IBM's Big Iron Makes Hay

Don't write off the mainframe - IBM's Q3 results were boosted by strong performance from its zSeries business

October 19, 2004

3 Min Read
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IBM Corp. (NYSE: IBM) posted its third-quarter results last night, reporting income of $1.8 billion, up 1 percent from $1.79 billion a year ago. Earnings per share were $1.06, compared to $1.02 in 2003s third quarter.

However, the results were affected by a one-time, pre-tax charge of $320 million for the partial settlement of legal claims against IBM’s pension plan. Without the charge, IBM’s earnings would have been $1.17 per share, up on analyst predictions of $1.14.

Once again, it was IBM’s hardware business that boosted its quarterly performance. Speaking on a conference call last night, IBM CFO Mark Loughridge said that sales of zSeries and xSeries servers had been particularly strong during the third quarter, as had PC shipments.

Loughridge pointed to the high-end zSeries as evidence that mainframes are thriving. Forty years old this year, the mainframe has been repeatedly written off, much to IBM’s chagrin (see Mainframe Skills Shortage Looms and IBM Celebrates a Birthday).

Of course, IBM has good reason to keep the mainframe flag flying. The Armonk, N.Y.-based company built the first of these data center powerhouses, and it still has a significant installed base around the world. Far from being the IT equivalent of the dodo, Loughridge predicted that mainframe growth will continue into 2005.But it was a different story for the lower-end iSeries, which is IBM’s flagship midrange server. Whereas xSeries and zSeries revenues grew 26 percent and 12 percent respectively, iSeries revenues plummeted 26 percent.

Loughridge blamed the slump on the current transition from Power 4 to Power 5 processors on the iSeries range. The migration should be complete within the next four months, he said, although he admitted that the process has taken longer than expected.

At least IBM’s software business is picking up after a flat second quarter. Third-quarter software revenues were $3.6 billion, up 5 percent on the same period last year.

Like many other vendors IBM has been experiencing limited demand for its software products, although Loughridge said that revenues from its WebSphere product family grew 14 percent over the same period last year (see IBM Unveils Q2 Results and Software Slump Is Deal Time).

The other big software story at the moment is the ongoing tussle between Oracle Corp. (Nasdaq: ORCL) and PeopleSoft Inc. (Nasdaq: PSFT) (see Oracle Extends Offer for PeopleSoft and Oracle Battles With PeopleSoft).After recently jumping into bed with PeopleSoft, IBM is clearly hedging its bets, as an Oracle takeover seems increasingly likely (see PeopleSoft Picks IBM, Pokes Oracle). Loughridge deftly side-stepped an analyst question about the takeover. "I am sure that we will continue to do business with PeopleSoft," he said, before quickly adding, "We do a lot of business with Oracle as well."

However, with a cloud of uncertainty hanging over PeopleSoft, Loughridge admitted that IBM is finding it "easier than ever" to attract independent software vendors. These firms, of which there are around 1,000 in the world, typically write specialized applications that work with IBM products such as WebSphere or the DB2 database platform.

The market responded positively to the results. In early trading this morning IBM shares rose $3.01 (3.5 percent) to $88.93.

— James Rogers, Site Editor, Next-gen Data Center Forum

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