What Do IBM Mainframe Computers Look Like Today?
The big news in tech stocks last week was IBM’s earnings which led to speculation that the “turnaround of IBM” has finally arrived which would signal that their CEO, Ginni Rometty, is finally making things happen after a lackluster attempt so far. While we’re shareholders in IBM (NYSE:IBM) for dividend growth reasons, we did take notice of a statement made in their earnings call by Mrs. Rometty which said the following:
There was enthusiastic adoption of IBM’s new z Systems mainframe, which delivers breakthrough security capabilities to our clients.
The first thing we thought when we read that statement was why are we still talking about mainframes? Aren’t these supposed to be giant old archaic machines covered in dust that are soon to be replaced by blazing fast server racks powered by NVIDIA GPUs? We needed to sort these misconceptions out fast, so we had one of our MBAs do some digging to find out just what the word “mainframe” means today and what the mainframe computer is being used for.
What is a Mainframe Today?
Mainframes have been around since the 1950s, so we’ll spare you the boring timeline of what transpired over the years. One thing that has stayed the same over time is that these large computers have always been able to process a large volume of secure transactions reliably (they can run for a decade without needing a reboot). Mainframes are not supercomputers like those built by Cray Inc. (NASDAQ:CRAY). The difference between a supercomputer and a mainframe is the type of problems they work on. A supercomputer focuses all its digital might on trying to solve a single problem. A mainframe uses all its computing power to perform billions of smaller transactions. So what’s the difference between a mainframe and a server?
You may recall that back in 2014, IBM sold their server business to Lenovo. That server business was comprised of computers built on the x86 architecture. Not to get too technical here, but all you nerds out there will remember your first 286 or 386DX. That’s what the “x86” stands for and it refers to a particular type of chip architecture. That’s all you really need to know about x86. The mainframe that IBM has today uses a completely different architecture called “z/Architecture” and the main advantage that it brings to the table is the cost per transaction. For example, IBM’s mainframe in production today can encrypt data 18X faster than x86 platforms at just 5% of the cost. Think about how incredibly powerful that statement is if you’re an IT decision-maker. This is a good segue into the details of IBM’s latest mainframe computer, the z14.
The type of architecture that IBM uses today is called “z/architecture” and it was introduced in 2000 as an extension to their old mainframe architecture (ESA/390). The most recent iteration of this mainframe architecture from IBM is called the z14 and it’s a beast:
With 32 terabytes of memory, it can handle 12 billion transactions a day on a single system, a 35% increase in capacity from the previous model. It’s all governed by a 5.2 GHz homegrown chipset, the fastest microprocessor in the world by clock speed. The entire system is built around a pervasive security framework which is built into the hardware, firmware, and operating system. This thing runs so hot that they need a radiator to cool it down:
It runs Java workloads 50% faster than x86 alternatives and can run 1,000 concurrent NoSQL databases. If you don’t speak nerd, that last sentence just means that this machine is extremely powerful. While “the cloud” is typically comprised of 100os of x86 servers, this thing is its own cloud.
One last thing worth mentioning when we talk about mainframe architecture is how secure it is. Here’s a chart from IBM which shows just how many “points of entry” there are for their mainframe as compared to a server using x86 architecture:
Couple that with 100% encryption, 100% of the time and it’s easy to see why mainframes are the backbone of the banking industry. As cybersecurity becomes more and more a focal point, one would expect to see other vulnerable sectors like energy and nuclear adopting mainframe technology as well.
IBM’s Mainframe Market Share
It’s at this point in the article that you may be wondering why we’re talking about IBM so much. It’s not because we’re shareholders, it’s because IBM dominates the “non-x86” mainframe marketplace today. In other words, of the servers out there that are not built using x86 architecture, IBM has a 75% market share. Of course, it’s not all good news. A firm called IDC tracks server market share and had the following to say about the non-x86 server market in Q4 2016:
Non-x86 servers experienced a revenue decline of 16.7% year over year to $2.4 billion, representing 16.2% of quarterly server revenue. IBM leads the segment with 75.4% revenue share despite a 17.1% year-over-year revenue decline. IDC also continued to track minimal revenue from ARM-based server sales in 4Q16; ARM sales have yet to make an impact on the server market.
So with a 16% drop in mainframe revenues year-over-year, we can all but assume that mainframes are going away, right? Not necessarily.
In July of this year, IBM announced the “world’s most powerful transaction system” that’s capable of running more than 12 billion transactions a day. That’s the z14 we just talked about, but what we really found amazing was just how pervasive IBM’s mainframes are today. Described as the “most powerful transaction system of the cloud era”, IBM mainframes are literally the backbone of today’s global commerce handling more than 30 billion transactions a day (more than the number of daily Google searches) including:
- 87 percent of all credit card transactions ($8 trillion a year)
- 29 billion ATM transactions ($5 billion a day)
- 4 billion passenger flights a year
- 68% of the world’s production workloads at just 6% of total IT costs
- Citi uses IBM mainframes to process 150,000 transactions a second
The reason why the mainstream computer remains entrenched in 92 of the top 100 banks in the world is because you just can’t compete with them on cost at the moment. Now that IBM has debuted their new workhorse, they can market it as a more efficient replacement for the older machines still in operation, just like this sophisticated diagram implies:
More importantly, IBM can try to identify additional applications based on today’s emerging trends. Let’s touch on a few of these.
Cybersecurity and Blockchain
A hot topic here on Nanalyze this year has been cybersecurity for obvious reasons. Every time you turn around, someone is grabbing someone else’s data. One way to put an end to these data breaches is to start encrypting data records. Of the 9 billion data records stolen between 2013 and 2017, only 4% were encrypted.
Of course encrypting everything takes a great deal of time and money, but don’t forget what we said at the beginning of this article. IBM’s mainframe in production today can encrypt data 18X faster than x86 platforms at just 5% of the cost.
Then there’s the topic of blockchain, something we’d really like to get some investment exposure to while avoiding the complete and utter isht show that is today’s ICO space. We’ve read about how keen IBM is to get involved in blockchain which is promising, but we also know that some other financial institutions have said blockchain just isn’t fast enough to be used in transactional applications. According to a buzzword laden video by IBM, z14 and blockchain go hand in hand in order to help enforce security (along with an obligatory reference to “blockchain as a service”). A recent article by TechCrunch backs this up by talking about how IBM is using blockchain to improve cross-border payments, a topic we touched on recently.
IBM’s Mainframe Revenues
We’ve learned quite a bit about how powerful mainframes are, and it doesn’t seem like they’re going away any time soon. While there was some positive messaging from IBM about their mainframe business this past quarter, crunching the numbers paints a somewhat uninspiring picture of contributions towards revenues. If we go back to that statement by IDC, non-x86 server revenues of $2.4 billion in Q4 2016 saw IBM mainframes capturing about 75%. That’s $1.8 billion or $7.2 billion annually all things being equal. That represents about 9% of the nearly $80 billion in revenues IBM brought in during 2016. There could be additional revenues that we’re not accounting for, but it seems like the sale of these machines isn’t the sole driver behind the IBM turnaround we’ve been waiting for.
Recently we talked about artificial intelligence and how it will be a key enabler of dividend growth investing, a real simple investment strategy that focuses on companies that have a track record of not only paying dividends every year but increasing them. You don’t see too many tech companies that pay dividends because they are better served spending that money on growth. IBM is the best of both worlds, at least for now. In 2016, they had earnings per share of $12.39 and paid out $5.50 (just 44%). That’s a lot of leeway that will allow them to keep increasing that dividend until Mrs. Rometty can sort out growth again. The z14 may just be what tips the scales for IBM to get back into growth mode.
Here at Nanalyze, we hold the lion's share of our investing dollars in a portfolio of 30 dividend growth stocks. Find out which ones in the Quantigence Dividend Growth Investing report freely available to Nanalyze Premium subscribers.