IBM's 1Q Server Sales Take A Hit

IBM said Tuesday a shift to low-end products contributed to a slowdown in server revenue for its first quarter.

April 19, 2006

2 Min Read
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IBM’s first-quarter server revenue declined across all brands except xSeries in part because of a shift to lower-end systems, the company said Tuesday in its earnings call.

Total revenue for the IBM’s Systems and Technology Group rose 3 percent year over year to $4.4 billion for the first quarter ended March 31. However, zSeries server sales dropped 6 percent, iSeries fell 22 percent and pSeries decreased 9 percent, said IBM CFO Mark Loughridge. xSeries sales jumped 10 percent in the quarter, driven by a 45 percent increase in blade server sales.

“We are seeing strong growth in our lower-margin business,” Loughridge said of the xSeries growth. He added that in the other server brands, IBM saw better performance in the low-end of the product lines than at the higher end.

The Systems and Technology Group also includes microelectronics, which saw a 37 percent revenue gain, and storage, which grew 6 percent.

IBM business partners said the move toward lower-end servers bodes well for their small- and midsize-business customers."We had an exceptional first quarter. Our server business was up year over year about 17 percent," said Joe Mertens, executive vice president of San Antonio-based Sirius Computer Solutions, one of IBM's largest U.S. business partners. "The xSeries business was exceptionally strong for us, up over 100 percent."

Mertens noted that the bulk of Sirius' business is in SMB accounts.

Vince DeRose, president of Peak Resources, an IBM Premier business partner in Denver, also has seen traction with the lower-end servers. “We are doing bigger workloads on smaller systems because of the power of IBM hardware,” he said. “We can do a $500,000 deal today that two or three years ago would have been $1.5 million.”

DeRose said he’s seeing a lot of demand for IBM server solutions but that IBM and its business partners must work together to find more deals. “We need to identify more opportunities to do the same amount or more business because we can do more workload on less hardware.”

Loughridge said the first quarter is typically a light hardware quarter for IBM and noted that the revenue declines in most hardware server brands wasn’t because of increased pricing pressure. Still, he acknowledged that IBM was seeing price competition primarily in the xSeries market and that pricing pressure in the first quarter was "more pronounced" in the United States.0

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