IBM (NYSE:IBM) has launched the latest in its z system mainframe line, the z13. It culminates five years and $1 billion of R&D, and utilizes 500 patents. The press release does a good job explaining the benefits, and is worth reading. Of interest to the IBM investor, the new system will give the company’s STG (Systems and Technology Group) a shot in the arm, and may be expected to provide growth for several years.

Here’s how system z revenue developed after the z196 was introduced in the third quarter of 2010:

Year System z Growth
2014 (9 mos) -22.0%
2013 -13.4%
2012 +5.4%
2011 +0.3%
2010 +16.4%

The mainframe business influences the software and service businesses. It should be noted that IBM last grew revenue in the years 2010-2012.

Is the Mainframe Relevant?

Previous calls for the death of the mainframe have been premature. Banks and other businesses that feature high transaction volume, to include mobile users, and require rapid performance and strong security, have typically used mainframes. The z13 also has real time analytics. A bank using the system can monitor transactions as they occur and address any potential fraud in real time.

In the 2011 10-K, IBM mentions that following the release of the z196, they gained 115 new z system clients. So, if the z13 does as well as its predecessor, the company will gain new customers.

Technology moves rapidly. However, IBM has demonstrably put a great deal of effort into developing a machine that incorporates what the clients want and need. My guess is that the new system will do well and give the company a much needed lift.

The importance of R&D

In January, IBM issued a press release covering the previous year’s patent performance. 2014 was no exception: IBM recorded 7,534 patents, becoming the first company to exceed 7,000.

In a previous article on IBM, I reviewed their R&D capabilities and reached the conclusion that they were directing their efforts in the right direction and would benefit from patents covering mobile, social, security, data, analytics and cognitive computing.

The new mainframe incorporates more than 500 patents. R&D when properly done improves the quality of the product and provides features that others can’t replicate. The resulting competitive advantage allows higher margins. It’s good to see something quantifiable in terms of how much R&D is making its way into the product.

Investment Implications

The last few months have not been kind to IBM investors. Recent reports suggest the company will be restructuring, in that it will realign its current 3 segments into a larger number to include Cloud, Analytics, Watson, Security and Mobility.

This may improve focus and speed execution, always problems with large, bureaucratic organizations. It also will provide for clarity in reporting growth in areas that have been of concern to investors. Previous presentations made it difficult to estimate progress in keeping up with industry trends, such as cloud computing.

The upcoming fourth quarter earnings conference call will draw a lot of attention, and may precipitate a new round of criticisms that the company can’t grow revenue. It will be more important to learn about the realigned segments and the expected performance of each. At the same time, any information as to early interest in the z13 will be worth noting.

The shares are priced for a no growth scenario, in spite of the $5 billion buyback authorization which will provide a tailwind for EPS.

Lack of growth and actual losses in the STG segment have been a drag on performance. Following the divestiture of the X86 and chip making businesses, the segment may resume growth from a lower base and generate a profit. Possibly the mainframe business will contribute to software and services by attracting new clients.

Progress along those lines would contribute to margin expansion and share price increases.

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