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IBM mainframe licences have a 90% margin, opportunity growing: CFO

“30% of our software book of business”

IBM mainframe software licences have a profit margin of about “$0.80 to $0.90 on every dollar of growth.”

IBM may sell single digit numbers of new mainframes in the UK each year (about seven or eight on a normal year without a new model) if The Stack’s sources are accurate. But licences for Big Iron remain Big Business for Big Blue: IBM CFO Jim Kavanaugh says they account for “about 30% of our software book of business.”

Kavanaugh gave this candid assessment at a recent Morgan Stanley conference: “Our transaction processing software runs on our mainframe architecture that supports over 90% of the transactions in many different industries, financial services, retail, airline industry, etc. That is a very important value vector for IBM… It carries a very high profit and cash generation that provides financial flexibility for us to reinvest” he told investors.

(“Demand for this mission-critical software has followed increases in Z Systems installed base capacity over the last couple of product cycles and strong renewal rates continued this quarter. Both are evidence of the importance of this platform in a hybrid cloud environment” Kavanaugh earlier noted on a Jan 25, Q4 call.)

See also: BT’s CDIO tackles technical debt with mainframe migration plan

Kavanaugh didn’t specify the transaction processing software explicitly, but IBM provides a family of “CICS” mixed-language application servers that provide online transaction management and connectivity for applications on IBM mainframe systems.

ibm mainframe licenses software margin
IBM CFO Jim Kavanaugh

CICS is used as an application server by a host of different companies in numerous industries, from aviation to banking, insurance to retail and transportation.

As IBM puts it: “The kind of applications that run in CICS often form the core of the owning business and are critical to their success. If these applications fail, unexpected downtime or errors can result in significant revenue loss and impact on reputation. This significance means that they need to run on a highly available, reliable, and robust platform such as CICS…”)

And for all the endless industry talk about the end of mainframes, or mainframe application migration to cloud (often a uniquely challenging process, not so much because of the technology, but because of compex dependencies aand poorly documented applications written in older language) IBM mainframe licenses continue to make it a lot of money -- and the opportunity is, in fact, growing.

“We've seen from our z14 mainframe cycle, z15 and now most recently z16, is that we've been generating significant accretive value versus prior cycles” Kavanaugh told investors in March 2023.

“What does that mean? That means we have much more installed MIPS capacity out in the marketplace compared to what history would be. That is an opportunity set with a high contribution from renewal rates that's actually been generating much more opportunity in our transaction processing system… [important for IBM because] it carries very high marginal profit dollars, about $0.80 to $0.90 on every dollar of growth” he said.

See also: COBOL code base in production hits 800+ billion lines