Last week, IBM delivered good news to Wall Street when it reported better than expected earnings for its fiscal third quarter. While it was at it, the company gave its mid-market customers something to cheer about by announcing that iSeries sales for the quarter were a whopping 25% higher than the same quarter last year. The sales growth indicates that IBM's strategy for reenergizing the iSeries is beginning to gain traction.
For the quarter, the computer giant officially reported a net income of $1.52 billion, which was 2.5% lower than the same quarter last year. However, the income figure included a one-time charge of $525 million for taxes that IBM will have to pay when it repatriates some of its foreign earnings. When this and other one-time items are excluded, IBM's earnings per share actually grew by 22%. On a similar note, the company had to report a revenue decline of 8% due to the sale of its PC business to Lenovo. However, when PC revenues are stripped out of last year's figures, IBM's revenues from continuing operations grew by 4% over the previous year. While revenues were on the soft side, adjusted net income exceeded the estimates of financial analysts.
Among IBM's many product segments, the iSeries stood out as a top contributor. The server's 25% revenue spurt capped three consecutive quarters of sales growth for the product family. As this article goes to press, the iSeries Division has not provided information about the performance of different industries and regions. However, sources inside the company have told me that growth was fairly even across most segments. There were also reports of significant growth in new iSeries accounts, especially among smaller firms.
While last quarter's iSeries sales were encouraging, not all of the 25% revenue growth was due to customers snapping up more servers than usual. Instead, much of it was due to a favorable comparison to a disastrous third quarter of 2004. In that quarter, iSeries sales were 26% lower than they were in the third quarter of 2003. The main cause for the sales slump was the fact that for much of the quarter, the largest eServer i5 that IBM could ship was a 2/4-way Model 570. Larger Model 570s did not ship until September of that year and IBM did not announce the Model 595 until October. As a result, Big Blue spent much of the quarter selling only part of a new product line (and the less lucrative part at that). Given the situation, a sales slump was virtually inevitable.
Seen in this context, sales growth during the last quarter--as well as growth during the first half of 2005--is returning iSeries revenues to levels that are similar to those of 2003. If you read the article I wrote about iSeries sales near the end of that year, you will learn that 2003 revenues were up significantly compared to 2002, which was the absolute worst year for iSeries sales. When you put these facts together, it becomes clear that 2005 is turning into the year when iSeries sales resumed their climb out of the revenue trough of 2002 after experiencing a tough 2004 due to the POWER5 product transition.
What are the factors behind this resumption of sales growth? Clearly, some of the growth is due to the increasing familiarity of customers with the eServer i5 models and the inevitable need to upgrade servers every several years. However, much of the growth can be credited to IBM's multi-million dollar campaign to promote the iSeries among customers and partners. Through its iSeries Initiative for Innovation, IBM has increased the rate at which new and modernized iSeries applications are being delivered to the market. In addition, the company has stepped up marketing efforts to bring added visibility to the server.
As part of those efforts, IBM aired an iSeries television commercial during Sunday football games for the first time on October 16. The commercial--which features a humorous take on the phrase, "I (as in iSeries) am the man"--focuses on how iSeries can consolidate proliferating servers and storage platforms. IBM may post the commercial on the iSeries Web site, so check the site for it.
In addition, IBM's efforts to expand sales of its products and services to small and medium-size businesses have also provided significant marketing "air cover" for the iSeries. Through its Express portfolio of solutions and its campaigns to recruit more Business Partners, the company has increased its mind share and market share among SMB firms over the last three years. As evidence of this trend, sales to SMB firms during the third quarter grew by 10% over the same quarter last year. This marks the second consecutive quarter that SMB sales have experienced double-digit growth. It is no coincidence that the iSeries Division has also experienced two consecutive quarters of double-digit growth and, as a result, will probably realize its objective of double-digit growth for 2005 as a whole.
In short, 2005 is shaping up to be a year of both recovery and growth for the iSeries. However, if IBM is to sustain similar growth levels in 2006, it will have to execute flawlessly on marketing, sales, and product development fronts over the coming months. Such execution will be all the more critical because next year's quarterly sales will not be able to benefit from favorable comparisons to disappointing prior-year results.
As this article goes to press, the iSeries Division's executive team is finalizing its strategies for the coming year. Let's hope that those strategies have the right ingredients and funding to keep the revival of the iSeries on track.