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IBM Profits on Old Hardware, the Mainframe [Update]

After Apple (AAPL) reported blockbuster earnings of 70.5 percent year-over-year revenue growth, anything in comparison seems lackluster. And yet, you can't knock IBM's (IBM) results, reported yesterday: Q4 revenue up 16 percent, year over year, to $29 billion and annual revenue up 4 percent to $99.9 billion.

What stands out is the importance of an old type of product. One of the major drivers of growth has been IBM's mainframe business. Once written off as the most anachronistic of legacy systems, mainframes are an important component of the company's financial success and suggest that, in many ways, the new world of cloud computing may look a lot like the old world of time-sharing.

Look at IBM's revenue breakout by category:

The systems and technology division, which includes computer hardware, had the largest year-over-year growth for both the quarter and all of 2010. Now look at IBM's description of the division's revenue:

Systems revenues increased 20 percent (21 percent, adjusting for currency). Revenues from System z mainframe server products increased 69 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), increased 58 percent. Revenues from System x increased 18 percent. Revenues from Power Systems increased 2 percent compared with the 2009 period; entry systems revenues were up 30 percent and mid-range systems grew 7 percent. Revenues from System Storage increased 8 percent, and revenues from Retail Store Solutions increased 26 percent year over year. Revenues from Microelectronics OEM increased 30 percent.
Both System z is a and System x are mainframes; System X and Power Systems are smaller servers. There's apparently enough demand, particularly for the newer System z, that IBM can increase revenue considerably faster than the computing capacity it shipped, the exact opposite of an industry trend, where more computing costs less over time. That may be a bit misleading, as the System z includes redundant components to keep machines running when there are problems. IBM might include the extra parts as providing additional capacity, even though they are backup.

[Update: I had mistakenly listed System x as a mainframe. It is actually an x86 server that can run Linux or Windows. Power Systems can run Linux, AIX, or IBM i OS.]

Even so, the company is shipping a lot of mainframe hardware and companies pay increasingly more for the work they do. So much for the end of the day of big iron, the old nickname for the systems. Why? I think there are three reasons:

  1. Companies use far more computing than ever before. Mainframes aren't excess capacity in a box, but a lot of capability that companies will need in the short run.
  2. Maintaining and controlling thousands upon thousands of servers is difficult. Mainframes, while complex, were designed from the very start for administration.
  3. Cloud computing needs both maximum flexibility and massive capacity. Although smaller servers scale down more easily than mainframes, you have to buy a lot of the former to get one of the latter.
The mainframe now has new ways to fit into IT departments and IBM was smart enough to recognize it and turn it into divisional gross margins of around 40 percent.


Image: stock.xchng user brcwcs.
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