When IBM released its fourth-quarter and full-year financial results on January 18, revenues for the System i were one of the few disappointments in an otherwise solid report. To reverse those results, IBM is unleashing several programs to win over new System i customers and reenergize existing accounts. While the new initiatives look promising, Big Blue will face some challenges in its efforts to grow revenues during 2007.
On the whole, IBM turned in a strong financial performance during its fourth quarter. Earnings per share grew by 12% to $2.26, while reported revenues grew by 7% to $26.3 billion. Revenue growth was particularly strong for the Software Group, which logged a 14% increase in sales. Much of the increase came from the software companies that Big Blue acquired during 2006. In addition, IBM's Global Services teams boosted their revenues by almost 7% and increased their estimated services backlogs. By contrast, the Systems and Technology Group (STG) booked only a 3% increase in revenues. The System i business—which is part of STG—reported a 10% reduction in revenues compared to the fourth quarter of 2005.
Unfortunately, this is the fifth consecutive quarter in which System i revenues have declined versus their year-ago results. On average, these declines have been significantly greater than 10%. By contrast, business was relatively strong during the second half of 2004 and most of 2005, a period during which many companies were upgrading their iSeries servers to the System i5. As those upgrades tapered off, revenues followed. This reflects how heavily the System i depends on upgrades of existing servers versus new system installations.
Cooking Up a Comeback
"Go local" with targeted vertical industry solutions. Over the last several months, the System i team has been quietly developing go-to-market campaigns with dozens of partners that provide solutions to sub-industries at the regional level. During 2007, these campaigns will reach out to companies in more than 80 regional sub-industries, such as auto parts dealers in North America and textile manufacturers in South Asia. To support these campaigns, IBM has dedicated a number of sales and marketing employees to what it calls the "Vertical Industry Program," or VIP. The primary goal of VIP is to use local solution providers to drive new account growth at the local level. Indeed, IBM's objective is to double the number of new System i accounts it gains in 2007 versus 2006.
Expand the System i "share of budget" at large accounts. As IBM is courting new accounts with VIP, it will be encouraging established accounts to expand their use of the System i. The computer giant's sales teams will call on large accounts to explore how the System i could help them consolidate their IT workloads, increase their business flexibility, and manage their information more effectively, among other issues.
Use innovative offerings to drive growth. In addition, IBM and its Business Partners will be encouraging all customers to invest in the latest offerings. Throughout the year, marketing campaigns will focus on hot products such as the IP Telephony Solution from 3COM offering and the ability to integrate BladeCenter and System x servers with the System i. Other sales efforts will feature the Model 520 Solution Editions running JD Edwards and SAP software. IBM will also launch a "Two i's for Every Enterprise" promotion that will tout the System i Capacity BackUp Edition as an inexpensive way for almost every customer to ensure system availability and business continuity.
Headwinds and High Hopes
Taken together, IBM's sales and marketing programs could make a significant dent in the current sales shortfall. Indeed, sources inside the company are already indicating that their opportunity pipelines are fatter than they were a few months ago.
That said, the System i team will find it difficult to entirely reverse its product's fortunes during 2007. The biggest challenge it faces is the fact that the System i product line is only one year away from being entirely refreshed with POWER6 processors. Most customers know this and will be loathe to upgrade to POWER5 models this year if they can make do with their existing systems until next year. As I have already pointed out, upgrades play a critical role in boosting revenues.
While boosting upgrades will be an uphill battle for Big Blue, winning new accounts through the VIP initiative should prove to be an easier task. From an immediate revenue standpoint, many of the new accounts will be small deals that add little to IBM's top line. However, today's small deals will grow to become tomorrow's lucrative upgrades. As such, any new accounts that IBM wins this year will become increasingly important revenue contributors in the years ahead.
Considering the situation that IBM faces, I would borrow a phrase from the sports world to characterize 2007 as a "rebuilding year" for the System i team. While the folks in Rochester may not have all of the resources they need to be a dominant player this year, they are preparing themselves to have a breakout season in 2008. Of course, what the team does this year will be critical to its success next year. That's why I'll be watching IBM's initiatives closely to see how they fare in the field.