Doing the math on IBM's real systems biz
Sales and profits climb out of a hole
For the past couple of quarters, I have been refining my model of IBM's server business, and I think with the incarnation I built to analyze the company's fourth quarter and full year results for 2010, I have something that is closer to reality than I have ever put together before.
And it shows just how much Big Blue is, despite all of its jaw-boning about services and Smarter Planet, dependent on good, old-fashioned systems.
You know, systems. What the System/360 and the System/38 were, and what the Application System/400 was. A collection of integrated server platforms with operating systems, storage, and maintenance all balled up into one package. In the old days and in the current IBM i and System z days, this usually means a stack of systems software such as middleware for managing transaction processing and databases for storing data. But I can't extract that data from IBM's numbers, so I have to stick with servers, operating systems, storage, and maintenance to get a sense of the "real" IBM systems business.
IBM doesn't provide revenue figures for any of these products, but does give some figures in its most recent quarterly reports that are indications of how business is doing. With the percentages of revenue and per cent change year-on-year figures that Big Blue provides for various parts of its business, those who persevere and start with some good revenue assumptions at the beginning of their model can come up with something that must be pretty close to reality. I've been doing this for more than five years now, backcasting and tweaking the numbers to fit each new set of figures that Big Blue tosses out and popping ibuprofen when necessary to bend it all into shape.
Here's what the most current set of numbers looks like for the company's three server lines:
The Power Systems line was, as you can see clearly from the chart, the dominant platform in terms of revenues for IBM in 2006, 2007, and 2008, and while the System z mainframes had some good quarters, the product was at the end of a long cycle with the z10 machines and was hurting badly in 2010.
But as you can see from this chart, thanks to the System zEnterprise 196 machines that started shipping last September, IBM mainframe sales were nearly identical to Power Systems sales and both were roughly in the range that System x machines (which includes x64-based BladeCenter blade servers) set in the final quarters of 2006 and 2007. However, as well as Power Systems and System z mainframe sales did in the final quarter of 2010 - a statistical heat at $1.35bn by my model - neither beat IBM's revenues from System x machines in Q4 2010, which came in at $1.54bn.
And I will make a prediction right here and now: Unless something radical happens in the computer industry - like someone nukes Intel's fabs or IBM decides to stop selling x64-based machines - neither Power Systems nor System z mainframes will ever surpass System x sales again. Well, until IBM puts the z/OS software stack onto Power Systems iron and converges the lines - or better still, IBM ports all of its operating systems to x64 chips and wipes its hands of the server chip racket entirely.
On a full-year basis, IBM's System z business raked in just under $3bn according to my model, up 15.1 per cent over 2009's pretty awful results. In a normal year, the mainframe should do around $3.5bn - like what used to be a normal year for the AS/400 all by itself in the mid-to-late 1990s. The Power Systems business, which has averaged just over $5bn with the i and p lines added together from 2006 through 2008, fell by 15 per cent to $4.3bn in 2009 and fell another 7.7 per cent in 2010 to just under $4bn. IBM may be eating market share in the Unix biz, but it has been losing around 22,500 OS/400 and i customers per year for the past five years. Hopefully this has stabilized in 2010. And for all four quarters of 2010, the System x biz brought in $4.72bn in revenues, up 26.8 per cent.
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:
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. ®