IBM 2Q Revenues Up, But AS/400 'Disappoints'

Despite nearly a 22 percent growth in hardware revenue for the second quarter of 1999, IBM reports "disappointing" results for the AS/400 brand, where volumes grew, but revenues were down.

Though AS/400 revenues in North America grew moderately, this was overshadowed by "very poor sales execution in Europe, where the AS/400 has traditionally been well received," according to IBM. The company reports it is focusing a great deal of attention on rectifying the AS/400's problems worldwide, focusing not only on sales programs but also on emphasizing applications that have met with particular success on the AS/400--most notably Lotus Domino.

In addition to sales execution issues in Europe, IBM also speculates another reason for the AS/400's slipping performance is the server line's popularity in the ERP market, which has experienced a great deal of difficulty during the first half of this year. While the AS/400 did see about 10 percent growth in North America, many of the units sold "came in at smaller configurations," according to Doug Maines, IBM's CFO.

IBM's family of server platforms had a mixed performance during the second quarter, with a slight growth in revenue but a slight decline in profit. Overall server revenue grew three percent, powered by the relative success of the G5 and G6 models of S/390 and the RS/6000 H70 SMP model (which sold 1,000 units in three months, making it one of the fastest-selling enterprise servers in the industry).

One analyst is not surprised with the AS/400's lackluster second-quarter performance, especially when compared with 1998, a particularly successful year for the brand. For IBM's hardware segment, the only positive was that personal systems--PCs, Netfinity servers, Network Stations, etc.--grew dramatically, at 50 percent revenue growth, according to Tom Bittman, VP and research director with Gartner Group (Stamford, Conn.).

What's significant about the dramatic growth in the personal system segment is that it accounts for all hardware growth for the quarter, Bittman points out. The server business--AS/400, RS/6000 and S/390--is flat. "The price/performance of the AS/400 is pretty aggressive, so IBM may be seeing more boxes sold but, because they've decreased the prices, they may not be making it up in revenue," Bittman says.

Bittman warns against overanalyzing the AS/400's lack of revenue growth through the first half of 1999. "I think the AS/400 still has a strong business, compared to the RS/6000 and the S/390," he says. The real area to keep an eye on, according to Bittman, is IBM's evolving Netfinity business, where Big Blue is working to create its own Intel offering to compete with Windows 2000.

--L. Greenemeier

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