IBM's Mixed Bag of Storage

IBM's storage revenues declined in its second quarter financial results, released last night, but healthy midrange performance offset the weakness in its high-end storage business. (See IBM Reports Q2 Results.)

The vendor's storage unit, which is part of its Systems and Technology Group, suffered a mixed set of results. Although the overall group, buoyed by strong mainframe performance, saw its revenues rise 3 percent year over year to $5 billion, system storage was down 2 percent.

"While some areas of our business did well, others have room for improvement," explained Mark Loughridge, IBM's CFO, during a conference call last night.

Within IBM's storage business, disk revenues were down 1 percent, although, according to Loughridge, the vendor still held share "led by midrange growth of 15 percent." Tape revenues declined 4 percent during the quarter, and high-end storage revenues were also down, although the CFO pointed to strong performance from IBM's DS8000 family, where revenues grew 10 percent year over year.

Laura Conigliaro, an analyst at Goldman Sachs, warned in a note today that the vendor still needs to overcome some end-user skepticism. "IBM's high-end storage continues to feel the aftereffects of quality problems which have since been resolved, but continue to limit customer interest in the product," she said.IBM's overall storage performance also prompted speculation that the vendor may be feeling the burn from increased competition. "We believe this suggests Hitachi's TagmaStore [through HP and Sun reseller agreements] is taking share," said Daniel Renouard, an analyst at Robert W. Baird & Co., in a note this morning.

Renouard pointed to EMC's recent results as evidence of broader weakness in the storage hardware market after the vendor just missed analyst earnings estimates with its own second quarter results. (See Tucci: EMC's Problems 'Self-Induced' and EMC Reports Earnings.)

These sentiments were echoed by Aaron Rakers, enterprise storage analyst at A.G Edwards. "Like EMC, IBM noted that it was seeing a lengthening in enterprise sales/evaluation cycles [most notably in June]," he said.

But IBM's storage results are not all doom and gloom, say analysts. In his note, Rakers says that although IBM's numbers could be viewed as negative, the company should take comfort from the performance of its DS8000 arrays.

IBM's strong midrange performance could spell good news for its partner NetApp, according to the analyst. (See IBM Swings NetApp Gateway, IBM Adds NetApp, and IBM Releases N5000 Series.) "We believe this provides further validation of IBM's ramping relationship with NetApp," he said.Rakers also warned that a slowdown in federal spending disclosed on last night's IBM call could have a ripple effect on its partner. "This could be viewed as a net-negative for NetApp, which has derived as much as 15 percent of its own revenue from this vertical in past quarters."

On last night's call, IBM's Loughridge was grilled by analysts about the vendor's historically strong services business, where revenues fell 1 percent year over year to $11.9 billion. In response, the CFO confirmed that IBM is planning new security, storage, and data services. He did not offer specifics. "We're developing new offerings in these areas that are well under way," he said.

Overall, IBM reported second quarter revenues of $21.9 billion, down two percent year over year, just beating analyst estimates of $21.89 billion. The vendor's earnings per share were $1.30, up 14 percent on the same period last year, and 1 cent above analyst estimates.

In trading today, shares of IBM were up $2.24 (3.02 percent) to $76.50.

James Rogers, Senior Editor, Byte and Switch