In-Depth
Down Was Up for IBM Corp.
Even though Big Blue’s revenues shrank, its earnings increased last quarter.
IBM's mainframe unit had an especially interesting quarter. In spite of a projected plunge in sales of Big Iron, zEnterprise sales were up by double-digits -- in growth markets.
On the whole, zEnterprise turned in a surprisingly strong performance. This came as something of a surprise. After all, ZEnterprise turned two in July, and – with a refresh of Big Blue's mainframe CMOS on tap for later on this year – most IT watchers (and IBM itself) expected customers to defer purchases.
Customers are doing just that -- in mature markets. “System z revenue declined 9 percent at constant currency, and MIPS declined 8 percent with a mix toward specialty engines,” said IBM CFO Mark Loughridge, during IBM's second-quarter earnings conference call with financial analysts. “System z profit margin was up again, which is typical at this point in the upgrade cycle.”
To get some perspective, zEnterprise sales were off by 20 percent (year-over-year) in Q1 of 2012. Part of the steepness of that decline had to do with the gangbuster performance of z in the first three months of 2011, when Big Blue moved over $1 billion in mainframes.
In fact, zEnterprise's 9 percent decline (year-over-year) in Q2 2012 seems almost miraculous -- at least when you look at the year-ago period. In the second quarter of 2011, z generated $1.2 billion in revenues, according to market watcher International Data Corp. (IDC). That translated into a 60 percent increase over Big Iron's performance in 2010. (True, Q2 of 2010 was one of the worst quarters in mainframe history, but even so, over $1 billion in mainframe-related revenue is impressive.)
Q2 also marked the fourth consecutive quarter in which Big Blue's mainframe group generated at least $1 billion in revenue. To put zEnterprise's recent performance in perspective, a 9 percent drop relative to a historically great quarter two years into a product cycle is impressive by any measure.
Growth Spurt
ZEnterprise also surged in growth markets, where sales jumped by 11 percent.
Loughridge, for one, seemed surprised. “For this position in the product cycle, we do really have stronger z performance than you would have statistically kind of expected to have,” he told analysts. “[T]he growth market z content was up 11 percent. Well, [if] you can drive 11 percent growth in the substantial part of your business in those growth markets that have new opportunities for us ... that obviously has substantial leverage in our business.”
For the quarter, IBM's revenues were off by 3.3 percent, to just under $26 billion. At the same time, Big Blue's net income was up by nearly 6 percent, at $3.88 billion. Big Blue was able to grow its earnings by cutting costs and by improving profitability across some of its lines -- such as zEnterprise. One reason was surging demand in growth markets. Another was pent-up demand from Q1, Loughridge said: “Some of that was backend loaded in the quarter and we did see, as I pointed out earlier, that last week of the quarter we saw an uptick in our [small cap value] business as we left the second entry and the third.”
One of the strongest growth markets for System z was in China.
“We had real power within the z side of the house in China, but if you look at across the sector dimension, and the brand dimension, we had really strong growth in our sectors, every single sector had growth, strong growth in the growth markets,” Loughridge said.
One upshot is that zEnterprise wasn't the only beneficiary of surging demand in growth markets. “We had very strong growth across every single brand: our software business grew double-digits [and] our services businesses grew double-digits within our STG content, with z growing at 11 percent,” he pointed out.