Advanced Computing in the Age of AI | Tuesday, May 24, 2022

Hardware Stall Continues For IBM In Q4 

The hardware business at IBM has fallen on hard times in recent months, and the difficulties continued for Big Blue as it wrapped up 2013. And so IBM's new chief financial officer, Martin Schroeter, let Wall Street know in a conference call that the company would be doing a workforce rebalancing – an IBM euphemism for layoffs – in the first quarter of this year to get costs and revenues back in synch.

Those layoffs will be on the same order of magnitude as those that the company announced in the second quarter of last year, also to align its employee count to revenue streams. But in last year's case the layoffs were for both its hardware and its services businesses. Schroeter said that IBM would book somewhere between $900 million and $1.1 billion in charges relating to the layoffs. IBM has not provided information on how many people it lays off during these rebalancings for years, so it is not clear how many people will be affected. If history is any guide, thousands of workers will be affected.

Rumors are swirling around that IBM is once again looking to sell off all or part of its System x X86 server business, possibly to Lenovo Group, Dell, or Fujitsu. That X86 server business was called out as being part of the reason why IBM's Systems and Technology Group had a 26.1 revenue decline to $4.261 billion in the fourth quarter. Pre-tax income fell by 79 percent to $206 million. The Power Systems business, which includes Power-based servers running the AIX, Linux, and IBM i operating systems, was called out as well. The mainframe is at the tail-end of its upgrade cycle, when fewer new machines are sold and customers mainly activate latent processor and memory capacity in the boxes to support growing workloads.

IBM does not provide revenue figures for its various server divisions, but System x revenues were off 16 percent and Power Systems sales were down 31 percent.

The System x decline can be attributed to processor transitions at Intel, increased competition from Hewlett-Packard and Dell, and the rumors about IBM wanting to sell off the System x business, which surfaced last April. The entry and midrange Power Systems machines were updated with Power7+ chips last year, but the top-end machines are still using Power7 processors that are now approaching four years old. IBM used to be able to grow its Unix business by taking away market share from Oracle, HP, and Fujitsu, but that stopped a few quarters ago and now IBM has been declining along with the market.

IBM puts its PureSystems converged machines into the System x category, and revenue for these machines was up 30 percent sequentially from the third quarter, with 2,500 PureSystems racks sold during the quarter and a total of 10,000 racks sold since the machines debuted in April 2012.

Schroeter said nothing at all about a potential sale of the System x business, but he did say that IBM was working to make the Power Systems line more relevant to customers. He reminded Wall Street that the company launched the PowerLinux machines with X86-level pricing and slightly better performance to try to attract Linux shops to Power iron and also that the company had created the Integrated Facility for Linux, a fancy name for low-cost pricing on Linux partitions for midrange-class and enterprise-class servers that the company rolled out last October. IBM is trying to make it up in volume. The trouble is, for the past several years a large portion of Power Systems sales came from growth markets, particularly in the Asia/Pacific region and in China especially. IBM says that the Chinese government is in the middle of reorganizing and therefore the provincial governments and state-owned enterprises have curtailed their spending, and this has had a dramatic downward effect on Power Systems sales.

But it is also likely that the Chinese government wants companies and governments to spend money on systems designed, built, and sold by indigenous IT suppliers. IBM has not talked about this, but it is probably not a coincidence that the very first chip licensee for the OpenPower Consortium, which was announced this week ahead of the Q4 numbers, is a newly formed Chinese company called Suzhou PowerCore that seeks to make its own variants of Power8 processors aimed at servers, networking gear, and storage.

Schroeter said that all of these actions would take time to bear fruit, but conceded that the market had changed.

"Even with these additional capabilities, we recognize that the size of the Power platform will not return to prior revenue levels," he said on the call. "We will take action in this business to reflect the new business model."

IBM's System z mainframe business had a 37 percent revenue decline in the fourth quarter, but this was expected given that the z10 processors came out last fall and were ramping well at the end of 2012, with revenues up 56 percent in the fourth quarter. This was a tough compare. Schroeter said that despite this revenue decline, the System z business has higher margins than it did a year ago. (It costs next to nothing to activate a core, after all, but they cost tens to hundreds of thousands of dollars to turn on, depending on how it is used.)

All told, IBM's server business had a 28.2 percent decline to $2.94 billion, and its storage business declined by 14.4 percent to $937 million. IBM's merchant chip business brought in $384 million, a 33.5 percent decline compared to a year ago. IBM does not break out its networking business separately from its other units. It is not clear, in fact, where networking sales go. They are probably bundled in with the dominant system associated with any deal.

IBM's Software Group had 2.8 percent revenue bump in the fourth quarter, to $8.14 billion, and pre-tax income came to $4.24 billion. Part of this is an illusion – IBM cannot profit in software without selling the systems first – and a real reckoning of profits and sales would tie the hardware and software together as it is in the datacenter and give a proper system perspective. IBM's business analytics business is booming, driven by various Cognos, SPSS, and other tools as well as Netezza parallel data warehouse appliances. IBM's database sales for distributed platforms (meaning Windows, Linux, and Unix) had double digit growth in the quarter as well.

By the way, the aggregate analytics business – including hardware, software, and services – accounted for $15.7 billion in sales for all of 2013, a level IBM had hoped to hit two years from now when it started building out this business several years ago. IBM has raised the bar for business analytics to $20 billion by 2015, and the new Watson Group announced two weeks ago is part of that additional expansion.

On the services front, IBM's Global Services had $14.66 billion in sales, down 2.3 percent. IBM's consulting and systems integration business, which is about a quarter of that total, grew by 3 percent, but the company's maintenance and outsourcing businesses declined. IBM's services backlog under contract rose by 2 percent to $143 billion.

Add it all up for the quarter and Big Blue had $27.7 billion in sales, down 5.5 percent, in the fourth quarter; thanks to cost cutting and some tax benefits, net income rose by 6 percent to $6.18 billion. For the full year, IBM had $99.75 billion in sales, down 3.6 percent, with net income of $16.48 billion, down seven-tenths of a point.

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