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IBM: Mainframe Cycle Dragged Its Q4 Earnings

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Jan. 28 2019, Updated 7:31 a.m. ET

Systems segment reported a fall of 21%

In the fourth quarter, IBM’s (IBM) Systems segment was the only operating segment that didn’t meet market expectations. The segment includes systems hardware and operating system software.

IBM’s Systems segment contributed $2.6 billion in revenues—compared to analysts’ expectation of $2.77 billion. IBM’s Systems segment reported a 21% decline in its revenues due to its Z mainframe. Storage sales, which fell 8%, also contributed to the segment’s decline. IBM’s power servers, which grew 9%, were the only silver lining for the Systems segment.

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Cyclicality impacted mainframe revenues

In the last quarter, the company’s mainframe revenues fell 44% after recording a rise of 75% in the fourth quarter of 2017. The rollout of IBM’s z14 mainframe in September 2017 helped the company’s mainframe business record double-digit growth last year.

Despite a fall in z revenues, the MIPS capacity improved. The increased adoption of the z14 mainframe helped the MIPS capacity, which increased ~20%. MIPS is a widely used measure of computing performance and related costs.

Although the cyclical pressures for IBM’s Z system were expected to lead to a fall in the segment’s mainframe revenues, the extent of the fall seemed to have been bigger than expected. IBM’s storage sales are reeling from pricing pressure in the ultra-competitive storage market.

IBM focuses on AI

The healthy adoption across IBM’s latest POWER9-based architecture helped its power revenues, which increased 10%. In the last quarter, IBM finished the launch of its next-generation POWER9 processors. The processors are designed to handle advanced analytics, cloud environments (IYW), and data-intensive workloads in the AI space.

According to Gartner, the AI market is expected to increase 70.0% to $1.2 trillion, which creates a huge opportunity for IBM. The AI market is expected to reach $3.9 trillion in 2022. Amazon (AMZN) and Microsoft (MSFT) are also investing heavily in the AI space (ORCL).

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