IBM Announces 1Q2013 Earnings: zEnterprise Shines

IBM announced its first quarter earnings for 2013, reiterating its earnings guidance for the year. Bearing in mind my previous cautions about not reading too much into one quarter or into one segment of the global mainframe ecosystem, IBM's zEnterprise server business performed quite well, growing 7% year over year (8% at constant currency). Any growth in the server business these days is highly likely to be a marketshare gain, and so it was with zEnterprise. Yes, that's correct: IBM mainframes are gaining substantial marketshare in the server market.

IBM's CFO added a few comments to give some color to that performance. One comment was that "MIPS" deliveries galloped ahead faster (27%) than the growth in revenue, so that means customers continue to enjoy progressively lower prices when they buy mainframe capacity. He also pointed out that speciality engines are continuing to perform well, too, reinforcing the fact that mainframe customers continue to place new applications on mainframes at a brisk pace. And he mentioned that several large mainframe sales got pushed into the second quarter, perhaps due to the unusual timing of the Easter holiday, so IBM is expecting a further increase to double digit zEnterprise growth in the second quarter.

Overall, though, IBM's hardware business had a tough quarter. One surprise (to me, anyway) was IBM's Power server business which declined 32 percent. There were several comments about that statistic. One is that IBM is overwhelmingly #1 in the UNIX server market and still probably gained marketshare — that gives you some idea how horribly Oracle/Sun and HP are doing in the same market segment. Also, IBM had a somewhat tepid quarter in their so-called "growth markets," and 20% or more of IBM's business in those markets is hardware, a lot of which is Power-based. There were also some model cycle effects as Power servers are transitioning to POWER7+ processors. IBM said they'll be increasing their efforts to promote Linux on Power in order to try to win a greater share of the Linux server market to add to their dominance in the UNIX market.

IBM's CFO noted that the PureSystems are doing quite well. In fact, IBM's CFO's comments would indicate they're selling in much greater numbers than the Oracle "Exa" systems, probably because they're more open and flexible, providing direct support for a much wider range of industry applications while also delivering the benefits of integration. (The new IBM PureData System for Analytics, featuring Netezza technology, is the PureSystem model most relevant to zEnterprise customers.) However, the growth spots in the quarter (zEnterprise and PureSystems) were not enough to offset the overall decline (14%, excluding IBM's divested Retail hardware segment) in IBM's total hardware business.

In his comments to analysts, IBM's CFO pointed out how storage is changing, with more content and value in the software used to manage storage. (IBM's storage software business was up more than 10%, he pointed out.) To which I would add that trend is true for all types of hardware, and I've mentioned that before. It doesn't mean you can't do without hardware — far from it — but getting the combination right is critically important, and how you do the accounting is much less important. Likewise, I would caution cost-focused IT organizations (which is almost all of them) not to concentrate much on hardware costs. The other parts of IT, notably staffing, continue to increase as a share of spending. Ignore those and your bottom line is in peril.

by Timothy Sipples April 19, 2013 in Financial
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