Server Market Is Solid in Q1, Says Gartner

by Timothy Prickett Morgan

The first quarter of any year is not usually one to brag about, but in 2005, the first quarter was not so bad. Not only were worldwide server shipments up by 10.7 percent to 1.745 million units, according to the box counters at IT market researcher Gartner, but aggregate revenues were also up by 4.1 percent to $12.33 billion. If server sales are any indicator of stability in the IT market, then the IT recovery we saw in late 2003 and through 2004 is under way.

The buoyant numbers might also suggest that, as many server makers have been hoping for, we might still be amidst a server upgrade and refresh cycle for both X86 machines (dominated by Windows and Linux) and RISC/Unix machines. That both shipments and revenues are up in a market where pricing is cut-throat across most architectures and operating system platforms is remarkable. The reason this might be the case is that in 1998 and 1999, most companies bought a lot of excess capacity for their Y2K projects, and in 1999 through early 2001, they bought even more gear for their dot-com projects. When the IT market went into slow-motion in mid-2001, companies had a lot of excess capacity, and while some people believe that companies have burned off this excess capacity and ditched these older systems, I think that for some systems (particularly back-office Unix systems with a long economic and technical life), the upgrade cycle is still under way even if X86 servers and mainframes have been largely refreshed by now.

Mike McLaughlin, principal server analyst at Gartner, said that as far as he is concerned, the upgrade cycle from the Y2K and dot-com booms spanned from the fourth quarter of 2003 and really was roaring in the first half of 2004. Server consolidation on RISC platforms also drove Unix server sales last year as well. But McLaughlin doesn't think the good numbers most server makers turned in this quarter is a reflection of an upgrade cycle, but rather a return to normalcy. "The IT economy is still rebounding," he explained. "This is a solid, normal, healthy quarter. Considering that we are projecting revenue growth in the server market of 5 percent this year, getting 4.1 percent in the first quarter is about right."

Perhaps the most significant numbers in the tables built by McLaughlin and his team are the ones for Hewlett-Packard, which almost matched Dell in overall server shipment growth in the quarter across all server types and within the X86 segment, which matched Dell in overall server revenue growth, and beat Dell in X86 server revenue growth by 4.5 percent. In the X86 server space, which accounted for 92 percent of shipments and 49 percent of sales in the first quarter of 2005, HP racked up 480,272 servers sold (up 16.2 percent) compared to Dell's 401,687 units (up 17 percent); HP's sales in the X86 space came to $2.063 billion (up 17.9 percent), compared to $1.32 billion for Dell (up 13.4 percent). "HP has created the broadest set of X86 offerings--towers, racks, and blades as well as Intel and AMD chips--and they have been poised to grow like this," said McLaughlin.

IBM, the number three vendor in the X86 space, boosted sales by 12.6 percent to $975.3 million, followed by number four vendor, Fujitsu-Siemens, up 12.6 percent as well to $307.5 million. As IBM has begrudgingly indicated, it was somehow outfoxed by Dell in the X86 market in the first quarter, and only grew shipments by 8.6 percent--lower than the 11.7 rate for the entire X86 market. Sun Microsystems had very good growth of 177.9 percent, but of course it only shipped 13,358 machines. Total X86 server sales were $6 billion in the quarter, up 9.4 percent.

On an operating system platform basis, Windows server shipments continued to dominate the market in the first quarter, accounting for 1.178 million units, about 69.6 percent of worldwide server shipments. However, Windows server shipments only grew by 7.5 percent in the quarter--not as fast as the market as a whole. Nonetheless, Windows machines, which are mostly X86 boxes (which means both 32-bit X86 and 64-bit X64 platforms in Gartner's lingo) but also include some Itanium machines, added up to $4.4 billion in sales, up 5.4 percent from this time last year.

Linux, which is also predominantly sold on X86 platforms but is also sold on Itanium and a number of RISC and mainframe platforms, had the best growth in the quarter in terms of sales, with revenues up 38.8 percent to just under $1.5 billion. Shipments of Linux-based servers grew by 48.7 percent to 344,301 units, according to Gartner. On the current curve, it looks like by the end of 2006 the Linux market will cool (yet still outgrow the overall market) to around 2 million units a year, or about a quarter of the overall market. (It is very tough to predict such things, of course.)

The Unix market was somewhat peppy in the quarter, with shipments up 2.2 percent to 137,349 units and revenues up 1.5 percent to $4.07 billion. If that doesn't sound exactly perky to you, the stabilization of the Unix market, which has been plummeting for years, is something of a cause for jubilation among the Unix vendors. Gartner believes that IBM just edged out HP to take the lead in the Unix market, with $1.19 billion in sales, up 9.5 percent, compared to HP's $1.15 billion in sales, up 1.9 percent. Sun's slice of the Unix revenue pie continued to fall, with sales down 7.9 percent and shipments down 6.2 percent 67,363. Sun is still the volume leader in the Unix market, with 49.9 percent of shipments. IBM is number two, with 26.5 percent of shipments, followed by HP with 13.3 percent. Even with chip shortages from IBM that are holding down sales of its Xserve machines, Apple Computer is the number five RISC/Unix vendor by box count, with 7.736 boxes sold. But with only $41.4 million in sales, it is not in the top 10 when ranked by sales. Fujitsu-Siemens was the number four vendor by revenues in the RISC/Unix market, with $305 million in sales on 4,060 shipments.

In the first quarter, mainframes and other proprietary boxes--the few that remain, that is--did not fare so well. Shipments of other platforms amounted to 84,632 boxes, down 25.8 percent, and revenues for these machines slipped 9.1 percent to $2.35 billion. IBM's iSeries line had flat sales in the quarter, while its zSeries mainframes dropped 13 percent. The iSeries has been in the middle of a transition to the Power5 processors, and mainframe customers are expecting a new machine sometime this year.