Advanced Computing in the Age of AI | Tuesday, October 3, 2023

China Slowdown, HPC Stall Hits IBM System Sales 

The Chinese government is in the middle of putting together an economic reform and investment plan, and spending by state-owned industries has stalled. This has affected the performance of a number of big IT suppliers, and IBM is the latest to be caught off-guard by the chilly spending environment.

IBM is also struggling with a decline in sales of its Power-based systems intended for supercomputing customers.

On Wednesday, IBM reported its financial results for the third quarter ended in September, and Mark Loughridge, chief financial officer at the company, said on a conference call with Wall Street analysts that Big Blue's sales in China were down 22 percent. That is in stark contrast to the 19 percent growth that IBM posted in the third quarter of 2012.

Alarmingly for the company's System and Technology Group, which peddles servers, storage, and switching gear, hardware sales in China were down 40 percent. In a normal quarter, explained Loughridge, China accounts for about 5 percent of IBM's overall sales, and about 40 percent of that revenue comes from hardware.

Loughridge said that IBM expected for the Chinese government to announce its economic reform plan sometime around the middle of November, but added quickly that it will take two quarters for these plans to be implemented and for state agencies and the companies that they control to loosen the purse strings. Therefore, IBM is not anticipating for revenues in China to pick up until the second quarter of 2014 and the forecast is for something on the order of middle single-digit revenue growth for IBM in the country for all of 2014.

In the quarter, IBM's overall revenues were $23.72 billion, down 4.1 percent, and thanks to some tax benefits it was able to bring just a little over $4 billion to the bottom line. Still, this is the sixth quarter in a row that IBM's revenues have declined, and that is something that makes big customers, Wall Street, and IBM employees a bit nervous. Loughridge said that 2013 was particularly challenging on the profit front, with hardware profits down by $1 billion and another $500 million in currency effects as the US dollar strengthened, particularly against the devalued Japanese yen.

Revenues for Systems and Technology Group were down 16.6 percent to $3.25 billion, and sales of hardware to other IBM groups – Software Group and Global Services, to be specific – added another $168 million. The hardware business posted a pre-tax loss of $167 million. In the year-ago period, Systems and Technology Group had a $124 million pre-tax income on total sales of $4.08 billion. This is not very much profit, of course.

IBM's Power Systems business was particularly hard hit in the third quarter, with revenues down 37 percent. Loughridge singled out the HPC market, saying that ten points of that decline was due to a drop in Power-based supercomputers.

Big Blue has not announced any new BlueGene massively parallel supercomputers, and there is no expectation that it will create a kicker to the current BlueGene/Q machine. Nor has it created Power-based nodes for its new NextScale "vanity free" clusters. So this decline in sales of Power-based machines to HPC customers is not much of a surprise. IBM is keen on selling the combination of Power servers and the Linux operating system, but it seems content to do so with its rack-based systems or its PureSystems integrated machines. However, HPC shops like lean and mean iron and do not need the extra frills and redundancy of components that enterprise customers do. (This is also changing, with enterprises adopting the minimalist hardware style of hyperscale datacenters and supercomputing labs.)

The System x business, which includes rack and tower servers as well as BladeCenter blade servers, was down 16 percent in the third quarter, and Loughridge did not elaborate on why. He did say that IBM sold 2,000 new PureSystems machines in the quarter, bringing the total sold to 8,000, and that in the major markets (meaning North America and Europe for the most part), revenues for PureSystems were up 30 percent. This business is, however, starting from a relatively small base. (By the way, those numbers cited above are for unique systems, many of them with multiple racks. IBM is not talking about server nodes there. The PureSystems chassis can hold fourteen single-wide server nodes in its chassis, and four enclosures in a rack, so a multi-rack system could be many hundreds of server nodes.)

IBM's venerable System z mainframe business saw a 56 percent increase in processing capacity sold, with a 90 percent increase in so-called "specialty engines" that are low-cost cores on System z machines that are only allowed to run Linux or accelerate Java, XML, or DB2 routines. But even with all of that capacity growth, pricing pressure is intense and revenues only rose by 6 percent for mainframe hardware. Significantly, as IBM enters 2014, sales of the new zEnterprise EC12 and BC12 machines will start to tail off, and it will be up to the Power8-based systems expected to start shipping in the middle of 2014 to fill in that gap.

Loughridge said that Software Group posted lower sales than expected, at just under $5.8 billion, and it only managed to grow six-tenths of a point in the quarter. But software is the profit engine at IBM, yielding $2.41 billion in pre-tax income. Global Services had just over $14 billion in revenues, down 2.9 percent, but thanks to workforce reductions earlier this year, IBM was able to boost pre-tax income at Global Services by 16.8 percent to $2.84 billion.

If IBM didn't need its hardware to actually sell its software and services, you might be thinking it would be tempted to sell off the hardware business and be done with it. But don't let these categories fool you. IBM sells systems, and they include systems software and services as they have since before I was born. This is just accounting.

On the call, Loughridge said that the shutdown of the US federal government has not yet impacted Big Blue's top or bottom line very much. Uncle Sam accounts for a little less than three percent of IBM's revenues in any quarter, give or take. At the moment, Loughridge said, most of the projects IBM is working on with the US government are either not exposed to the shutdown or are deemed critical and are still proceeding. But, he added, if the shutdown persists into November and out into December, then it will start impacting its business.

The combination of the slowdown in China and the shutdown of the US Federal government is, ironically, good news for enterprise customers who are looking for deals as 2013 comes to an end. They can bargain a little more aggressively because IBM will be that much more eager to close deals to make its fourth quarter numbers.