I usually doesn’t like to read too much into the statements of IBM suits at financial briefings. This has been especially true since IBM introduced a new presentation format this year to downplay its platform business and emphasize its strategic imperatives. (Disclaimer: I am NOT a financial analyst, rather a technology analyst.)
But this quarter the CFO said flat out: “Our z Systems results reflect a product cycle dynamic, seven quarters into the z13 cycle; revenue was down while margins continue to expand. We continue to add new clients to the platform and we are introducing new technologies like blockchain. We announced new services to make it easier to build and test blockchain networks in a secure environment as we build our blockchain platform it’s been engineered to run on multiple platforms but is optimized for scale, security and resilience on both the IBM mainframe and the IBM cloud.”
If you parse the first sentence–"reflect a product cycle dynamic"–he is not too subtly hinting that IBM needs a z System refresh if they want to stop the financial losses with z Systems. You don’t have to be a genius to expect a new z System, probably the z14, in 2017. The same suit said, “We’ve been shifting our platform to address Linux, and in the third quarter Linux grew at a double digit rate, faster than the market.” So, based on that, we can probably guess that the z14 (or whatever it will be called) will run z/OS, followed shortly by a LinuxONE version to further expand the z System’s Linux footprint.
Timothy Prickett Morgan picked that up too, and more. He expects a z14 processor complex will be announced next year around the same time that the Power9 chip ships. In both cases, Power and z Systems customers who can wait, will wait; or, if they're smart, will demand very steep discounts on current Power8 hardware to make up for the price/performance improvements that are sure to accompany the upcoming Power9 and z Systems machines.
When it comes to revenue, 3Q16 was at best flat, but actually was down again overall. The bright spot, again, was IBM’s strategic imperatives. As the suit stated: in total, we continue to deliver double-digit revenue growth in our strategic imperatives led by our cloud business. Specifically, cognitive solutions were up 5 percent and, within that, solution software was up 8 percent.
Overall, growth in IBM’s strategic imperatives rose 15 percent. Over the last 12 months, strategic imperatives delivered nearly $32 billion in revenue and now represent 40 percent of IBM. The suit also emphasized strong performance in IBM’s cloud offerings which increased over 40 percent, led by the company’s as-a-service offerings. IBM ended the third quarter with an as-a-service run rate of $7.5 billion, up from $6.7 billion last quarter. Most of that was attributed to organic growth, not acquisitions. Also strong, was IBM’s revenue performance in security and mobile. In addition, the company experienced growth in its analytic offerings, up 14 percent this quarter with contributions from the core analytics platform, especially the Watson platform (Watson Health and Watson IoT).
IBM apparently is convinced that cognitive computing, defined as using data and adding intelligence into products and services to help companies make better decisions, is the wave of the future. As the company sees it, real value lies in providing cognitive capabilities via the IBM cloud. A critical element of its strategy is IBM’s industry focus. Initially, industry platforms will address two substantial opportunity areas, financial services and blockchain solutions. You can probably add healthcare too.
Blockchain may emerge as the sleeper, although I have long been convinced that blockchain is ideal for z shops—z Systems already handles the transactions and delivers the reliability, scalability, availability and security to do it right. As IBM puts it, “we believe blockchain has the potential to do for trusted transactions what the Internet did for information.” Specifically, IBM is building a complete blockchain platform and is now working with over 300 clients to pioneer blockchain for business, including CLS, which settles $5 trillion per day in the currency markets, to implement a distributed ledger in support of its payment netting service, and Bank of Tokyo Mitsubishi, for smart contracts to manage service level agreements and automate multi party transactions.
Says Morgan: “IBM is very enthusiastic about using blockchain in commercial transaction processing settings, and has 40 clients testing it out on mainframes, but this workload will take a long time to grow. Presumably, IBM will also push blockchain on Power as well.” Morgan may be right about blockchain coming to Power, but it is a natural for z Systems right now, whether as a new z14 or a new z-based LinuxONE machine.