Why IBM's Hardware Business Is Flying High

IBM's Systems & Technology Group saw its best quarter in a decade based on hardware sales in the first quarter of 2011, and analysts say it is because IBM has the right mix at the right time.

IBM executives are making all the right moves when it comes to the company's hardware business.

IBM's STG (Systems & Technology Group) showed its best quarter in a decade when the systems giant announced its first-quarter 2011 earnings April 19. During a call with analysts announcing the first quarter earnings, Mark Loughridge, IBM's chief financial officer, said IBM's STG roared to its best first quarter in more than a decade-up $4 billion, or 19 percent year-to-year-with double-digit growth in all brands, including System z mainframe, Power, System x, storage and microelectronics.

IBM's success in servers and systems is tied to the strategic decision IBM made during the 2008 recession to invest billions of dollars in hardware, with a focus on innovation and integration at every level of the systems stack, from semiconductor technology through application optimization, IBM officials said.

IBM's investments in high-value and high-growth areas like workload optimization, analytics, virtualization and data center energy efficiency are bearing fruit. In 2010, IBM released significant new product enhancements across its entire portfolio, from a radically redesigned System z mainframe and Power to Intel-based System x and storage.

"In our Power business, IBM has focused on advanced technology to address emerging client needs for advanced analytic workloads, private and secure clouds, and Smarter Planet applications such as smart energy grids, all of which provide new opportunities for growth," Tom Rosamilia, general manager of System z and Power systems at IBM, said in an interview with eWEEK. "In 1Q, Power systems revenue grew 19 percent year-to-year, reflecting the strong market acceptance of our Power7 product line introduced in 2010. Additionally, IBM recorded 210 competitive displacements resulting in more than $200 million of business, with roughly 60 percent of those wins coming from Oracle's legacy Sun installed accounts and 30 percent from [Hewlett-Packard] accounts."

Commenting on IBM hardware surge, Greg Richardson, an analyst with Technology Business Review, said:

"IBM's efforts to build need-based systems out of integrated pieces of hardware have enabled the company to arrive at a utopia of balanced growth across its Systems and Technology Group. IBM delivered double-digit revenue growth across all of its hardware lines, led by a cyclically strong System z, which increased 41 percent year-to-year, and 19 percent growth in Power Systems revenue, which experienced increased revenue in low- and high-end engagements. In addition to strong revenue momentum, IBM benefitted from a shifting mix to high-margin System z and improved operational leverage across its STG business units to drive profit growth in 1Q11."

IBM's first quarter 2011 results followed a 2010 fourth quarter in which IBM showed the best year-to-year revenue growth in servers since at least 200-22 percent, with double-digit growth in several product areas and growth in every platform.

"Server sales in emerging markets in Asia, Africa and South America grew 19 percent in 1Q," Rosamilia said. "The IBM mainframe, declared dead not too long ago, continues its resurgence-in part because of inroads it's making in Africa as evidenced by recent purchases in Cameroon, Senegal and Namibia."

Coincidentally, Rosamilia noted that April 20 marked the second anniversary of Oracle's announcement that it would acquire Sun Microsystems. Deutsche Bank Global Markets said in a March 26 research note, "IBM has consolidated over 30 points of share in the mid-range server market since 2000 at the expense of both Oracle/Sun (minus 5 pts) and HP (minus 19 points)," and "IBM's Power architecture arguably has a 1 to 2 generation lead over UltraSPARC, suggesting it is best positioned to win these customer migrations."

In addition to the 210 displacements Rosamilia noted for the first quarter, in 2010 more than 2,900 customers moved critical business workloads to IBM servers and storage systems-more than 1,100 from Oracle-Sun and more than 750 from HP. According to IDC, Oracle-Sun has lost server share the last eight quarters and its annual server share losses are accelerating (0.6 points lost in 2008; 1.2 points in 2009; 8 points in 2010). IBM took back the lead in server revenue market share as 2010 drew to a close, according to Gartner and IDC.

In February, IBM's Watson beat two past champions on "Jeopardy," demonstrating how an optimized system in a commercially available Power 750 environment could provide the performance needed to interpret and answer complicated questions in real time. Though Watson is equipped with special software from IBM Research, the Power 750 systems behind Watson are the same that can help any bank, retailer or utility process an enormous amount of information and run thousands of analytical tasks at once, IBM said.

Meanwhile, Technology Business Research's Richardson added that "IBM is building a suite of hardware, software and services solutions around its new zEnterprise 196-core mainframe platform. The company updated the value proposition for its mainframes, targeting and optimizing select workloads such as mission-critical applications, transaction processing, virtualization, data warehousing, analytics and private cloud computing."

IBM also recently announced plans to support Windows servers running on the IBM zEnterprise mainframe systems.