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Deconstructing and rebuilding IBM's server sales

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It's that time, once again, to play Guess How Much Server Revenues Big Blue Had. Get out your stack of quarterly reports from IBM, your thinking cap, your fuzzy dice, and your spreadsheet program of choice, and let's see if you can come up with better numbers than I did.

As previously reported, IBM's worldwide sales in the fourth quarter declined 6.4 per cent to just over $27bn, but IBM was able to boost net income by 12 per cent to $4.43bn. And thanks to share buybacks, IBM showed a 17.1 per cent increase in earnings per share to $3.28. IBM celebrated by firing untold thousands of people. I say untold because IBM hasn't copped to its layoffs, even though we all know they are happening.

But that's a different story. This one is about IBM's server sales. As you well know from years of watching IBM's quarterly financials, the company provides an overall revenue figure for sales each quarter for its Systems and Technology Group, which makes and sells servers, storage, retail systems, chips, and other technology; then, the company provides growth rates for different bits of its product lines within STG.

Since the beginning of 2008, IBM has created bogus Converged p and Legacy i categories, merging bits of the formerly independent System i business with its System p business in an effort to mask some actual declines or slowing growth rates in its AIX-based Power server business.

No one other than some Wall Street buffoons fell for these shenanigans, and more than one IBMer is embarrassed by the ploy because it makes the i platform look weaker than it really is. But IBM is more concerned with giving the impression that its Unix server business is all gangbusters than trying to level with its customers and shareholders.

In the fourth quarter, STG had a tough quarter, no question about it, with revenues down 20 per cent to $5.4bn; sales fell 16 per cent when measured in local currencies before revenues were brought back to New York and converted into U.S. dollars. So the problem is not currencies. System z mainframe sales fell by 6 per cent, while the Converged p line (which is nearly all of the former System p and System i lines at this point) grew by 8 per cent, and Legacy i sales fell by 92 per cent.

The Legacy i products are entry and midrange machines based on Power5 and Power5+ processors, so no wonder no one wants those and sales have collapsed. Power6-based i platforms have been available since last April, so it makes sense that these old entry i boxes don't account for much. System x sales were the big disappointment for IBM in Q4, with sales down 32 per cent; storage, which was down 20 per cent, was not exactly throwing parties, either.

That's what we have to go on to make a model to calculate actual server sales in the quarter. That and a few years of historical data, some whispers here and there, and a lot of assumptions. After an hour or so of tweaking my model, here's what I came up with:

 

1Q 2008

2Q 2008

3Q 2008

4Q 2008

System z

$606 M

$1,035 M

$775 M

$1,087 M

System i

$161 M

$236 M

$247 M

$243 M

System p

$871 M

$1,164 M

$919 M

$1,355 M

System x

$1,050 M

$1,056 M

$939 M

$950 M

Total

$2,688 M

$3,492 M

$2,880 M

$3,635 M

 

 

 

 

 

Power Systems

$1,032 M

$1,400 M

$1,166 M

$1,598 M

Power6 i

$115 M

$155 M

$227 M

$230 M

Legacy i

$46 M

$81 M

$20 M

$13 M

Converged p

$986 M

$1,319 M

$1,146 M

$1,585 M

Storage

$759 M

$938 M

$842 M

$1,085 M

Retail Store Solutions

$223 M

$208 M

$177 M

$205 M

Technology

$548 M

$573 M

$532 M

$488 M

Total STG

$4,219 M

$5,212 M

$4,431 M

$5,425 M

IBM has been somewhat helpful for the past six quarters in that it is actually giving the percentage of STG sales that come from servers, storage, OEM tech, and retail stuff. So you can isolate a server revenue figure. In the fourth quarter of 2008, that comes to just a bit over $3.6bn.

Now, assuming you have good numbers from prior quarters, you can just use the percentages IBM gives to reckon sales each quarter. Once you have four good quarters of data, you are home free. Assuming my Q4 2007 numbers were accurate, then I calculate that IBM sold just under $1.1bn in System z mainframes in the fourth quarter of 2008. System x sales, being a pretty dramatic disappointment, came in at $950m. Knowing those two numbers, you can do some simple subtraction to reckon what overall Power Systems sales are, which in this case is just a fewm bucks shy of $1.6bn.

Then the guessing begins. No one except IBM has any idea what the revenue stream was for Power-based servers that had i5/OS V5R4 or i 6.1 as their primary operating system. It is my guess that IBM sold $243m worth of these i platforms in Q4, which represents a 37 per cent decline in i platform sales in the quarter. Which means the i decline thanks to the economic meltdown was worse than for the System x servers. And this stands to reason, given the nature of the i customer base - small and medium businesses, usually privately held, and very conservative, particularly when the economy heads south.

That would put AIX and Linux Power-based machines at $1.35bn in sales, down 8 per cent. (If you carve out a big chunk of Power6 i sales and dump it into the p category, you can get the 8 per cent growth for Converged p sales in the quarter.)

Based on my estimates, in the first half of 2008, the funny games with Power platform sales helped IBM hide declines in its Unix and Linux on Power business. I believe that IBM's non-i Power server business declined by 11 per cent in Q1, and this is what IBM didn't want people to figure out.

For the year, I figure that Power System i machines (including legacy iSeries boxes) accounted for $887m in sales, down 13 per cent, marking the first time the platform has closed a year with under $1bn in sales. (If you have better numbers to suggest I am wrong, I am ready to listen.) And Power Systems AIX and Linux machines had a 1 per cent sales drop in 2008, to $4.3bn, so the picture is not perfect there, either.

Thanks to a terrible Q3 and a worse Q4, the System x line (including x64 BladeCenter boxes) had an even steeper decline than the i platform, down 15 per cent to just under $4bn. But the x platform is still more than four times bigger than the i platform. System z mainframe sales were up 13 per cent in 2008 by my math, to $3.5bn, matching the sales level set in 2006 for mainframes.

If you like pictures, this one is nice:

IBM 2008 Server Sales

As you can see, System x and System i sales (if the System i was still a category) more or less held their ground sequentially, so the economic meltdown didn't collapse sales so much as remove the normal end-of-year bump. (Declines this quarter will probably be rather dramatic.) And the normal uptick in System p and System z sales in Q4 2008 were just a little more subdued than usual.

There is no question that p and z sales will decline in Q1, but these product lines will have an easy compare and no expectation of new products. This time last year, everyone knew IBM was rolling out improved Power6 servers and z10 mainframes, so a lot of customers held their orders for new servers until they could see these boxes. This year, customers are closing their checkbooks because they are freaked out by the economy.

Here's the interesting bit: Power-based server sales came in at $5.2bn for 2008, down 3 per cent from a pretty good 2007. IBM's overall server sales for the year came to $12.7bn, down 4 per cent. Those declines could have been a lot worse.

Consider Sun Microsystems, whose high-end Sparc server business declined by 32 per cent in the same period, to $662m (that's billings, not booked revenues, which are slightly smaller - but by how much, Sun doesn't say). Sun's entry Sparc servers, which are based on the "Niagara" family of multicore processors rather than big, dual-core or quad-core Sparcs from Sun and Fujitsu, had 31 per cent growth in calendar Q4 (Sun's fiscal 2009 Q2) to $369m.

But if you do the math, Sun's overall Sparc server business was down 18.1 per cent to just over $1bn. Like IBM, Sun likes to break its businesses into two artificial categories so it can show growth. The difference is that Sun's server business, even when you toss in its X64 products and storage, weighs in at about $8bn in sales annually - about half of Big Blue's equivalent server and storage racket. ®

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