IBM's weak hardware revenues drags down overall earnings results
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April 21, 2014
As many industry analysts had already expected, IBM's lower first quarter storage revenues dragged down Big Blue's revenues
from the rest of its operations. The storage business is getting more competitive.
Revenues from IBM's Systems and Technology unit (STG) were $2.39 billion for the quarter, down 23 percent compared to 2013's 1st quarter.
IT industry analyst Stifel Nicolaus' Aaron Rakers says-- "IBM’s storage results have posted year-to-year declines for the past ten
In a series of prepared remarks Martin Schroeter, IBM’s senior vice president and CFO, Finance and Enterprise Transformation, said-- "Looking
at hardware, as expected, the combination of secular and cyclical challenges continued."
Additionally, secular changes are the long-term ones, while cyclical changes refer to quarter-to-quarter differences, Schroeter pointed out.
Then he added-- "Our flash solutions contributed to some growth again this quarter, but we saw substantial weakness in high-end storage."
That means the DS-8000, primarily, Big Blue's monolithic array that competes with EMC's VMAX and Hitachi/HDS' VSP (which is OEM'd for
Hitachi by HP as the XP).
Rakers had this to say about the flash revenues-- "Gartner estimates a $46.7 million revenue contribution from FlashSystem during the
December quarter, up from $37.1 million in the prior quarter. This compares to EMC’s XtremIO at $49.5 million, albeit including beta
customer revenue recognition, and NetApp’s EF-540 at $14.6 million in the December quarter."
And that flash revenue portion is a very small part of STG's storage revenues. IBM has previously committed to spending a billion
dollars to increase its flash business.
Schroeter continued-- "We are selling our industry standard server business to Lenovo. We are repositioning Power and building an
ecosystem around OpenPOWER, and we’ve taken actions across Power and Storage to right-size the business to the market dynamics we took
actions to align our structure to the demand profile we are currently seeing."
So IBM is right-sizing its storage business, meaning possible or probable headcount reductions and product line shrinkage.
In IBM's view, there's no prospect of growth in any of its storage product categories in the short term, at least sufficient to get storage
revenues overall growing in a meaningful way.
And it's not just cuts in storage. Schroeter added-- "Our focus for STG this year is to stabilise the profit base. The repositioning
of the Power platform, the announcement of POWER8, new announcements in storage, and the right-sizing of the business will all contribute,
as we move through the rest of the year."
"This, together with the divestiture of System x, will result in a smaller and more profitable hardware business going forward," he added.
He emphasized that "IBM will remain a leader in high-performance and high-end systems, in storage and in cognitive computing."
"This, we think, with reference to storage, is dubious. We wouldn't really class IBM as a leader in storage, not with its history
of declining revenues," he said.
Tivoli, IBM's systems and network management framework software, was a brighter segment, however, with Schroeter saying-- "Tivoli grew
revenue 7 percent. This quarter we had growth in all three of Tivoli’s product segments, systems management, storage, and security. Security grew
double digits for the sixth consecutive quarter."
In other IT news
In just the first three months of 2014, Google reported in its financial statements yesterday that it spent an incredible $2.35 billion
on its data centers and infrastructure. There's no question that the company is growing very fast.
The investment was revealed by Google deep within its financial results and clearly demonstrates just how much the company has
grown in the past 8 to 10 years, considering that it spent the same amount during the entirety of 2008.
What Google now spends on purchases of property and equipment in just one quarter, most of which goes on data centers and associated IT
equipment, it used to spend in a whole year.
And such a level of expenditure dwarfs Google's data-intensive competitors as well. For example, Amazon just spent $880 million in
its most recent quarter, and Microsoft only spent $1.7 billion.
The significant difference in capital expenditures between Google and its competitors illustrates both the globe-spanning scale
at which the company operates and also demonstrates its wider strategy of designing systems to not only organize but store and analyze
the globe's information.
For example, Google Street View was launched in the summer of 2007 and since then has been gobbling up tons of visual data captured
on land and even at sea.
All of that data has to go somewhere and even with Google's in-house technical resources this carries a certain cost, like it or not.
And while all of this is happening, the company has been buying more and more computer chips as it tries to run sophisticated
analysis tasks over this voluminous information, such as the so-called "cat face" recognizing layered neural network it trained
using 15,000 CPUs.
Now, we're reaching a point where Google's "Deep Learning" endeavors have grown enough to be put into wide production use for such
tasks as image recognition, natural language processing and, of course, its very first project-- search.
This means that the company is also going to be buying more computer chips than before to let it analyze all that data.
Google's spending on property and equipment for the entirety of 2013 was $7.35 billion, including operating lease agreements.
Given this quarter's significant spending, Google's massive and secretive artificial intelligence push, and the fact that it has
just begun a serious price competition war for cloud services with Amazon and Microsoft, Google could spend upwards of $10 billion
In other IT news
Fujitsu Semiconductor and Panasonic say they are ready to jointly launch a new chip company in the fall as part of the duo’s
plans to merge their LSI businesses, according to a few reports in the media this morning.
The new venture will have ¥50 billion in funding, with Fujitsu chipping in ¥20 billion, Panasonic ¥10 billion and the Development
Bank of Japan investing the rest.
The news comes just over six weeks after Fujitsu announced it was dissolving a joint venture with NEC and NTT to build chips for
Fujitsu established Access Network Technology Limited in August 2012, taking a majority 52.8 percent stake in the company. But
just 1 1/2 year later it claimed that fierce competition had forced it to close the company.
Panasonic will doubtless hope this upcoming venture with Fujitsu doesn’t suffer the same fate. On paper, it has a better chance of
success, given that this isn't a case of launching into a new technology segment, but instead the product of a decision taken last
year to consolidate the design and development functions of the two companies’ LSI businesses.
At the time, they had the following by way of explanation-- ``In recent years, as market conditions have rapidly deteriorated and
overseas semiconductor manufacturers have risen in prominence, the system LSI businesses of Fujitsu Semiconductor and Panasonic have
been facing a severe business environment.``
``In light of this situation, Fujitsu and Panasonic have both come to acknowledge that bringing together their respective advanced
technologies and customer bases is vital in building a competitive business globally. Focusing on system LSI marketing, design and
development under a fabless model, Fujitsu and Panasonic aim to achieve future growth in system LSI businesses.``
Japan's once proud chip giants have suffered a dramatic reversal in fortunes over recent years, ultimately leading to Elipda's
acquisition by Micron and a $1.8 billion government-led bailout of Renesas.
In other IT news
As you probably all know by now, Windows XP's expiration date of support and security updates officially ended as of Tuesday
this week. With about 21 percent of all personal computers still running Windows XP, there's a good chance you are among those whose computer
is now running an unsupported operating system. That could leave the door open to some serious hacking down the road.
And doing an upgrade to Windows 7 isn't a good option either. Yes, it will keep all your apps and settings, but it'll also
preserve all the clutter and some very bloated files that slows down an old Windows install, and you're still limited to 32-bit
What you need to do is to reformat the hard drive, start all over, and reinstall all your programs and software.
But you'll be happy to learn that there's another, albeit little-known secret to replace your old, unsupported XP operating system
with a new one that's fairly secure, current, gets regular Microsoft security updates and comes free of charge.
The solution is to simply run Windows XP as a 'Zombie OS' on something else. Chances are you're already using Windows XP for a particular
application that's incompatible with 64-bit Windows. Backwards compatibility with legacy code was dropped to keep the size and complexity of
the OS down.
In fact, Vista was the first 64-bit version of Windows to see some adoption, even if that OS never won the hearts of nobody, when its
users suddenly found that some of their beloved but ancient apps didn't work any more.
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