z Systems and Cloud Lead IBM 2Q Results

DancingDinosaur generally steers clear of writing about reported quarterly revenue. Given the general focus of this blog on enterprise and cloud computing, however, IBM’s recent 2Q15 report can’t be ignored. Although it continued IBM’s recent string of negative quarterly results, the z and cloud proved to be bright spots.

Infographic - IBM Q2 2015 Earnings - Cloud - July 20 2015 - Final

Strong IBM cloud performance, Q2 2015 (click to enlarge)

As IBM reported on Monday: Revenues from z Systems mainframe server products increased 9 percent compared with the year-ago period (up 15 percent adjusting for currency).  Total delivery of z Systems computing power, as measured in MIPS, increased 24 percent.  Revenues from Power Systems were down 1 percent compared with the 2014 period (up 5 percent adjusting for currency).

It’s not clear when and how Power Systems will come back. IBM has opened up the Power platform through the Open Power Foundation. A good move in theory, which DancingDinosaur applauds. Still, much depends on the Foundation gaining increased momentum and individual members rolling out successful Power-based products. The roadmap for POWER8, POWER9, and beyond looks promising but how fast products will arrive is unclear. There also is potential for the commoditization of the Power platform, a welcome development in many quarters, but commoditization’s impact on future revenue also is not clear.

Cloud revenue was up more than 70 percent, adjusting for currency and divested businesses; up more than 50 percent as reported, according to IBM. Given that cloud, along with mobile and analytics, has been designated strategic by IBM this is an encouraging development. The company’s cloud strategy is starting to bear fruit.

The big question hanging over every vendor’s cloud strategy is how to make money at it. One of the appealing aspects of the cloud in terms of cost and pricing for IT-using organizations is what amounts to a race to the bottom. With pricing immediately apparent and lower pricing just a click away it has become a feast for the bottom grazers to whom the lowest price is all that matters. For companies like IBM and Oracle, which also has declared cloud a strategic initiative, and other large legacy enterprise platform providers the challenge is to be competitive on price while differentiating their offerings in other ways. Clearly IBM has some unique cloud offerings in Watson and Bluemix and others but can they deliver enough revenue fast enough to offset the reduction in legacy platform revenue. Remember, x86 is off IBM’s menu.

Timothy Prickett Morgan, who writes frequently about IBM technology, also had plenty to say about IBM’s 2Q15 announcement, as did a zillion other financial and industry analyst. To begin he noted the irony of IBM promoting cloud computing, primarily an x86 phenomenon while trying to convince people that Power-based systems are cost competitive—which they can be—and will do a better job for many of those workloads, correct again.

Morgan also makes an interesting point in regard to the z: “IBM doesn’t have to push the System z mainframe so much as keep it on a Moore’s Law curve of its own and keep the price/performance improving to keep those customers in the mainframe fold.” That’s harder than it may seem; DancingDinosaur addressed the Moore’ Law issue last week here. As Morgan notes, with well over $1 trillion in software assets running on the mainframe, the 6,000 or so enterprises that use mainframes are unlikely to move off the platform because of the cost, disruption, and risk such a move would entail. Just ask Union-Pacific Railroad, which seems to be doing a slow-motion platform migration off the mainframe that seemingly may never actually end. Morgan concludes: “IBM can count on a certain level of money from the System z line that it just cannot with the Power Systems line.”

As noted above, how much revenue Power can generate for IBM depends on how fast the Open Power Foundation members introduce products that expand the market and how many Power processors SoftLayer can absorb as the business unit expands its global footprint.  There also is the question of how many POWER8 servers Rackspace, a much larger cloud provider than SoftLayer, will take and whether the Rackspace initiative will catch on elsewhere.

In any event, IBM’s 2Q15 report showed enough positive momentum to encourage IT platform enthusiasts. For its part, DancingDinosaur is expecting a business class z13 in the coming months and more.

DancingDinosaur is Alan Radding, a veteran IT analyst and writer. Please follow DancingDinosaur on Twitter, @mainframeblog. See more of his IT writing at technologywriter.com and here.

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