Power Systems Sales Jump 19 Percent in Q1

April 25, 2011 Timothy Prickett Morgan

The Power Systems business is finally hitting on all five cylinders: blade servers, entry servers, midrange servers, enterprise servers, and the big bad box. It took IBM the better part of a year to get the entire Power7-based server lineup into the field, and the first quarter of 2011 was the first financial period when all of the new iron was available and, perhaps more importantly, when customers thought business conditions had stabilized enough for them to actually spend money.

In the first quarter ended in March, IBM posted revenues of $24.6 billion, an increase of 7.7 percent over the year-ago period. Net income rose by 10.1 percent to $2.86 billion, and thanks to $4 billion in stock repurchases in the quarter, earnings per share rose by 17 percent to $2.34. That EPS figure is what Big Blue is always, always, always focused on. And because business was so good in the first quarter, despite some sluggishness in services signings, which fell by 18 percent, IBM boosted its expected EPS for 2011 to $13.15 (that’s on an operating, not a net, basis), a bump of 15 cents.

This being an AS/400 newsletter–no matter what IBM calls it–what is going on with the Power Systems is of paramount importance, of course. Systems and Technology Group, which designs and makes processors and other chips as well as servers, storage, and now networking devices as well as retail store systems, had its best growth in over a decade, with sales up 19 percent compared to Q1 2010, cresting just above $4 billion. All of IBM’s brands had double-digit revenue growth, and all of the major geographies where IBM does business also had double-digit growth.

Power Systems revenues in Q1 were up 19 percent, matching the overall growth for STG. In a conference call with Wall Street analysts, Mark Loughridge, IBM’s chief financial officer, said that entry Power Systems sales more than doubled compared to the year-ago period, and added that high-end Power servers had more than 30 percent growth. IBM believes that it gained about four points of market share in the Unix market in the first quarter, and moreover that when all the numbers are done, almost all of the growth in the Unix business in the first quarter will be attributable to Big Blue’s Power Systems line, with sales from Hewlett-Packard, Oracle, Fujitsu, and a few others being essentially flat.

IBM’s System z mainframes, which are also at the beginning of an upgrade cycle, had a 41 percent boost in sales in the first quarter, with aggregate MIPS mainframe capacity shipped rising by 34 percent. That’s the best showing in a first quarter that IBM has had for MIPS growth since 2004, when another mainframe cycle (with the high-end System z990 and midrange System z890 machines) was just getting rolling in the wake of another long recession.

In Q1 2011, System x and BladeCenter server sales were only up by 13 percent, said Loughridge, with IBM holding share in the overall X64-based systems market. But IBM’s high-end System x machines did really well, with sales up 42 percent and allowing IBM to gain share way up there. Across all server lines, IBM reckons that it gained about two points of market share in the first quarter.

IBM’s storage sales continue to be a problem, rising only by 10 percent in the quarter, but Loughridge said that disk-based array sales rose by 13 percent and that in the 20 high-growth markets outside of the Western economies (including Japan, Australia, and New Zealand in that term) storage sales rose by 14 percent.

IBM’s Global Services behemoth continues to employ most of the people at the company and to generate most of the revenues. In the quarter, Global Services accounted for $14.57 billion in sales, up 6 percent. The Global Technology Services division, which includes system outsourcing, integrated technology services, and maintenance on IBM and other vendors’ wares, had $9.86 billion in revenues up 6 percent, while Global Business Services division, which does consulting, systems integration, and application outsourcing, had $4.71 billion in sales, up 6.8 percent. IBM’s services backlog was $142 billion as Q1 came to an end, up $8 billion from a year ago and helped mightily by the declining U.S. dollar.

It is ridiculous, if you think about it, to consider any of the IBM units as separated, since the company’s systems drive services sales and its services drive systems sales. And so it is with Software Group as well. No one wakes up one day and says they want to buy CICS and DB2 for the mainframe, but rather customers have long histories of using IBM hardware and software technology and they continue to do that even as they modernize their systems and software to reflect changing business practices and evolving economic needs. And that is what allows Steve Mills, the general manager of IBM’s converged Systems and Software Group, to feel like a hero. But he is not a hero, no matter how IBM dices and slices its divisions and books. The IBM Company is the hero, and divisions called Software Group or Systems and Technology Group are, when you scratch below the surface, somewhat silly.

That said, Software Group gets to brag about being the profit engine. (As if there would be any software sales at all without IBM systems sales. . . .) Software Group had $5.31 billion in revenues in the first quarter, up 5.8 percent from the year ago quarter, and had gross margins of 87 percent. (More than twice that of the hardware and services units.) Thanks to the acquisitions of Coremetrics, Unica, and Sterling Commerce and to organic growth, the WebSphere line of application servers and integration products had 51 percent revenue growth in the first quarter. Application servers and business integration tools saw nearly 30 percent growth in the quarter. Lotus-branded middleware, groupware, and email servers had only 1 percent growth, Rational development tools had a 5 percent boost, and Tivoli systems management tools showed an 8 percent jump. IBM’s storage hardware might be taking some lumps, but Tivoli-branded storage software had a 20 percent jump in sales, and software products for XIV clustered arrays jumped by 60 percent.

Again, the way IBM dices and slices its product sales makes hardware look less valuable and software look more valuable than they really are. It would be interesting to see actual revenues for XIV arrays, including hardware, software, and services; and then mainframes, Power Systems i boxes, and so forth.