>> From the SiliconANGLE media office
in Boston, Massachusetts, it's theCUBE.
Now here's your host, Dave Vellante.
>> Hi, everybody, welcome to this edition
of theCUBE Insights powered by ETR.
In this breaking analysis, we're going to look
at IBM's Systems business and, specifically,
the IBM system Z, and talk about the impact
that it's going to have on IBM financials.
Now, Alex, if you would kindly bring up the first slide.
So this is data from ETR's
spending intentions survey for the second half of 2019.
They asked customers, compared to the first half of 2019,
what are your spending intentions
on the second half of 2019, specifically for IBM?
So you can see the N here is 448 customers
out of their panel of 4500, of which around 11 or 1200
answered this question specifically cited
that they were IBM customers.
What this data shows is 21% of the customers
said we're going to increase spend in the second half
relative to the first half with IBM.
52% said we're going to stay flat.
14% said they're going to decrease.
You see 6% said we're going to basically leave
the IBM platform and 7% said
we're going to bring on IBM as new, we're a new customer.
So, if you take the people that are spending more and new
and subtract out the leaving and the spending less,
you get a net score, and you get a net score of 8%.
Now we've been sharing with you this ETR data
over the last several weeks and months.
8% is not great.
IBM, according to ETR spending surveys,
they're losing share relative to the overall market.
We've covered this pretty extensively.
We covered the Red Hat acquisition
and talked about how that IBM intends
to supercharge its cloud business.
Specifically with Red Hat, I've said
I've been on record, saying this is largely
a services play where they're going to basically take
Red Hat as an application development platform
and help their customers modernize their systems
from using their large services footprint to do that.
And I want to talk for a moment
about the IBM business overall.
IBM is all about mission-critical work.
The IBM Z, their high-end systems, their related database,
it's all about mission-critical work.
IBM shared some data with analysts recently
where they talked about, if you look at IBM Z,
IBM Security business, its database,
particularly Db2, its middleware,
its application management services,
and its infrastructure, and all that set of consulting work
that goes around that.
Add that up, it accounts for 60% of IBM's revenue.
So this is why I want to spend some time talking about IBM Z.
I mean it's kind of a boring but important topic.
It used to be the heart of IBM's business.
It used to drive entirely their income statement,
but in fact, today, it's still very critical.
All those pieces that I mentioned
account for 60% of that business.
So Z is critical for driving IBM's Systems business
and that gives air cover for IBM's business overall.
So, Alex, if you bring up the next slide.
What I've done is just pulled out some quarterly data
of IBM's Systems revenue overall,
and then juxtapose it against IBM's Z revenue.
This is growth, this is just percent growth.
So the blue is IBM Z percent revenue growth
relative to the previous year.
This is in constant currency, by the way.
And as well, it excludes the elimination
of IBM's Systems X business, the Intel-based business,
so it's normalized for that.
And then the orange is the overall Systems growth
so you can see that the blue grows virtually
immediately after IBM announces a new system.
So, for instance, in January of 2013,
IBM announced the Z13.
We were there with theCUBE to cover it.
We talked to a number of practitioners.
What big banks and big mainframe customers do
and, by the way, 25 of the world's top 25 banks run on Z.
Huge proportion of retail giants run on Z.
Why, because it is the system of record,
and the top system of record,
along with Oracle, in the world.
I'll talk more about that, but you can see here
Z13, so we talked to a lot of practitioners
at the January launch, and they told me
they'd buy this thing sight unseen because they know
it's going to drive revenue for them.
If they can get more power, more performance, lower cost,
it drops right to their bottom line.
So you can see 2016, even though
there was a kicker in there,
of the next generation, not next generation,
but a kicker to the Z, I didn't show it here,
but bad year in 2016 in terms of growth.
And you can see the blue is proportional to the orange.
It drags it down in here.
Z14 is announced and you can see,
when the Z14 was announced, in July of 2017,
just right after that, boom.
Big uptick in Z revenue and proportional Systems revenue.
So you're on this two-year cycle of Z announcements
and you can see 2019, in the first half, has not been great.
IBM just announced the Z15 in September,
so we fully expect that in Q4, you're going to see that uptick.
So kind of wanted to share that with you.
Next slide, I just want to make a couple of points
about IBM's Systems business.
It's about an $8 billion business overall
in terms of annual revenue.
It comprises Z, power, and storage.
It's as they say, System Z drags a lot of software.
It drags storage, it drags services.
It's about a 53% gross margin business.
The storage business is actually
quite a good gross margin business,
I think, probably higher than power.
The server business is not the greatest gross margin.
I think mainframe is still pretty good.
IBM and Oracle dominate the business for systems of record:
Oracle with Exadata and IBM with Z.
Now you might say, hey, Exadata is growing
and Z is, I just showed you, the sort of fluctuation,
but overall, it's sort of flattish.
Maybe it can eke out growth.
It actually can show good growth in one year,
but if you normalize it over a couple years,
it's pretty much a flat business or declining business.
So you might say, well, Oracle X has grown,
but that's 'cause Oracle's replacing
its entire hardware business
and much of its related software business with Exadata,
all that wood behind one arrow,
whereas IBM has a more diversified portfolio,
and so that's kind of apples-to-oranges comparisons.
Now the ETR data shows that the storage intentions
for the second half of 2019
really flipped to positive territory.
Servers were still negative but improving.
And so, as I showed you in the previous slide,
I definitely would expect the Systems business
to have an uptick in Q4
and it's dragging storage with it.
IBM synchronized the storage announcement, the DS8000...
I am not great with model numbers
but the recent storage announcement
with the mainframe announcement,
I'll make some more comments about that.
But it seems that IBM's trying to do a better job
of synchronizing that.
IBM's also going to smooth out its Systems revenue, I believe.
I mean, right now, it's very cyclical,
but I'll make some comments about that in a moment.
So IBM system Z and Exadata are unique
in that their IO is tightly integrated.
These are purpose-built systems
and the storage and the IO are purpose-built
for the systems of record,
so they're very, very low latency.
Give you an example, Oracle Exadata,
in recent announcements at Oracle OpenWorld,
I think 18 microseconds latency.
IBM, with its recent Z announcement, I think, is even lower.
I want to say 15 microseconds but don't hold me to that.
Whereas, if you compare that to traditional systems,
you're talking about maybe 200 microseconds,
in other words, those systems that aren't purpose-built
for systems of record with integrated IO.
The IO is hardwired with custom silicon and A6
and so it's ultra, ultra-fast IO
which means you can push 10 times the IO through the system.
So very, very high performance
relative to what you saw in previous generations.
Why do I spend so much time talking about this?
Because this is a harbinger for future Systems developments.
Talking, within two to three years,
you're going to see the mainstream systems
with this type of low latency.
So now, you might also say, wow,
that means that the IBM and the Exadata business
are in big trouble.
No, these systems are not going to be replaced,
they're not going to be migrated.
It's too risky, it's too expensive.
We've talked about that a lot on theCUBE
where it just doesn't make business sense
for people to convert off the Z mainframe.
There's too much custom code.
They'd have to freeze that code
for many, many months, maybe even longer.
They'd risk their business.
They're going to make much more money
purchasing the next generation of system
as long as the Z mainframe continues
to add function, which it's doing.
Same thing with Oracle Exadata.
Years ago, IBM announced support for Linux.
Obviously, Red Hat is now another key piece of that.
In the recent Z15 announcement, Encryption Everywhere.
They announced a hybrid cloud
so basically bringing the Z to cloud.
Really strong security focus.
This cloud piece is interesting.
We talk a lot about Cloud 2.0.
Bringing the Z and the systems of record to cloud
is something that IBM has said
that it intends specifically to do.
That will begin to potentially smooth out
IBM's Z revenue.
You know, it's ironic.
In the latter part of the 1980's,
kind of a financial game that IBM was playing,
they converted their rental base,
which was a monthly income stream, to purchase.
When they did that, it created the effect
of showing up on the income statement
and kind of hiding the trouble that IBM was really in.
When that transition ended, IBM really tanked,
and that's when IBM got into big trouble,
the whole downsizing trend.
Gerson had came in, they bought PWC,
and really transformed the company.
But the Z as the system of record,
or the old 3090, has lived on.
Now we're seeing that dynamic come full circle
where, over time, IBM can shift from
an upfront pay to a subscription,
which is, as they say, coming full circle.
It's going to be interesting to see how that transition works.
The other point again.
The storage seems to be synchronizing its product cycles
with Z at least at the high end.
And so this is likely to carry through the Q4.
We see, from the ETR spending data,
that storage intentions are up.
I think the net score was up 5% versus
a negative from the previous quarter.
Servers overall were still down.
They don't have a question specific to Z,
but I would fully expect that Q4 this year,
you're going to see a nice uptick in Z revenue.
And, as I pointed out before, with that 60% number,
this is going to provide another halo effect
for IBM's overall business.
Will it be enough to propel the stock?
Probably not, this stuff is factored in,
the analysts understand these product cycles,
but it's something that I wanted to shine a light on
because, again, it's one of these important topics
that not a lot of people talk about.
People roll your eyes when you talk about the mainframe,
but the mainframe is here, it's alive and well,
and what I call "mainframe", Oracle Exadata and IBM Z,
are really the two companies
that are prominent in that space.
And, while they might compete, to my earlier point,
you're really talking about each company
having its own install base
and, as long as they keep investing in R & D
and keep those product cycles coming,
I would expect that this business
is going to be healthy yet cyclical for a long, long time.
This is Dave Vellante for theCUBE Insights powered by ETR.
We'll see you next time, thanks for watching.
(upbeat electronic music)