Proprietary Mainframe Servers in Decline -- Except for IBM

The use of proprietary mainframe servers continues to decline -- for everybody but IBM. System z, in fact, is doing just fine. The rest of the mainframe field? Not so much.

How's the mainframe market doing?

For some mainframe players -- and IBM Corp. is by no means the last word in Big Iron -- the answer to that question is a resounding "So-so," or as mainframe stalwart Groupe Bull noted in its fiscal year 2010 annual report, "the use of proprietary mainframe servers continues to decline."

Groupe Bull might have added a footnote to this claim: "For everyone but Big Blue, that is." IBM, in fact, is doing just fine. The IBM mainframe group recently notched another strong showing in the server market, posting $1.2 billion in Q2 sales, according to market watcher International Data Corp. (IDC). System z sales were up by more than 60 percent, buoyed -- no doubt -- by demand for Big Blue's zEnterprise, which last year replaced its aging System z10.

Although it's tempting to dismiss System z's year-over-year sales performance as artificially inflated -- Q2 of 2010 was nearly a disaster for Big Iron -- there's no sneezing at more than $1 billion in mainframe-related revenue. To put it in perspective, zEnterprise accounted for almost one-tenth (9 percent) of worldwide server revenues. By itself, zEnterprise generated $250 million more than Oracle Corp.'s (nee Sun Microsystems Inc.'s) hardware business.

It was also the fourth consecutive quarter in which Big Blue's mainframe group generated $1 billion or more in revenues.

What's more, IBM claims it's having success in green-field customer accounts, too, with 68 new mainframe customers since it first announced zEnterprise last July. Nearly one-third of those customers are in growth markets, according to officials. "We have 24 new mainframe customers in growth market countries just since the introduction of the zEnterprise last year. Think of it as planting the flag, which provides a great base for future growth," said IBM CFO Mark Loughridge, in a July earnings call with financial analysts.

How long can zEnterprise sustain this performance? Loughridge thinks there's plenty of gas left, although he conceded that zEnterprise's "substantial" sales performance might cool off over the last two quarters of 2011.

"The front end of the mainframe cycle [is] defined by new placements and new placement growth[;] as we go into the back half of the cycle … [it's] more defined by microcode upgrades, less revenue, but more profit margin performance," he told analysts. "As we go into the second half of the year, we do start to wrap on that substantial performance that we saw out of the mainframe last year."

Mainframe Haves, Have-Nots

No other mainframe player can even come close to IBM's performance, but that doesn't mean competitors are standing still.  Take mainframe stalwart Unisys Corp., for example. The company remains committed to enhancing its ClearPath line.  

Although the best days of Unisys' ClearPath mainframe line may be behind it -- unlike System z, ClearPath never experienced a late-life resurgence -- it has continued to be a reliable revenue generator for Blue Bell, Penn.-based Unisys.  This wasn't quite the case in Q2 of 2011, however, when Unisys' sales dipped below $1 billion (to $937 million) and it absorbed a $11.6 million loss. In the year-ago quarter, by contrast, Unisys realized $120 million in profit.

The culprit, says CFO Janet Haugen, was lackluster showing for Unisys' ClearPath mainframe business. "[O]ur revenue in the quarter was impacted by lower sales in ClearPath systems against the strong quarter a year ago," said Haugen, in a late-July earnings call with financial analysts. Haugen urged market watchers to assess ClearPath -- and Unisys -- on the basis of its annual performance, and not on a quarter-by-quarter basis. Consider the full-motion video, and not the single-frame still, Haugen seemed to argue. "[O]ur ClearPath sales can vary significantly from quarter-to-quarter, which is why we believe the best way to measure this business is on an annual basis. We grew our ClearPath sales in the first quarter of this year and for the full year 2010." 

Haugen's point concerning quarter-to-quarter volatility is true in many technology segments. In Q2, for example, IBM's mainframe business improved upon its performance in Q1 by almost $200 million. It's one thing, however, to fall back on volatility when -- in spite of fluctuations from quarter to quarter -- you're growing your business. It's something else, however, when your business plan calls for treading water. In the latter case, deficits in any one quarter must be made up in others. Unisys isn't expecting to grow its ClearPath-related revenues, Haugen conceded. "For 2011, we continue to focus on our goal of maintaining ClearPath revenue roughly flat with 2010 levels," she indicated.

On the other hand, Q4 is traditionally a big quarter for most vendors, particularly those that market high-end systems. It's conceivable -- it's likely, even -- that with strong Q3 and Q4 showings, Unisys can maintain ClearPath's share.

But Unisys, more than IBM, Groupe Bull, Hitachi, NEC, and other mainframe players, has been disproportionately affected by uncertainty in the public sector.

In the United States, and in many EU member states, public sector spending is subject to almost unprecedented scrutiny. In her Q2 pitch to analysts, Haugen effectively conceded as much. "In our Services business, we continue to be impacted by lower revenue in our U.S. Federal business due to the ending of the TSA contract and the uncertainties in Washington," she acknowledged.

There are reasons for optimism, however. Yes, public sector services revenues declined. And, yes, enterprise services revenues were essentially stagnant. But Unisys is wringing more profitability out of its services business. "We were able to improve the profitability of the Services business in the second quarter even with the lower revenue, driven by continued improvements in service delivery execution," said Haugen. Couple profitability improvements with a seasonal rebound in public sector and enterprise spending, and Unisys could achieve its stated objective of maintaining ClearPath's revenue performance.

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