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Doing the math on IBM's real systems biz

Sales and profits climb out of a hole

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So what am I saying here...

I have said it before, and I will say it again: recessions cause platform transitions in large numbers of customers. It looks like we have just witnessed another platform shift as a fair number of proprietary and Unix shops have moved to Windows and Linux systems, or at the very least deployed new applications (like clouds) mostly on x64 iron.

I no longer have any idea how much iron running IBM i is peddled by Big Blue, sold directly in some cases but mostly booked as sales to channel partners Arrow Electronics and Avnet, which have thousands of resellers worldwide who actually sell and support the boxes. If you put a gun to my head and let me be optimistic, I would say there was about $1bn in i-related hardware sales and $3bn in AIX-Linux sales on Power-based iron.

That's the server part of the IBM business, about $4.24bn in the fourth quarter and $11.6bn for all of 2010, which works out to 24.7 per cent growth for the quarter and 10 per cent growth for the year. So what about the other parts of the real systems biz? Well, here are my revenue estimates, based on IBM data, for operating systems, storage, and technical support services, shown graphically:

IBM System Sales

Operating systems hit $704m, which boosted overall systems sub-total to just a hair under $5bn in revenues in the quarter. But you need to add in disks. IBM's external storage hardware business (tape drives and tape libraries plus disk arrays) accounted for $1.18bn in the quarter, and then you need to toss in tech support services (which is mostly on IBM iron) and that's another $1.94bn. When you add it all up, that is $8.1bn if you round up.

If you do the math for all of 2010, then IBM's real systems business is $24.7bn, up 7.1 per cent over 2009, but very stable and not all that different from the $25.6bn in 2008. No question that there was a dip in 2008, with about $1.6bn in systems revenues gone missing - mostly from declining mainframe and Power Systems hardware sales, as you can see from the graphic above.

But you have to admire the fact that despite the quarterly ups and downs and all the drama, for the past five years IBM has kept an annual systems business on the order of $25bn.

Rather than merge Systems and Technology Group and Software Group together last July, as it did, Big Blue should have put all of its actual systems revenues together and showed how much of the business it really controlled. The bookkeeping and cheerleading goals that IBM had in the early 1990s to pump up its software and services businesses only serve to artificially diminish the size and scope of its actual systems business.

But you would expect a systems guy like me to say that, wouldn't you?

The important thing - if you like IBM servers and want Big Blue to keep making them - is that the Systems and Technology Group, which is the organization that designs, makes, and sells the company's chips, servers, and storage, had sales of $6.28bn in the fourth quarter. With sales of iron to other divisions, STG had $6.51bn in sales and reported $1.21bn in pretax income.

That is the most pretax income STG has seen since the fourth quarter of 2007. STG was actually losing money at a pretax level earlier in the year, which is never a good thing. For all of 2010, STG had just under $18bn in sales and $1.59bn in pretax income. It has not bounced back to its former heights in 2007 and 2008. Those numbers exclude IBM's high-end printer business, which was sold three years ago. ®

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