 2009 through 2023:

Power Systems Quarterly

That is a little busy to read, so here is what it looks like on an annual basis, which sort of averages out the trend line better:

Power Systems Annual

That is a pretty big revenue decline from 2009 through 2016, but some of that is due to Moore’s Law improvements. IBM has doubled the performance of its processors every three years for a long time – which is not all that aggressive, it is about half of the traditional Moore’s Law rate. But the transaction processing needs of the 175,000 or so Power Systems customers – 120,000 on IBM i, 40,000 on AIX, and maybe 15,000 on Linux, mostly older supercomputers for HPC simulation and modeling and platforms for running SAP’s HANA in-memory database and SAP4HANA applications – grow at something a little north of gross domestic product, which inches along at 2.5 percent or so every year if you want to be generous. If you do the math on that, IBM is doubling the throughput of its processors every three years, but it takes around 30 years for GDP to double. So companies downshift to smaller platforms that have more performance but which don’t drive as much revenues to Big Blue as older machines might have. But we think that the aggregate CPWs and rPerfs of the Power Systems base is still growing, and we think it has probably tripled since the Power7 chips launched in systems in 2010 and doubled since the midpoint between the Power8 in 2014 and the Power9 in 2018.

Having more performance available than you need is a great deal right up to the moment that IBM can’t afford to invest in the development of the next generation of Power processors and related systems. As far as we know, IBM is not there yet, and a rise in revenues means that it is much easier to justify whatever investments the company is making right now to bring Power11 machinery to market sometime in 2025.

So, put a little whisky in your coffee or tea or Coke and celebrate! Ask your boss and colleagues to join you!

The Power Systems unit does not operate in a vacuum inside of Big Blue, of course. We want all of IBM to do well so the company can continue to create, extend, and support its Power and Z platforms and to also do the same for the Red Hat platform it acquired in 2019. If all of IBM is humming along, then it is easier for Power Systems to adapt and thrive.

To help you understand the numbers a little bit better, we put together this divisional breakdown of IBM revenues and operating income that goes back to Q1 2022:

IBM Big Table

And here is a chart so you can see visually what is going on from Q1 2019 through Q4 2023 with the latest way that Big Blue talks about its business:

IBM Divisions Chart

With the Infrastructure group, net income is growing faster than gross profits which is growing faster than revenues, which is what you want to see if you can get it. But steady decline in Infrastructure Support revenues, as opposed to the whole shebang of Hybrid Infrastructure that it serves, it a bit concerning.

In the quarter, the Infrastructure group had $4.6 billion in external sales, up 2.7 percent compared to Q4 2022. Hybrid Infrastructure sales – meaning Z and Power platforms, storage of all kinds, operating systems, and secondhand gear – rose by 8.2 percent to $3.31 billion in our model. However, Infrastructure Support was down 9 percent to $1.3 billion. Six years ago, this business was closer to $1.7 billion, and at this rate, it will be well under $1 billion six years from now. Maybe IBM is cutting the fees it charges for maintenance as it shifts to subscription pricing and this is a natural effect. We don’t know, but it would be interesting to see how the revenue is allocated for support.

Every quarter we try to figure out how much of IBM’s own Power and Z platforms drive in terms of base system revenues. That’s Power and Z machinery plus storage, operating systems, transaction processing and middleware, and support for them. But not database, application, or application development software for those systems. We also try to separate out sales of IBM software for other platforms. This is what we call IBM’s “real” systems business, and the chart below shows IBM’s overall sales compared to that estimated “real” systems revenue for the past decade:

IBM Real Systems Versus Revenue

As you can see, IBM started reversing the declining systems business in 2017, thanks in large part to a pretty good supercomputing business (which was not profitable) as well as the rise of SAP HANA on Power and a very good System z14 mainframe cycle. In 2020, IBM added the Red Hat revenue stream, and that started to bend the line back up and to the right, and despite all of the changes in IBM as it divested Kyndryl and other things, that underlying core systems business has been growing pretty steadily in its normal sawtooth fashion.

Without Red Hat, we reckon that underlying “real” systems business had $8.18 billion in sales in Q4 2023, up 2.9 percent, and pre-tax income rose by 9.8 percent to $4.48 billion, or 54.7 percent of revenues. If you add in a big chunk of the Red Hat stack, then we think that the “real” IBM systems business weighed in at $9.49 billion, up 3.5 percent year on year and had somewhere around $4.68 billion in pre-tax income, representing 49.6 percent of those revenues.

This is a very good business, and one that is worthy of continuing investment. And that is exactly what we expect that IBM will do. That systems business will slow down in 2024 until the Power11 and z17 processors come out in new systems in 2025, but that is to be expected. And the IBM i business might even buck that trend and grow. Linux on Power is going to grow, too. So everything might hinge in what AIX customers do in 2024.

2 thoughts on “Power Systems Grows For The Second Year In A Row”

ema tissani says:

January 29, 2024 at 6:58 am

I’m not surprised about the decline of “infrastructure support”, I noticed a general local disinvestment in local country support resources and the shortening of HW EoS dates, much shorter than in the past; I hope IBM doesn’t make the error to reduce the overall quality of the local support team, it was always a big differentiator and appreciated value.

and… keep your IBMi hardware updated, especially if you are not using NVMe yet!

Thanks as usual for the quality and depth of your articles.

Timothy Prickett Morgan says:

January 29, 2024 at 7:53 am

We appreciate the insight you always bring to bear as well. Thank you.

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