All the big software hardware guys are having issues as cheaper computing services come on line. Aivars Lode Avantce
Software Update: IBM Software Results: Software Growth Moderates
Sluggish SepQ Software results from IBM (covered by JPM analyst Mark Moskowitz) contrast with strong results in the prior quarter (though 2Q had the benefit of some slipped deals from 1Q), and together with recent earnings from ORCL and RHT and pre-announcements from CTXS and TDC, suggest a challenging demand environment for software. We estimate IBM’s total Software revenues and Key Branded Middleware (KBMW) grew only about 1% and 2% on an organic, cc basis, respectively, though management noted that the Software pipeline heading into 4Q was “strong”.
· Tepid organic, cc Software growth. We estimate IBM’s aggregate Software business grew 1% y/y on an organic, cc basis, compared to about +4%, -1%, and +3% in the last three quarters, respectively. We estimate organic, cc KBMW growth was 2% y/y, compared to +8%, -1%, and +4% in the last three quarters, respectively.
· Weak sequential KBMW growth. Total KBMW revenue declined sequentially by 14%, the biggest sequential decline we have on record. However, sequential KBMW growth in 2Q13 was the strongest 2Q performance in seven years, suggesting a more difficult sequential compare for 3Q than in years past.
· What do IBM’s results mean for SepQ software industry results? We believe IBM’s results likely do not bode well for the sector near term, particularly after sluggish results reported by AugQ-ending companies ORCL and RHT, in addition to pre-announcements from CTXS and TDC. We continue to expect sluggish aggregate demand from European and US governments near term, and believe that weakness from the Financial Services may continue, though vendors have reported improvements in the vertical.
· MIPS shipments grew 56% y/y. MIPS shipments grew 56% y/y in the SepQ, representing the fourth consecutive quarter of growth (after declining growth in the previous five quarters before 4Q12). Management attributed this growth primarily to specialty engines, which were up more than 90% during the quarter, and to a lesser extent to the launch of a new Z series mid-range server. While MIPS grew at what appears to be a healthy rate, we note the easy comp of a 2% y/y decline in the year ago quarter. We do not believe that this MIPS shipment number will impact mainframe software industry revenue in the near-to-mid term, contrary to what some investors appear to believe.