While IBM delivered solid results and its software and services businesses shined, the hardware business was a disappointment to many Big Blue watchers. The growing popularity of virtualization may be a big reason.
Revenue for IBM's hardware unit was up 4 percent in the fourth quarter to $7.28 billion. Not terrible, but below the 5-plus percent gain analysts were looking for. Delve into the reasons why IBM's hardware stumbled a bit and you wind up with one word: virtualization.
Virtualization, which allows you to run multiple applications on one server and partition your server farms better, is going to hurt any company that relies on server sales, specifically the x86 variety, for its bread and butter. When it comes to x86 servers, IBM's xSeries revenue was up 7 percent courtesy of gains in Europe and Asia. The rub: "Flat blade sales were a surprising disappointment," says J.P. Morgan analyst Bill Shope.
The big question is why blade sales were flat. Shope opines:
"We continue to believe the x86 market is beginning to see some pressure from virtualization, and we expect further evidence of this when HP and Dell report next month."
Shope is dead on with this observation and chances are good it will become a key theme in 2007. There's a good reason virtualization is gaining momentum at a rapid clip: CIOs are sick of having so much spare computing power lying around.
In other words, the days of adding another blade willy nilly are over. Virtualization stomps on that thinking.
And that's really bad news for x86 server sales.
There were other issues with IBM's hardware business. Among them:
--A 6 percent sales decline in the company's chip business when its semiconductor powers Sony Playstation 3 and its gaming rivals. Citigroup analyst Richard Gardner finds a decline in game-console revenue "remarkable" considering the new game machine cycle.
--Gardner also noted that "management acknowledged the apparent lack of strong motivation for customers to upgrade to the company's new Power 5+ proprietary Unix-server line." See SeekingAlpha transcript.
While those aforementioned items are real, they pale with the long-term threat virtualization provides to hardware sales. The good news for IBM: It's a services business with a fast-growing software unit.
As Shope noted, we'll see how HP and Dell's results turn out, but increasingly hardware vendors are going to scrap for a smaller x86 server pie as virtualization goes mainstream.