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Volume 8, Number 21 -- May 29, 2008

The Server Biz Enjoys the X64 Upgrade Cycle in Q1

Published: May 29, 2008

by Timothy Prickett Morgan

There is a lot of vintage server iron out there in the world, and most of it could only be classified as energy efficient if the characterization was being done by a pathological liar. The same holds true for a lot of RISC/Unix iron. And with energy costs rising, companies wanting to scale their applications without paying for new data centers, and the desire to have systems that can better exploit virtualization, server makers enjoyed a pretty good first quarter for shipments and sales from January through March, according to statistics compiled by Gartner.

In the first quarter of 2008, Gartner believes that server makers pushed more than 2.27 million units out the door worldwide, an increase of 7.6 percent over the 2.11 million units that they sold in the first quarter of 2007. As has been the case for many years now, server unit shipment growth is roughly twice that of revenue growth when reckoned in U.S. dollars. Specifically for Q1 2008, server sales worldwide came to $13.56 billion, up 4.3 percent compared to the year-ago quarter. There is obviously a lot of jubilation that there is revenue growth at all, considering the jittery state of the economy in the United States, particularly in the financial services, real estate, and housing markets.

That revenue growth has to be taken with a few grains of salt, however, since the legitimately explosive growth in the server build out in Brazil, Russia, China, India, and a few other hot markets is being amplified by the weak U.S. dollar. The massive trade imbalance that the United States has been running with the rest of the world for so long that people forget we used to be a net lender of money and a net exporter here in America, coupled to the fact that oil is priced in dollars and oil production is running at full tilt as China, India, and other national economies consume more of the black gold, have hammered the U.S. dollar's value. While Gartner doesn't show this in its statistics, when measured in local currencies where servers are being sold, it is hard to imagine even 4.3 percent revenue growth. In fact, it is hard to imagine any revenue growth at all in aggregate across the globe. Take IBM as an example. In its first quarter, sales in Europe, the Middle East, and Africa rose by 16 percent to $8.8 billion, but when measured in local currencies, the countries in EMEA only saw 4 percent growth; in the Asia/Pacific region, IBM reported sales back here in New York of $5.1 billion, up 14 percent, but at constant currency in the region, sales only rose by 3 percent. The weak dollar is driving IBM's growth a lot more than any other factor. What is true for IBM is true for all American-based server makers, and four of the top five makers are all based here and recognize their revenue after translating to dollars.

"There were a number of dynamics that affected the market to produce an initial quarter of growth for 2008," explains Jeffrey Hewitt, research vice president at Gartner. "For example, X86 server replacements were on an upswing as the year commenced, we continued to see build outs of large Web datacenters, and emerging-market growth forged ahead."

Hewlett-Packard, which has been dogging IBM's heels like a border collie with an attitude since its acquisition of Compaq back in 2001, jumped ahead of Big Blue in the quarter to capture the top revenue position in the server space; HP has long since, thanks to the Compaq deal, become the top shipper of servers globally. HP booked $4.01 billion in sales across its combined server platforms, an increase of 10.3 from the first quarter of 2007, and was one of the major factors that helped pull the revenue growth for the entire server market upwards considering that HP accounted for 29.6 percent of all server sales in the quarter. IBM was not that far behind, at $3.91 billion in sales across its systems lines, but only grew at 2.1 percent in the quarter, which is lower than the average rate. Slowing Power and mainframe server sales ahead of expected announcements didn't help IBM in the quarter much, to be sure, and you can bet that Big Blue is looking for a resurgence in Q2.

Dell held onto its traditional number three spot in terms of server sales in the quarter, with $1.64 billion in revenues, up 6.6 percent and helping the class average a little bit, too. Struggling Sun Microsystems, which is trying to pump up its X64 and new Sparc T-class server businesses as its older Sparc systems decline, declined by 7/10ths of a percent in the quarter to $1.32 billion in sales, followed up by sometimes partner, sometimes competitor Fujitsu-Siemems with 4.9 percent growth to $732 million in sales. Other vendors accounted for $1.94 billion in sales, dropping 9/10ths of a percent. The top five vendors in the space comprised 85.7 percent of worldwide server sales in the quarter, and if that is not the definition of a mature market, I don't know what is.

Incidentally, of the top vendors in the space, HP was the only server maker in the market that accelerated revenues at a higher pace (10.3 percent) than it did shipments, in this case up 7.8 percent to 683,433 units, according to Gartner. HP is bucking the trends, at least in this quarter, as its Integrity business continues to get traction, customers buy more heavily configured rack servers for virtualization, and its c-Class blades (which also carry a price premium) are being adopted. HP accounted for 30.1 percent share of server shipments in the quarter, with growth in the ProLiant, Integrity, and NonStop lines. But the company's growth did not match that of Dell, which boosted shipments by 15.8 percent in the quarter to 516,499. (That gives Dell 22.7 percent of shipments.)

IBM came in third in the shipment race, as it has for years because it tends to focus on larger and more pricey systems, with 302,057 shipments, up only 2.3 percent and also bringing down the class average as it did in the revenue calculations. Sun was able to boost server shipments by 6.6 percent in the quarter, to 84,313 units, and only did so because it X64 server shipments more than filled in the hole created by collapsing Sparc server shipments. Fujitsu-Siemens pushed out 78,667 boxes, a decline of 2.6 percent, and other vendors in the market accounted for 606,159 units, up 5.1 percent.

In terms of platforms, Gartner said that sales of RISC/Itanium platforms running Unix accounted for $3.79 billion in sales, up 3.7 percent, with IBM getting 34.2 percent of the pie with $1.3 billion in sales, up 2.9 percent, trailed by Sun, with $1.12 billion, down 3.5 percent, and HP with $1.02 billion, up 6.1 percent thanks to relatively strong Integrity sales. Fujitsu-Siemens had a relatively tiny share of the Unix server market, with $194 million in sales, up 9.3 percent, followed by NEC, with a stunning 907 percent growth rate to $109 million in sales. Other vendors accounted for only $43 million in sales, down 44.4 percent. This market is mature, like crazy, and shipments fell by 8.4 percent to 94,402 units as companies consolidate multiple Unix images on bigger iron.

Over on the X86 and X64 platform, sales in the first quarter of 2008 came to $7.56 billion, up 6.9 percent, with HP getting 35.3 percent of the pie with $2.66 billion in sales. Dell came in second with its $1.64 billion, garnering 21.7 percent of this platform's global sales in the three months, followed by IBM's $1.17 billion, a 15.5 percent share. Fujitsu-Siemens posted $326 million in X86 and X64 server sales in the quarter, according to Gartner, followed by NEC, with $225 million, giving them 4.3 percent and 3 percent share, respectively. X86/X64 server shipments across all vendors rose by 8.6 percent to just under 2 million units.

Across all platforms, Linux server shipments were up 13.9 percent, compared to 6.8 percent shipment growth for Windows machines. Most of the Linux and Windows shipments are on X64 boxes these days, but there is some Windows revenue on Itanium-based machines and there is a fair amount of Linux revenue on Itanium, Power, and mainframe kit, too.

That leaves the category called Other, where IBM mainframes, Power-based i5/OS and i machinery, NonStop fault tolerant boxes, and Itanium-based OpenVMS, and a few other mainframe boxes get pushed. In terms of revenues, which really matters for these machines, if you do the math, sales were down 2.7 percent to $2.21 billion, and this is including Itanium machines running Windows and Linux thrown into the mix. All told, this Other category accounted for 9,747 machines, a decline of 25.9 percent compared to the year ago quarter. That seems like a very tiny amount of machines, but the average selling price for these boxes in the quarter came in at $226,700. Not bad business, if you can get it.


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