IBM’s latest earnings report contains some great news: IBM z Systems had yet another strong quarter. I love to see that result, and (in my view) so should everyone in the industry who cares about systems innovation. Mainframes are where the future begins, and the future continues to look bright based on these results.
Please note that one must not give too much weight to this single financial result. The mainframe ecosystem is much larger and more complex than the revenue number that IBM reports for their IBM z System (and LinuxONE) machines suggests. The ecosystem includes IBM and non-IBM operating systems, middleware, tools, applications, services (including education and training), and financing, as examples. Also, the IBM z Systems revenue number is cyclical. A single quarter does not make a trend, much less an arc of history.
As background, IBM started shipping the IBM z13 model in March, 2015 (1Q2015) and the IBM z13s model in March, 2016 (1Q2016). Their LinuxONE Emperor and Rockhopper cousins started shipping in the same quarters, with the Emperor maybe one month earlier. The 4Q2016 revenue number is compared to the year ago quarter, to 4Q2015. It should have been a relatively “tough compare.” Yet IBM reported a +4% z System revenue increase. Outstanding.
IBM’s CFO provided a bit of “color” to explain that result: margins were up, and “new workloads” figured prominently in the win column. Margin improvement is predictable to some degree. When IBM starts shipping a new model, its assembly plants ship lots of physical machines with processors and other components. Physical goods always have real costs. Later on, the emphasis shifts to machine upgrades that involve shipping fewer physical components. In many cases mainframe customers at least tentatively committed to those upgrades back when they purchased their original machines (new or as hardware model upgrades), but IBM cannot book upgrade revenue until an upgrade is in place. Thus it’s reasonable to expect cyclical variation in profit margins. The 4Q2016 margin contribution was at least potent enough that it lifted the whole IBM Systems division’s profitability. (IBM Power Servers and Storage had a tough revenue quarter, unfortunately. Probably for cyclical reasons, though.)
“New workloads” is even better news. Although variable and cyclical, it’s reasonable to expect that mainframe customers’ existing applications and databases will grow at some pace along with digitization of the global economy. As a notable example, when the world is inexorably moving from paper and coin cash transactions to plastic and smartphone electronic transactions, the world’s electronic payment systems (heavily mainframe-based for entirely sensible reasons) will rise to meet the demand. That’s terrific, and what’s even more terrific is the addition of new applications and new information systems to those machines, and brand new customers joining the mainframe community. “New workloads” is shorthand for this phenomenon, the “horizontal” growth. Examples include blockchain technologies. IBM is betting heavily on blockchain, and in 2016 IBM introduced its High Security Business Network for Blockchain, publicly available through the IBM Bluemix cloud and run on IBM LinuxONE Emperor servers. LinuxONE and z System customers can also run blockchain technologies on their own machines, and many are. IBM is a member of the Linux Foundation promoting Hyperledger blockchain technologies, and the Hyperledger code is available as open source to everyone, including to mainframe customers. There is widespread industry agreement that blockchain technology solutions will not succeed unless they have the best security controls. The cryptographic math is well proven, but protecting the “rear flanks” of those blockchain solutions is the key (pun intended). IBM LinuxONE and z System servers handle that defensive part of the equation brilliantly, and that’s one part of the “new workload” story.
So, to sum up, mainframes keep expanding and growing, multidimensionally. Bravo.
Turning to IBM’s overall results for a moment, IBM is clearly a profitable, going concern. A couple decades ago there were some doubts about that, but not since, and not now. However, overall revenue was down 1%. IBM is still correcting course to change that minus sign to a plus sign. IBM’s investments in cognitive solutions, security, cloud (especially in hybrid clouds), and other areas are looking good so far. They’re all highly mainframe relevant, by the way.
Welcome to 2017.