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Next quarter may bode better for iSeries sales

A huge drop in iSeries revenue reflects recently announced i5 and p5 servers, say experts. But one analyst says that while second quarter earnings were poor, third quarter results will be the real sign of whether the iSeries will ever make a turnaround.

To industry observers who had hoped IBM's new eServer i5 would be a turnaround for ailing server sales, last week's second quarter earnings report must have been very disappointing.

Yes iSeries revenue continues to plummet. But don't despair. There's always next quarter.

The next quarter will be more telling.
Charles King
AnalystSageza Group

The news is particularly discouraging because of a seemingly healthy 2003. iSeries revenue was up 12% last year and according to IBM, it has signed over 2,000 new customers worldwide. It gave users a glimmer of hope. But first quarter earnings showed a 7% drop. Now, second quarter results are even more grim.

According to IBM, revenues for the iSeries servers slowed significantly (dropped by 28%), as did pSeries Unix servers but to a lesser degree (only 3%). The results are likely a reflection of a drop in demand because of the product transition to Power5 architecture, experts say.

Early last week, IBM announced the eServer p5 , a Unix-based server that uses the Power5 technology. The p5 consolidates IBM's pSeries family with its AIX operating system and the iSeries with its OS/400 and i5/OS operating systems.

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In May, IBM announced the next generation of its iSeries, the eServer i5 , the first server based on the Power5 chip. The new server was developed using technology from the pSeries, and, as a result, the servers share common hardware.

The i5 is currently shipping. The p5 will ship at the end of August.

Typically, the anticipation of a new server is reflected in lost sales. "Anyone who might have thought about buying one [i5 or p5] is holding off," said Charles King, analyst, Sageza Group, Mountain View, Calif.

However, given that the i5 was announced in early May, some expected to see better numbers for the platform. Still, King said that he doesn't believe the sales were fully realized.

The next quarter will be more telling," he said.

New IBM chief financial officer Mark Loughridge said during a webcast presentation on Thursday, that while sales of the i5, which shipped June 11, have been well-received by the market, sales of older models were affected by customers buying the i5 new models. However, he admitted that the iSeries, as well as the pSeries, was a challenging segments for IBM.

Also disappointing were flat software revenues, which Loughridge blamed on deferred purchasing decisions at the end of the quarter. Revenues from IBM's middleware, including WebSphere, DB2, Rational, Tivoli, and Lotus, stayed the same as 2003 at $2.7 billion.

Individually, some software segments didn't fare too badly. WebSphere and DB2 were up 5% and Data Management increased 3%. However, both Tivoli and Rational decreased by 5%, Lotus by 2%.

Overall, hardware revenues increased 12% to $7.4 billion in the second quarter versus the second-quarter 2003. In the current quarter, revenues from the Systems and Technology Group totaled $4.2 billion, up 10% due to eServer revenue increases for zSeries servers (up 44%), which had particularly strong results -- clearly the company's bright spot -- and xSeries Intel-based servers.

Let us know what you think about the story; e-mail: Kate Evans-Correia, Senior News Editor

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