IBM And Inspur Power Systems Buck The Server Decline Trends
September 9, 2019 Timothy Prickett Morgan
For the first time in 11 quarters – in other words, since the final quarter of 2016 – the server market contracted. And not just because the hyperscalers and cloud builders were cutting back on spending as they consumed the vast amount of compute capacity that they bought in 2018. Enterprises pulled back on spending, too, and every geographic region and every category of server had declines as well, many of these due to their own independent cycles and some due to macroeconomic effects.
As we reported back in July, the Power Systems business grew 3 percent at constant currency in the second quarter ended in June, and was up 1 percent as reported for external sales. We reckoned, using our own model of IBM’s Power Systems sales, that Big Blue pushed $518 million in systems and another $48 million in server sales to its storage division as the foundational platform for the DS series of SANs, for a total of $566 million, down 1.5 percent because of a 22 percent decline in storage array sales based on the Power iron. No matter, IBM’s server business grew against a very tough compare a year ago when it was installing major supercomputers in Oak Ridge National Laboratory and Lawrence Livermore National Laboratories. This was, as it turns out, more of a feat than we had realized at the time.
According to the latest statistics from IDC, the worldwide server market contracted by 11.6 percent to just a tiny bit over $20 billion and server shipments fell by 9.3 percent to 2.69 billion units.
Sales of volume servers, which cost $25,000 or less, fell by 11.7 percent to $16.3 billion. Midrange machinery, which costs between $25,000 and $250,000 in the way IDC looks at the datacenter world, declined by less than the market at large, falling 4.6 percent to $2.4 billion. This is the category that the vast majority of IBM i machinery falls into. Sales of high end machines, which cost more than $250,000 and which represent some of the Power Systems iron that Big Blue sells as well as its pricier still System z mainframes, were off 20.8 percent to $1.3 billion. Our best guess is that high-end Power Systems iron bucked this trend in the second quarter and actually rose against a relatively easy compare as the market had been waiting for Power9 upgrades in the Power E980 family to kick in.
Other factors contributed to the revenue decline aside from slumping shipments. Everyone has to remember that DRAM memory and flash storage prices went crazy in 2017 and 2018 and are only now starting to trend downwards. Our best guess is that about half of the revenue growth in 2018 was due to richer configurations of processors as well as higher memory and flash prices and the other half was due to actual volume increases in the market, and with the air being let out of pricing on DRAM and flash, the revenues have to contract along with the average selling prices. We are not surprised by this. Just like the boom was a bit artificial, so is the bust, and the only ones who really profited from that incremental price hike on DRAM and flash were the memory makers. It’s not like it make server OEMs and ODMs more money. They just got to look bigger and pay bigger component bills for the same razor thin margins; they got to look like they were gouging when they were not, which seems unfair.
Even though Power Systems sales were up a smidgen as reported, IBM’s System z mainframes are at the very tail end of the z14 cycle – the word on the street is that the machines are due sometime before the fall is out and we really didn’t expect them until early 2021 – and the decline has been quite severe here.
IBM doesn’t break out System z and independent storage sales in its financials, so we can’t be sure how much the IBM mainframe line contracted in IDC’s model, but IBM did say that sales fell by 41 percent at constant currency in the quarter, which probably means it fell at around 43 percent as reported. IBM makes up a big portion of sales of machinery that is not based on X86 processors, and what we can tell you is that non-X86 iron sales fell by 21.5 percent to $1.6 billion according to IDC, and in this category System z mainframes are hurting and Power Systems sales are helping and they are probably averaging out to somewhere around the 20 percent decline mark that is twice as deep as the revenue decline in the overall server market. Just don’t blame Power Systems this time around.
Sales of X86 iron were off 10.6 percent to $18.4 billion, by contrast, more or less making the market and comprising 92 percent of the revenues and probably somewhere around 98 percent to 99 percent of shipments. IBM’s server shipments are miniscule by comparison, as are sales of all non-X86 iron at this point – including servers based on Arm processors.
The interesting thing to contemplate is how Inspur is doing sell Power-based systems in China, which is now IBM’s main way of getting its platform into the Middle Kingdom. Inspur plus its Inspur Power Systems subsidiary together had an incredible 32.3 percent rise in sales in the second quarter, seriously bucking the downward revenue trend, hitting $1.44 billion in sales and giving Inspur a 7.2 percent share of overall global server sales compared to Lenovo’s $1.21 billion (giving it 6.1 percent share) and IBM’s $1.19 billion (giving it 5.9 percent share). Here’s how the different vendors stacked up in Q2 2019:
IDC thinks that IBM’s overall external server sales contracted by 27.4 percent, by the way. As you can see, IBM and Lenovo, which bought IBM’s System x server business almost five years ago, is dropping too, but shrunk less and was able to bypass IBM to tie for fourth place in IDC’s revenue rankings. Dell shrunk faster than and Hewlett Packard Enterprise and they are also, technically speaking, in a statistical tie for first place, according to IDC’s numbers, but the gap is over $200 million so it is probably safe to say Dell managed to stay ahead of HPE despite declining three times faster than its rival. If the ODMs had remained flat in sales, the market would have had modest contraction, and if they had grown a bit, the market would have been flat. That is how much the ODMs mean in the modern server business these days.