 From the SiliconANGLE Media Office in Boston, Massachusetts, it's theCUBE. Now, here's your host, Dave Vellante. Hi everybody, welcome to this edition of theCUBE Insights, powered by ETR. In this breaking analysis, we're going to look at IBM's systems business, and specifically, the IBM Systems Z, and talk about the impact that it's going to have on IBM financials. Now, Alex, if you would kindly bring up the first slide, so this is data from ETR's spending intention survey for the second half of 2019. They ask customers, compared to the first half of 2019, what are your spending intentions on the second half of 2019, specifically for IBM? So you can see the end here is 448 customers out of their panel of 4,500 of which around 11 or 1,200 answered this question, specifically cited that they were IBM customers. What this data shows is 21% of the customers said we're going to increase spend in the second half relative to the first half with IBM. 52% said we're going to stay flat, 14% said they're going to decrease. You see, 6% said we're going to basically leave the IBM platform, and 7% said we're going to bring on IBM as new, we're a new customer. So if you take the people that are spending more and new and subtract out the leaving and the spending less, you get a net score, and you get a net score of 8%. Now, we've been sharing with you this ETR data over the last several weeks and months. 8% is not great. IBM, according to ETR's spending surveys, are losing share relative to the overall market. We've covered this pretty extensively. We covered the Red Hat acquisition and talked about how that, IBM intends to supercharge its cloud business, specifically with Red Hat, I've said, I've been on record saying this is largely a services play where they're going to basically take Red Hat as an application development platform and help their customers modernize their systems from using their large services footprint to do that. But so, and I want to talk for a moment about the IBM business overall. IBM is all about mission critical work. The IBM Z, their high-end systems, their related database, it's all about mission critical work. IBM shared some data with analysts recently where they talked about, if you look at IBM Z, IBM's security business, it's database, particularly DB2, it's middleware, it's application management services, and it's infrastructure, and all that sort of consulting work that goes around that. Add that up, it accounts for 60% of IBM's revenue. So this is why I want to spend some time talking about IBM Z. I mean, it's a kind of a boring but important topic. It used to be the heart of IBM's business, it used to drive entirely their income statement. But in fact, today it's still very critical. All those pieces that I mentioned account for 60% of that business. So Z is critical for driving IBM's systems business and that gives air cover for IBM's business overall. So Alex, if you bring up the next slide, what I've done is just pulled out some quarterly data of IBM's systems revenue overall and then juxtapose it against IBM's Z revenue. This is growth, this is just percent growth. So the blue is IBM Z percent revenue growth relative to the previous year, this is in constant currency by the way, and as well it excludes the elimination of IBM's systems X business, the Intel based business. So it's normalized for that. And then the orange is the overall systems growth. So you can see that the blue grows virtually immediately after IBM announces a new system. So for instance, in January of 2013, IBM announced the Z13. We were there with theCUBE to cover it. We talked to a number of practitioners. What big banks and big mainframe customers do, and by the way, 25 of the world's top 25 banks run on Z. Huge proportion of retail giants run on Z. Why? Because it is the system of record and the top system of record along with Oracle in the world. I'll talk more about that and you can see here, Z13. So we talked to a lot of practitioners at the January launch and they told me they buy this thing sight unseen because they know it's going to drive revenue for them. If they can get more power, more performance, lower cost, it drops right to their bottom line. So you can see 2016, even though there was a kicker in there of the next generation, not next generation, but a kicker to the Z. I didn't show it here, but bad year in 2016 in terms of growth. You can see the blue is proportional to the orange. It drags it down in a year. Z14 is announced and you can see when the Z14 was announced in July of 2017, just right after that, boom, big uptick in Z revenue and proportional systems revenue. So you're on this sort of two year cycle of Z announcements and you can see 2019 in the first half has not been great. IBM just announced the Z15 in September. So we fully expect that in Q4, you're going to see that uptick. So we wanted to share that with you. Next slide, I just want to make a couple of points about IBM Systems Business. It's about an $8 billion business overall in terms of annual revenue. It comprises Z power and storage. Says they say, systems Z drags a lot of software. It drags the storage, it drags services. It's about a 53% gross margin business. The storage business is actually, I think a good gross margin business, I think probably higher than power. The server business is not the greatest gross margin. I think mainframe is still pretty good. IBM and Oracle dominate the business for systems of record. Oracle with Exadata and IBM with Z. Now you might say, hey, Exadata is growing and Z, I just showed you the sort of fluctuation but overall it's sort of flattish. Maybe it can eke out growth and actually can show good growth in one year but if you normalize it over a couple of years it's pretty much a flat business or declining business. So you might say, well, Oracle Exadata is growing but that's because Oracle is replacing its entire hardware business and much of its related software business with Exadata, all that wood behind one arrow whereas IBM has a more diversified portfolio and so that's kind of apples to oranges comparisons. Now the ETR data shows that the storage intentions for the second half of 2019 really flipped to positive territory. Servers were still negative but improving and so as I showed you in the previous slide I definitely would expect the systems business to have an uptick in Q4 and it's dragging storage with it. IBM synchronized the storage announcement, the DS8000, well not great with model numbers but the recent storage announcement with the mainframe announcement, I'll make some more comments about that but it seems that IBM's trying to do a better job of synchronizing that. IBM's also going to smooth out its systems revenue, I believe, I mean it's right now, it's very cyclical but I'll make some comments about that in a moment. So IBM System Z and Exadata are unique in that their IO is tightly integrated. These are purpose built systems and the storage is in the IO are purpose built for the systems of record. So they're very, very low latency. Giving example Oracle, Exadata, recent announcements at Oracle Open World, I think 18 microseconds latency. IBM with its recent Z announcement I think is even lower, I want to say 15 microseconds but don't hold me to that. Whereas if you compare that to traditional systems you're talking about maybe 200 microseconds, in other words those systems that aren't purpose built for systems of record with integrated IO. The IO is hardwired with custom silicon and ASICs and so it's ultra, ultra fast IO which means you can push 10 times the IO through the system. So very, very high performance relative to what you saw in kind of previous generations. Why do I spend so much time talking about this because this is a harbinger for future systems developments. Talking, within two to three years you're going to see the mainstream systems with this type of low latency. So you might also say wow, that means that IBM and the Exadata business are in big trouble. No, these systems are not going to be replaced and not going to be migrated. It's too risky, it's too expensive. We've talked about that a lot on theCUBE where it just doesn't make business sense for people to convert off the Z mainframe. There's too much custom code, they'd have to freeze that code for many, many months maybe even longer. They'd risk their business. They can make much more money purchasing the next generation of system as long as the Z mainframe continues to add function which it's doing, same thing with Oracle Exadata. Years ago IBM announced support for Linux. Obviously Red Hat is now another key piece of that. They just, recent Z15 announcement, encryption everywhere. They announced a hybrid cloud so basically bringing the Z to cloud, really strong security focus. This cloud piece is interesting. We talked a lot about cloud 2.0, bringing the Z in the systems of record to cloud is something that IBM has said that it intends specifically to do. That will begin to potentially smooth out IBM's Z revenue. It's ironic, in the late latter part of the 1980s, kind of a financial game that IBM was playing they converted their rental base which was a monthly income stream to purchase. When they did that, it created the effect of showing up on the income statement and kind of hiding the trouble that IBM was really in. When that transition ended, IBM really tanked and that's when IBM got into big trouble, the whole downsizing trend, Gershner came in, they bought PWC and really transformed the company but the Z as the system of record or the old 3090 has lived on. Now we're seeing that dynamic come full circle where over time, IBM can shift from an upfront pay to a subscription which is, as they say, coming full circle. It's going to be interesting to see how that transition works. The other point again, storage seems to be synchronizing its product cycles with Z at least at the high end and so this is likely to carry through to Q4. We see from the ETR spending data that storage intentions are up. I think the net score was up 5% versus a negative from the previous quarter. Servers overall were still down. They don't have a question specific to Z but I would fully expect that Q4 of this year you're going to see a nice uptick in Z revenue and as I pointed out before with that 60% number, this is going to provide another halo effect for IBM's overall business. Will it be enough to propel the stock? Probably not. It's factored in the analysts understand these product cycles but it's something that I wanted to shine a light on because again, it's one of these sort of important topics that not a lot of people talk about. People kind of roll your eyes when you talk about the mainframe but the mainframe is here, it's alive and well and what I call mainframe Oracle Exadata and IBM Z are really sort of the two companies that are prominent in that space and while they might compete to my earlier point you're really talking about each company having its own install base and as long as they keep investing in R&D and keep those product cycles coming I would expect that this business is going to be healthy yet cyclical for a long, long time. This is Dave Vellante for theCUBE Insights powered by ETR, we'll see you next time. Thanks for watching.