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

IBM Second-Quarter 1999 highlights:
  • Overall revenues up 16.4 percent to $21.9 billion
  • Net Income $2.4 billion (compared with $1.5 billion for 2Q 1998)
  • Hardware revenues up 22 percent to $9.4 billion
  • Software revenues up 9 percent to $3.1 billion
  • Global Services revenues up 15 percent to $8 billion
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 underwhelming 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.

Other speculation concerning the AS/400's performance during the second quarter leads down a familiar path. "Year 2000 is heavily impacting sales of commercial packaged software," says David Andrews, managing partner of the Cheshire, Conn.-based consulting firm D.H. Andrews Group. "Customers are just not putting new commercial packaged software in. That's having a greater impact on AS/400 than it would have on Intel-based servers or Unix servers."

In addition to the AS/400 market's dependence on commercial business-type applications, the server's success is also tied to the support it receives from IBM. "I think we're seeing some reaction to the fact that IBM isn't as aggressively marketing the AS/400 as they might, and that's a combination of culture and politics within IBM," Andrews says. "It's hard to argue with Lou Gerstner's overall strategy for IBM because it's been enormously successful. But part of that strategy has been to place less emphasis on hardware and more on software and services."

Tom Bittman, VP and research director with Gartner Group (Stamford, Conn.), 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 note was that personal systems--PCs, Netfinity servers, Network Stations, etc.--grew 50 percent, he says.

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, behind 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).

The server business--AS/400, RS/6000 and S/390--is essentially flat, Bittman points out. "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.

Andrews echoes Bittman's sentiments, indicating that the AS/400 is still a successful and profitable product for IBM and that it will continue along this path for a long time. "You can't leap to the conclusion that the sky is falling," Andrews says. "My best guess is the AS/400 Division in '99 will still make approximately the same level of profitability as Sun Microsystems Corporation, and also more than Disney makes from its amusement parks combined." As result, Andrews does not believe IBM will panic with regard to funding research and development in the AS/400 space.

Overall, IBM saw second-quarter net income of $2.4 billion, primarily on the strength of its services and software businesses. The company's revenue rose to $21.9 billion in the second quarter, a 16 percent increase over the same quarter last year. Revenue from Global Services rose 14.6 percent to $8 billion, while software revenue rose 9.1 percent to $3.13 billion.

Louis V. Gerstner, Jr., IBM chairman and CEO, says, "We continued to build on our strategic priorities in the second quarter. These priorities are focused on three areas: services, software and the sale of our leadership technology to the marketplace. Our services business continued to show excellent results in the quarter. Our software unit once again turned in a very good performance, with particularly strong results from our database, transaction processing and Tivoli products. Although we saw price pressures in some areas of the technology segment, our technology business nevertheless performed well overall in a difficult environment.

"In summary, our results were strong worldwide," Gerstner says. "In addition to the strength in our services, software and technology areas, we once again saw very good growth in our System/390 servers, with shipments of System/390 computing power more than doubling year over year. There was a marked improvement in the quarter in our RS/6000 business. Our PC business continued its year-over-year improvement. In short, we maintained our momentum in the second quarter while taking important steps to further strengthen our portfolio over the long term."