Power Systems Sales Down In Q2, But Improving

July 28, 2014 Timothy Prickett Morgan

With the Power8 machines launched in April and not shipping in some cases until June and in others until August, no one expected for the second quarter to be a necessarily great one for IBM‘s Power Systems business. But, as it turns out, it was not as bad as many quarters have been, even though there was an understandable decline. With Power8 machines now shipping, and as we report elsewhere in this issue, more on the way in the midrange and high-end, perhaps the Power Systems line will stabilize in the second half of the year.

We certainly hope so. This is the eighth quarter out of the past nine where IBM has had year-on-year declines in Power Systems sales, and the one quarter where it did not see a drop, back in the third quarter of 2012, sales were flat as a pancake. In the second quarter ended in June, IBM’s Power Systems revenues were off 28 percent, and hopefully this is the last such quarter we will see with such a big drop.

“The year-to-year performance reflects fundamental changes in the business,” explained Martin Schroeter, IBM’s chief financial officer, in a conference call with Wall Street analysts. “As we have talked about in past calls, we have taken actions to align our structure to the demand profile, while investing to address where we see opportunity in the future.”

As you might expect, Schroeter talked up the potential of the OpenPower Foundation to open up new markets and opportunities for systems based on the Power processor, but that does not necessarily mean it will lead to revenue opportunities for IBM. It could turn out that other companies end up co-designing future Power chips with IBM that are compatible with IBM i, AIX, and Linux and that these chips get manufactured in Taiwan or China or the Middle East or maybe even Africa if someone ever moves a chip fab there. Actually, I think it is highly likely that IBM will encourage companies to use its intellectual property and development tools for Power chips to make variants as well as designing its own, and these will be made elsewhere at some point. As long as IBM maintains compatibility with the Power8 instruction set, it won’t matter and IBM i should load on them. IBM has committed $3 billion for future chip and systems research, but none of this is specifically earmarked for Power processors.

The main thing is that IBM saw sequential revenue growth with the Power Systems business moving from the first quarter to the second quarter, despite the fact that the Power8 machines were not yet shipping until the quarter was nearly over. IBM also showed sequential growth in its System x business, which includes the various incarnations of its Flex System modular servers as well as rack, blade, and tower servers based on X86 processors. The fallout from the pending $2.3 billion acquisition of the System x business by Lenovo Group could be settling, and this business was only off 3 percent year-on-year. IBM’s storage business also showed sequential growth, but year-on-year it was down 12 percent. The Storwize and FlashSystem storage arrays were called out as doing well, but growth here was not enough to offset declines in other products.

IBM’s System z mainframe business was down only 1 percent, which is a lot better than the typical 15 percent or so declined expected at this point in a mainframe product cycle. Aggregate MIPS shipped during Q2 were flat, which is again better than expected. IBM said that at this point in the z12 cycle, it has generated 98 percent of the revenue and profits of the z11 cycle, and the aggregate MIPS shipped in the z12 cycle is 25 percent higher than in the z11 cycle. That’s about as good as it gets for System z in the 21st century. (It would be fascinating to see what similar numbers for Power Systems would look like.)

Add it all up, and IBM’s Systems and Technology Group posted sales of $3.33 billion, down 11.4 percent. About $2.27 billion of that was for servers, with just under $700 million coming from storage. The remaining $366 million is the tiny portion of revenue that Big Blue gets from its Microelectronics Division. And there is no question that IBM absolutely will find some way to get out of the chip-making business even if it does continue to do fundamental research in chip design and manufacturing technologies to drive its Power, System z, and other future systems businesses. Gross profits at the Systems and Technology Group were under pressure again, falling nearly three points to 33.9 percent. Pre-tax income was a mere $25 million, but that was a lot better than the $141 million pre-tax loss in the year ago quarter when IBM actually had $3.76 billion in external sales for Systems and Technology Group.

Global Services had $13.95 billion in sales, down 1.4 percent, and the services backlog was down 1 percent to $136 billion. As has been the case for some time, customers are doing shorter engagements and smaller projects. IBM said that the SoftLayer cloud contributed 1 point to the growth of the Global Technology Services unit, but the company is not about to call out infrastructure or platform or application cloud services as separate items, any more than it gives revenue figures for System z, System z, or Power Systems iron. Global Services posted a pre-tax income of $2.68 billion in the period. Software Group had $6.88 billion in sales, an increase of 1 percent year-on-year, and it also posted a pre-tax income of $2.68 billion.

Add all of the groups up, and IBM had $24.36 billion in revenues, off 2.2 percent, but net income rose by 28.2 percent to $4.14 billion, thanks in large part to cost cutting and “workforce rebalancing,” as IBM calls layoffs.