Power Systems Poised To Embiggen This Year?

May 6, 2024 Timothy Prickett Morgan

We were away on a hiatus and not publishing last week, and therefore we are now going to go through Big Blue’s financial results for the first quarter of 2024, and take a deep dive into its systems business and Power Systems in particular. Once again, the news is generally good, and that is comforting when this is the final third of the Power10 and System z16 product lines from IBM, with follow-on Power11 and System z17 processors expected sometime next year.

In the March quarter, IBM reported overall revenues of $14.46 billion, up 4.1 percent year on year, with gross profits up 6.7 percent to $7.72 billion and net income up 21.3 percent to $1.61 billion. That profit was pushed up by a $502 million income tax benefit and a $30 billion gain from discontinued businesses, which is why it is out of proportion to gross profits. But, a benefit is a benefit, and many public companies keep them around to use when it is convenient for them; some benefits they have to book right away.

IBM revenues, by divisional product categories, over time.

The Infrastructure group at IBM, which is the part of the company that sells servers, storage, operating systems, and technical support for Power Systems and System z iron, had $3.08 billion in sales, down seven-tenths of a point from the year ago period, and as is normal, down 33.2 percent from a pretty good fourth quarter of 2023 for system sales. Gross profits for Infrastructure came to $1.67 billion, up 4.1 percent and representing 54.2 percent of revenues. We think pre-tax income was $219 million – IBM no longer reports this number for its groups and divisions – and net profits after taxes came to $311 million.

By our model, we think the Hybrid Infrastructure division, which means all hardware and systems software, accounted for $1.81 billion, up 5 percent, and Infrastructure Support, which means break-fix and other technical support for IBM systems, accounted for $1.27 billion, down 7.9 percent.

In other groups, Software had sales of just under $5.9 billion, off four-tenths of a point; Consulting had sales of $5.19 billion, up 4.5 percent; and Financing had sales of 193 million, down 1.5 percent.

Every quarter we like to calculate IBM’s “real” systems business, which includes the base systems, operating systems, transaction processing software and core middleware (but not databases and development tools and including a sizable chunk of the Red Hat business), and financing and tech support for the System z and Power Systems lines added together. In our model, we believe that this “real” systems business generated $7.23 billion in sales, up 3 percent. Red Hat’s portion of this datacenter systems total was $1.16 billion out of a total of $1.66 billion for Red Hat. (We are not including OpenShift and OpenStack in the “real” systems estimate.)

IBM’s “real’ systems revenue versus overall revenues.

This is a big and healthy business, as we like to remind people.

The Power Systems business is also healthy, even if it is nowhere near as large as it used to be before Moore’s Law advances in chip performance outstripped the capacity growth requirements of most customers using OS/400/IBM i and AIX platforms and customers could get a relatively powerful machine for comparatively little money.

Power Systems sales – like those of the AS/400 and RS/6000 and their progeny before – have always had their up and down quarters. But in the past several years, the pretty steep decline in sales reversed and sales have been rising for more than two years. Take a look:

This is our own financial model. IBM has never reported revenues for its different server brands, although for a long time it gave out constant currency growth or decline rates, and starting last year, IBM started giving out absolute growth rates as reported in its quarterly financial results.

The drop in 2019 and 2020 that you see in the chart above is Big Blue essentially exiting the Power-based supercomputing business. The general decline from 2009 through 2019 is the combined effect of Moore’s Law and more aggressive pricing as well as competitive pressure from X86 platforms. More than half of the Power Systems base defected to other platforms, with a big decline in the 2000s; at the same time, customers using HP-UX and Solaris as well as IBM and other mainframes moved to the AS/400 and RS/6000 platforms and their follow-ons, which helped to compensate in part for those defections. But clearly it did not reverse the tide.

These days, Big Blue is sticking to its Power Systems and System z knitting, making enhancements to try to improve the efficiency and performance of existing IBM i and AIX customer workloads, and it is not trying to directly compete against Arm and X86 server platforms. Excepting at the high end of the X86 server business, where it can still win deals, as is the case with SAP HANA in-memory systems.

Based on our model and IBM’s statements about Distributed Infrastructure sales in Q1 2024, which includes revenues from the Power Systems division and the Storage division combined, we think that IBM’s Power Systems server sales were up by 6 percent to $181 million in the quarter. This includes Power VS cloud revenues recognized in the quarter as well, which we think is nominal but growing. We think there is another $77 million in Power Systems iron that was sold to the Storage division to create DS and ESS storage arrays, an increase of 18 percent year on year. So that is $258 million in total Power Systems revenues in Q1, up 9.3 percent.

If you squint at the chart above, you can reckon the overall upward trendline for Power Systems sales. But it is still hard to see.

An annual trend in Power Systems sales makes it easier to see the overall trend, which we show above. And just for fun, we threw in a forecast for growth in 2024, which is pretty good considering that Power10 is at the end of its cycle. That is a 5.2 percent increase we are projecting in 2024, to $1.61 billion. This is more a hunch than anything else, so take it with several grains of salt.

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