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Big Blue defies server crash with Q1 profit

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Power play

IBM's Power Systems, which are no longer broken out separately as AIX and Linux platforms and OS/400-i platforms, showed had 35 per cent growth at the high end of the product line (which means Power 570 and Power 595 boxes, I believe). But overall sales of Power Systems fell by 2 per cent. However, in constant currency, Power Systems sales were actually up 5 per cent. IBM believes that it took 4 points of market share in the RISC/Itanium server market (and is probably counting i-based server sales as if they were Unix boxes to get that number). Loughridge said that Big Blue had 62 competitive replacements in the first quarter where its Power Systems machines kicked out other vendors' boxes, and half of these involved sales of over $1m in server gear.

The System x x64-based server line, which includes rack and tower machines as well as BladeCenter blades running Xeon and Opteron processors, continued its slide for the third quarter in a row, with sales down 27 per cent in the quarter.

"The demand for x86 solutions continues to soften as customers virtualize workloads and consolidate on more efficient platforms," Loughridge declared. I simply don't believe this is the only reason why IBM's System x business has been falling for three quarters. Something else is going on, especially since IBM makes the most scalable x64 boxes on the market and should be benefiting from any virtualization-driven consolidation. I think Hewlett-Packard and Dell are beating IBM to win deals at SMB shops, plain and simple, just like HP has come to dominate blade server sales as IBM was doing a few years ago.

In other parts of the Systems and Technology Group, storage revenues dropped by 20 per cent, with double-digit declines in both disk and tape hardware sales. IBM's sales of chips and other stuff through the Microelectronics division fell by 36 per cent in Q1, and retail store systems fell by 38 per cent.

By comparison, Software Group had a pretty decent quarter and contributed mightily to Big Blue's bottom line. Even as revenues for Software Group fell by 6 per cent (up 2 per cent at constant currency) to $4.5bn, pre-tax margin for this group rose by 2.9 points to 25.9 per cent. IBM's WebSphere middleware posted a 5 per cent rise in Q1, but database sales (mostly DB2) fell by 8 per cent.

Tivoli systems management and storage software sales fell by 1 per cent and Lotus groupware sales slid by 12 per cent, but Rational development tools saw an increase of 9 per cent. Loughridge was very keen on bragging that about two-thirds of IBM's software sales are akin to annuities, in as much as customers pay monthly or annual fees to use the code. It is great to have a business built on legacy software that is hard to move, unless you are the customer trying to cut costs in a down economy.

And if you are, well, who you gonna call? Global Services, which is now split into Global Technology Services, which does strategic outsourcing as well as supporting IBM's hardware and software, and Global Business Services, which does business process outsourcing and re-engineering, systems integration, application outsourcing, and other unspeakable acts of consultancy. Global Technology Services posted sales of $8.8bn in the first quarter, down 10 per cent as reported (but only down 1 per cent at constant currency). But once again, thanks presumably to firing a whole bunch of people and off-shoring some of its own people's work, IBM was able to boost profit margins in GTS by 2.3 points. Margins in GBS were largely unchanged, and sales fell by 10 per cent as well to $4.4bn.

In terms of contract signings in the quarter, IBM's outsourcing business was a bright spot inside GTS, with long-term signings up 8 per cent to $5.6bn; within GBS, long-term application outsourcing contract signings were up 44 per cent to $1.4bn. (Yeah, I know, why are the two outsourcing businesses in different places? Because IBM needs to pump up GBS numbers, I guess). Global Services had a total of $12.5bn in contract signings in Q1, and IBM's total services backlog stood at $126bn as the quarter ended. That is five quarters worth of revenue that is more or less waiting to be plunked into the bank.

By geography, the Americas region is still IBM's biggest market, but sales declined by 7 per cent to $9.3bn in the quarter. Sales in EMEA fell by 18 per cent to $7.2bn, while revenues in the Asia/Pacific region fell by 6 per cent to $4.8bn. OEM revenues (mostly chips to game console makers) are always booked in the States and they fell by 38 per cent to $461m.

When asked about IBM's rumored deal to acquire Sun, which fell through two weekends ago, and Oracle's proposed acquisition of Sun, which was announced this morning, Loughridge didn't offer much insight into IBM's thinking. He said that Oracle and Sun have been partners for two decades, and that the main result has been market share gains for Big Blue.

"We have been competing with Sun, and we know Oracle inside and out, and now they have the same address and the same mailbox," Loughridge said. He then bragged that IBM has done more than 100 acquisition deals for over $20bn since 2000 and that it uses a disciplined and precise process to wring sales and profits out of those acquisitions, before brushing off a question about Cisco's entry into the system space by saying that IBM was going to continue to play to its own system strengths, next question please. . . .

And many, many times on the call Loughridge said that IBM would meet or exceed its stated goal of raking in $9.20 of earnings per share in 2009, a stepping stone to the $10 to $11 per share that is a goal for 2010 that Loughridge and Palmisano have been pointing to like the upper deck at Yankee Stadium (the old one, not the new one where the Yankees get whipped) for the past year.

There's very little question that IBM can bring in these profits for quite a while, perhaps for years. There is no way that Big Blue would say otherwise unless it couldn't hit the numbers. But with Oracle wanting to be in the systems space and able and willing to cut a lot of costs out of Sun, and Cisco wanting to get a bite of the systems pie, too, IBM may find 2011 tough sledding, just like the uptake of Unix servers nearly killed the company two decades ago when they swarmed the mainframe.

Which, of course, is why IBM is talking up its "smart planet" computerization of all kinds of transportation systems and electric and water infrastructure. As Loughridge pointed out, there's about $5 trillion in stimulus money that Uncle Sam and a number of other governments have kicked into the global economy, and IBM reckons that it can chase about $3 trillion of that opportunity. The real question is whether this non-IT infrastructure biz is Plan A or Plan B for IBM some years from now. ®

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