Comparing IBM's Hardware Segment With Its Competitors

Jun.11.13 | About: International Business (IBM)

The systems and technology segment generates a substantial portion, 17%, of International Business Machines' (NYSE:IBM) total revenue. The performance of the hardware segment has been a drag on the company's consolidated performance. In this report, IBM's hardware segment's performance will be compared with competitors Oracle Corporation (NYSE:ORCL), Hewlett-Packard Company (NYSE:HPQ), and Dell Inc. (NASDAQ:DELL). Is IBM's poor performance company specific, or is the hardware industry going through a period of declining revenue? How does IBM's performance compare to competitors?

In the first section, the components of the hardware segments of the companies will be covered. The second section covers the historic performance of the hardware segments. The final section discusses the historic performance of the hardware segments.

The recent performance of the hardware segments were poor, generally. I don't think there will be much improvement in the current fiscal year. That said, IBM's performance was in-line with its peers while Dell led the pack.

Defining The Hardware Segments

IBM's systems and technology segments is comprised of its systems, storage, and microelectronics businesses. The systems business provides a range of general purpose and integrated systems designed and optimized for specific business, public, and scientific computing needs. The storage business provides data storage products and solutions that allow clients to retain and manage rapidly growing, complex volumes of digital information. The microelectronics business provides semiconductor design and manufacturing primarily for use in IBM systems and storage products as well as delivering semiconductors and related services to external clients.

HP hardware segment was formerly known as the Enterprise Servers, Storage, and Networking segment. The segment consists of four parts: The Industry Standard Servers, Business Critical Systems, Storage, and Networking. Industry Standard Servers offers primarily entry-level and mid-range ProLiant servers, which primarily run Windows, Linux, and virtualization platforms from Microsoft, VMware, Inc. (NYSE:VMW) and other major vendors and leverage Intel and AMD x86 processors. Business Critical Systems delivers our mission-critical Converged Infrastructure with a portfolio of HP Integrity servers based on the Intel Itanium processor that run the HP-UX and OpenVMS operating systems, as well as HP Integrity NonStop solutions. The storage offerings include storage platforms for high-end, mid-range and small business environments. The switch, router and wireless LAN products deliver open, scalable, secure, agile, and consistent solutions for the data center, campus, and branch networks.

Dell's hardware segment comprises of servers, networking, and storage. The servers are designed to offer customers affordable performance, reliability, and scalability; Dell's portfolio includes high performance rack, blade, tower, and hyperscale servers for enterprise customers and value tower servers for small organizations, networks, and remote offices. The networking solutions are designed to help companies simplify their IT environments; the products employ scalable technologies that help companies of all sizes build for the future; the solutions are designed to lower data center operating costs and improve manageability in high performance computing environments.

Oracle's hardware segments consists of two broad categories, Hardware Systems Products and Hardware Systems Support; this analysis includes in the Hardware Systems Products. The system products are servers and storage. The servers are SPARC or x86. The storage products are designed to securely manage, protect, archive and restore customers' mission critical data assets and consist of tape, disk, hardware-related software including file systems software, back-up and archive software and storage management software and networking for mainframe and open systems environments.

There are some differences between the companies' operations. Oracle does not have a networking or microelectronics division. Dell and HP have networking divisions while IBM has a microelectronics division. The imperfections of the comparisons improve our understanding. Further, we do not want to be myopic: the comparisons, including the difference, are useful, and they improve our understanding.

Hardware Performance

IBM's Systems and Technology segment's revenue grew 11 percent in fiscal 2010, 5 percent in fiscal 2011, declined 6 percent in fiscal 2012. The segment produces about $18 billion in annual revenue and has a pre-tax margin of about 8 percent.

HP's Enterprise Servers, Storage, and Networking segment's revenue increased 26 percent in fiscal 2010, 9 percent in fiscal 2011, and declined 7 percent in fiscal 2012. The segment produces about $20.5 billion in annual revenue and has an earnings margin of about 12 percent.

Dell's Servers, Networking, and Storage divisions increased combined revenue 20 percent in fiscal 2010, 4 percent in fiscal 2011, and 7 percent in fiscal 2012. The division's revenue is just shy of $11 billion.

Oracle's Hardware Products division's revenue declined 13 percent in fiscal 2012, which is the only full-year comparison. I'm forecasting revenue to continue to decline this fiscal year. Oracle's fiscal year should have ended May 31, 2013. The Hardware Products division generates less than $4 billion in annual revenue and has a margin somewhere between 10 percent and 20 percent.

Analyzing the Results

HP and IBM have the largest hardware segments by revenue; Oracle's hardware division is the smallest in terms of revenue. It is clear that hardware sales have slumped recently, but Dell's division grew revenue. Oracle's hardware division may have the highest margin, may be the most profitable. IBM's hardware segment did not perform as poorly as Oracle's division or HP's segment, but trailed Dell's hardware division.

Looking forward, the hardware segment may continue to be a drag on IBM's consolidated revenue. However, relative to competitors the performance is decent. That said, I continue to be long-term bullish on shares of IBM, but short-term there may be a decline in the share price. Second quarter results remain eagerly awaited.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.