While the term "mainframe" may conjure images of room-sized computers cranking out calculations decades ago, International Business Machines' (IBM -0.56%) ever-evolving mainframe systems remain relevant more than 50 years after their initial introduction. A staggering 87% of all credit card transactions are touched by an IBM mainframe, along with 29 billion ATM transactions and 4 billion passenger flight bookings annually. A major mainframe refresh comes every few years from IBM, prompting existing customers to upgrade and producing a nice revenue boost for Big Blue.
The last major mainframe refresh came in January 2015 with the launch of the System z13. The z13 is capable of processing 2.5 billion transactions per day, with real-time encryption and embedded analytics. The big selling point of the system was that it could deal with the deluge of financial transactions initiated on mobile devices. A single z13 system can process the equivalent of 100 Cyber Mondays every day. IBM estimated at the time that 40 trillion mobile transactions would take place each day by 2025.
The next mainframe is here
IBM unveiled the 14th iteration of its mainframe system this morning, the IBM Z. It's quite an upgrade, capable of processing 12 billion encrypted transactions each day, a nearly fivefold increase compared to its predecessor. It sports 32 terabytes of memory, triple what the z13 offers, and IBM claims that its input/output performance is three times that of the z13.
The IBM Z. Image source: IBM.
The major focus of the IBM Z is security. The system is capable of encrypting all data associated with an application, cloud service, or database, as opposed to previous systems where data is encrypted selectively. A sevenfold increase in cryptographic performance, enabled by a fourfold rise in silicon dedicated to cryptographic algorithms, allows for this expanded encryption to have no negative effect on system performance.
This security push comes at a time when cyberattacks are increasingly making the news. A ransomware virus emerged in June in Ukraine and quickly spread globally, locking computers and demanding payment in bitcoins. Major companies like shipping giant A.P. Moller-Maersk and FedEx were disrupted. This followed a similar incident in May, when the WannaCry ransomware attack spread to hundreds of thousands of computers.
According to IBM, more than 4 billion records were leaked last year due to cyberattacks, a more than sixfold jump compared to 2015. An IBM study found that heavy use of encryption can reduce the cost of dealing with such attacks by $16 per record, representing potential savings of tens of billions of dollars.
Despite the benefits of encryption, IBM claims that just 2% of all corporate data is currently encrypted. A study done by RedLock Cloud Security Intelligence earlier this year found that a staggering of 82% of cloud databases aren't encrypted at all. IBM claims that this aversion to encryption is due to performance degradation that occurs on x86 systems when encryption is implemented. The IBM Z, with its dedicated encryption hardware, doesn't have that problem.
What it means for investors
IBM enjoys a surge in sales each time a new mainframe is launched, driven by existing customers, such as 92 of the world's top 100 banks, upgrading to the new system. This time around shouldn't be any different, particularly with cybersecurity being such a major issue. The launch of the System z13 during the first quarter of 2015 produced a year-over-year revenue increase of 130% for the mainframe business, and a roughly $400 million increase in hardware revenue.
This initial surge eventually fades, with a few quarters of year-over-year mainframe sales growth followed by declines. This pattern has consistently repeated over the past decade:
Chart by author. Data source: IBM.
IBM has reported 20 consecutive quarters of revenue declines, and this number will likely rise to 21 on Tuesday when the company reports its second-quarter results. The launch of the IBM Z may be enough to put an end to that streak during the third quarter, although sustainable revenue growth will require IBM's growth business, like cloud computing and analytics, to finally offset declines in legacy businesses. IBM does expect to grow per-share adjusted earnings this year, and the launch of the IBM Z will help the cause, due to both additional revenue and a reduction in system development spending.
In spite of monumental shifts in computing over the years, with the latest being cloud computing, IBM's mainframe has remained relevant thanks to constant iteration and improvement. The IBM Z, a security powerhouse, carries on the torch for IBM.
