Guild Companies--Gartner Says Server Sales Up a Tiny Bit in Q3

While server shipments have been up a healthy amount in recent quarters, what we have been all looking for as sellers and consumers of servers is an uptick in server revenues. If vendors are actually making money selling servers, that is a pretty good indication that the economy is on the mend. Well, if server stats are an economic barometer, then the latest numbers from Gartner's Dataquest unit would seem to indicate that the economies in North America, Europe, and Asia are stabilizing.

According to the latest Dataquest server sales statistics for the third quarter, worldwide server sales were up 0.6 percent to $11.1 billion. Growth, even miniscule, is better than decline. That revenue growth, according to Joseph Gonzalez, one of the server analysts at Dataquest who put together the Worldwide Server Quarterly Statistics database, was driven in large part by a 23 percent increase in server shipments. This increase in shipments, he says, is coinciding with a shift towards smaller machines that rival the power of larger and more expensive boxes from a few years ago. In effect, Moore's Law is putting as much pressure on overall server revenues as price competition among the server makers. There is more to it than this, of course. Gonzalez says that companies are for the most part letting their midrange and enterprise systems sit tight as they consolidate and modernize their front end systems. For the server market to really get cooking in terms of revenues, more midrange and high-end customers will have to start upgrading these machines. They might do this, or they might start playing around with clusters of smaller machines. Many companies are starting to experiment with such ideas right now, and if they bear fruit, along with various virtualization technologies such as virtual and logical partitioning (which increase the utilization of machines and therefore allow customers to do more computing with less iron), the pressure on overall server sales levels could continue.

On a worldwide basis across all server architectures, IBM was the top server vendor in Q3 with $3.5 billion in sales, up 4.7 percent from last year and up 9.9 percent from the second quarter of 2003. Hewlett-Packard was the number two vendor, according to Dataquest's estimates, with $3.1 billion in sales, up 1 percent year-to-year and up 2 percent sequentially. Sun Microsystems remains the number three server vendor in the world, when ranked by sales, with $1.2 billion in revenues, but its sales were down 14.2 percent in the quarter and down 20.7 percent sequentially. (Sun's fiscal year end is the second calendar quarter, which means sales reps push like crazy to sell all they can in calendar Q2 and that means calendar Q3 is typically not Sun's strongest--except during the dot-com boom why Sun's sales were not on a cycle so much as on a straight line up.) Dell grew its sales by 21.8 percent to $992 million, making it the fastest growing company in the server space yet again and putting it within spitting distance of Sun. If you are wondering why Sun is targeting Dell with entry-level products, it is because Dell is hammering away at the installed base of Sun Unix servers with Lintel machines.

On a platform basis, Dataquest reckons that the Windows server market grew by 12 percent to $3.8 billion in the third quarter, giving Windows platforms a 34 percent share of all the platforms sold in Q3. Part of this growth for Windows is due to upgrades from vintage Windows NT and old Windows 2000 systems to Windows 2003 machines. Companies are consolidating machines to try to cut software and administration costs. HP was the dominant Windows server supplier, with $1.3 billion in sales and 9.6 percent growth. Dell's Windows server business grew by 22.1 percent in the quarter to $735 million; IBM was third with $686 million in sales and 11.8% growth.

The Unix platforms--driven primarily by Sun's Solaris, HP's HP-UX, and IBM's AIX--managed to stay the top platform by revenue, but only by a small margin. Overall Unix sales were $3.9 billion, a decline of 4.1 percent compared to Q3 2002. HP's Unix business contracted by 3.2 percent to $1.3 billion (and was undoubtedly propped up by brisk sales of its high-end Superdome machines). Sun's Unix server business declined by 14.7 percent in Q3 to $1.2 billion, meaning that HP has topped Sun as the main Unix server supplier. IBM grew its Unix server sales by 5 percent in the quarter to reach $977 million in sales. If Sun keeps declining and IBM keeps growing, Sun could drop to number three in Unix--something that has never happened before. And if IBM doesn't keep growing, HP could top IBM as the dominant server vendor.

The Linux server market grew at 39.6 percent in the quarter to $817 million, making it once again the fastest growing portion of the server market. However, Linux has not yet come close to knocking out Windows or Unix as the top server platform. IBM raked in $260 million in Linux server sales according to IDC, followed by HP with $234 million and Dell with $128 million.

The remaining portion of the server market, which includes IBM's MVS and OS/400 servers, HP's OpenVMS machines, Unisys mainframes, and a number of other proprietary machines, continued to drop as companies hold back on spending on these platforms. That said, these platforms still accounted for $2.6 billion in sales in the quarter, with IBM brining in nearly two-thirds of that figure with its proprietary machines.

Two other interesting things about the third quarter server numbers from Dataquest: Shipments were up across all geographies, and in many places where revenues have been lagging, they actually perked up in the third quarter. Gonzalez says that part of this has to do with the relative weakness of the dollar, which allows server buyers outside the United States to get computing power from U.S. manufacturers at decent prices compared to what they could do when the dollar was strong. The euro and yen stretches a lot further these days, and that is driving shipments outside of the U.S. In the Asia/Pacific region, sales were up 5.4 percent, with increases of 8.7 percent in Canada, 4.4 percent in Western Europe, 2.3 percent in the U.S., 19.5 percent in the Middle East and Africa, and up 5.1 percent in Latin America. Sales in Japan were down 17.7 percent, and that knocked a several points off the overall worldwide sales growth because Japan is such a big market. Shipments in Japan were up 15.4 percent, which suggests cut-throat pricing and extreme competition are driving server prices down very fast.

Gonzalez believes that the shipment growth we have seen in the past few quarters in the server market is sustainable given that many aging machines need to be replaced and the improving states of the economies around the world. However, whether or not substantial revenue growth is achievable is anyone's guess. If companies loosen their IT purse strings a little more as conditions improve, they may start doing bigger projects requiring bigger or at least more iron. Gonzalez says that as far as he is concerned, the server market is stabilizing, but he will not consider it recovered until server makers start pumping up revenues and pulling in some profits. This probably will not happen until late 2004--if at all.