Original URL: http://www.theregister.co.uk/2010/10/18/ibm_q3_2010_numbers/

IBM hits $24bn target thanks to big iron

Big Blue: less profitable than Apple

By Timothy Prickett Morgan

Posted in Financial News, 18th October 2010 23:01 GMT

People expecting some big and pleasant surprises out of Big Blue in its third quarter are probably going to be disappointed that IBM did exactly and precisely what it said it would do. Revenues were up 3 per cent to $24.3bn, and net income climbed 11.7 per cent to $3.6bn.

To help generate some enthusiasm for IBM's share price, Mark Loughridge, IBM's chief financial officer, made much ado early in his call with Wall Street analysts that about IBM raising its 2010 earnings per share guidance by 15 cents, to hit at least $11.40 this year. But that went a bit flat when the very first question during Q&A session made Loug[hridge admit that the extra 15 cents came exclusively through lower taxes paid to Uncle Sam in the third and fourth quarters. It was not anything that Big Sam was doing to boost the top line or expand the bottom line.

Oh, and by the way, it is interesting to note that Apple reported its financials at the same time today, breaking through the $20bn barrier for the first time in its history. Apple hit $20.3bn in sales for its fiscal fourth quarter ended September 25 and brought $4.3bn to the bottom line. Yes, Apple is nearly as big as Big Blue and it is more profitable. There ain't no app for that. Unless IBM merges with SAP and takes the fight to Oracle.

In the third quarter ended September 30, IBM's Systems and Technology Group, which is still being reported separately even though it was merged with the Software Group back in July, was the hero of the people this time around, with the new System zEnterprise 196 mainframes finally starting to pull a little of their weight and the high-end Power 795 and entry Power7-based servers starting to get a few weeks of traction in the quarter. Services continues to be problematic, but the situation is improving, and software sales just keep chugging along and are expected to accelerate into the fourth quarter alongside hardware sales, according to Loughridge.

IBM's Systems and Technology Group, which makes servers, disk and tape storage, chips, and other hardware, grew revenues by 10.4 per cent to $4.33bn. This is the best growth IBM's hardware business has posted in six years, said Loughridge.

This group saw 25 per cent growth (at constant currency) in the growth markets IBM is chasing like an old border collie racing down the country road after a car, and sales in Brazil, Russia, India, and China were up 40 per cent. System z mainframe sales rose by 15 per cent and aggregate MIPS (the ancient measure of relative performance for mainframes) shipped in the quarter was up by 54 per cent, which Loughridge said was the highest growth that Big Blue had seen in six years for its mainframe line. This is pretty good considering that the System z196 mainframes did not ship until late in the third quarter, and the so-called "system of systems" zBX Power and x64 blade extensions to the mainframe won't ship until later in the fourth quarter.

Big Blue's Power Systems business continues to slide, and Loughridge made excuses about product transitions that have been plaguing the Power-based lineup since this time last year. IBM's rollout of Power7 chips was choppy, with midrange and blades coming out in February, bigger boxes in April, and the entry and big iron boxes in August. With the entire Power Systems product line refreshed and the AIX 7.1 and IBM i 7.1 operating systems now shipping, the company has run out of excuses. The good news is that midrange Power7 sales were up 11 per cent compared to a year ago, so perhaps the rest of the Power Systems product line will catch up. This is undoubtedly the plan. Loughridge said IBM did 250 competitive Unix takeouts in the quarter, and these deals brought in an incremental $225m in revenue (including hardware, software, and services).

IBM doesn't give out precise revenue levels for its myriad branded products, but it is a safe bet that even with the mainframe bounce, the System x rack and tower and BladeCenter blade server businesses were together larger than IBM's mainframe or Unix businesses individually. The System x revenue (which includes BladeCenters sold with x64 processors) had a 30 per cent bump in sales, and IBM's high-end eX5 four- and eight-socket machines (based on Intel's Xeon 7500s) helped push up high-end System x sales by 27 per cent.

Loughridge said that IBM believes in gained share in both the Unix and x64 server spaces in Q3; IBM can't gain share in the mainframe market because it has no competition.

On the storage front, IBM said that storage hardware sales were up 7 per cent worldwide and rose by 23 percent in the growth markets. Disk array sales were up 14 per cent with DS8000 and XIV high-end arrays pulling the oars hard. IBM added 130 new customers for XIV clustered arrays and nearly doubled revenues from a year ago and when asked about acquisitions, Loughridge said, "Frankly, XIV has been one of the best acquisitions that IBM has done."

IBM's Microelectronics had a 28 per cent increase in sales in the quarter, and when you add it all up, pre-tax income for STG was $327m, up 45.6 per cent.

The softer side of Big Blue

If the hardware bump gave IBM some of the growth it managed to squeeze out of the IT racket, Software Group continues to be the profit engine. Software Group posted sales of $5.15bn in the third quarter, up a mere seven-tenths of a percent because IBM sold off its PLM software business to Dassault Systemes earlier this year, but up 4 per cent if you exclude that. IBM's WebSphere middleware product line, which has been bolstered by a bunch of acquisitions in the past two years, had a 14 per cent revenue bump, with databases and other information management tools up 5 per cent in the quarter.

Tivoli system management tools had a good quarter, too, with sales up 9 percent, with storage management products growing 20 per cent and security software up in the double digits. Lotus and Rational kind of stumbled along flatly in Q3 as these units have been doing for a while.

IBM's key branded middleware grew at 7 per cent, while the total middleware grew at only 3 per cent, which means that other middleware (predominantly on mainframes) and operating system sales declined.

The Global Services behemoth continues to dominate Big Blue in terms of revenues, with $14.1bn in sales, but up only 2.1 per cent compared to the year-ago quarter. While the Global Business Services unit, which does business process re-engineering and outsourcing, saw 5.4 per cent growth in the quarter, with $4.57bn in sales, the Global Technology Services unit, which does outsourcing, systems integration, and hardware maintenance, only had seven-tenths of a per cent of growth, to $9.5bn.

IBM's services backlog stood at $134bn at the end of the third quarter, up $5bn compared to the second quarter but flat year-on-year. IBM had $5.7bn in outsourcing signings in the quarter (including application outsourcing), down 15 per cent, while the transactional services businesses (systems integration, consulting, and application integration) had $5.4bn in signings, up 4 per cent.

On a geographical basis, IBM's sales in the Americas region rose by 3 per cent to $10.2bn in the third quarter (up only 2 per cent at constant currency, though), while revenues in the EMEA region were $7.4bnm, down 6 per cent as reported but up 1 per cent in local currencies. The Asia/Pacific region was the growth engine for Big Blue in Q3, with sales up 14 per cent (7 per cent in constant currency) to 5.9bn. IBM's OEM technology sales were $806m, up 27 per cent.

Loughridge was happy enough with growth in North America and Europe because they were a point or two better than in the second quarter, and Japan saw the first growth "in a long time" for IBM. But this is anemic compared to the BRIC countries, which had a 29 per cent revenue spike for Big Blue, and 28 other growth companies that IBM is pursuing had a combined double-digit revenue growth. Loughridge said that in 2008 the growth markets had revenue growth rates that were 8 points ahead of these major markets, and as 2010 has gone on, the gap is now 12 points.

"The growth markets are just out of the blocks faster than the majors," Loughridge said.

The fact that companies like IBM are constantly firing people in those major economies and hiring cheaper labor in those growth markets never seems to come up in the conversation. Funny, that. ®