Server Market Revenues Decline In 1Q16: Gartner & IDC

2016 is apparently not a good year for worldwide server vendors. Recently released data on the global server market for first-quarter 2016 by two independent research firms — Gartner Inc. (NYSE:IT) and International Data Corporation (“IDC”) — showed that the industry saw a year-on-year revenue decline for the first time, following seven straight quarters of growth.

The Data

According to the preliminary data released by Gartner, worldwide server revenues decreased 2.3% year over year to $13.091 billion despite overall shipment growth of 1.7% to 2.715 million. The research firm cited lower average selling prices as the main reason for the drop in revenues, which more than offset shipment growth.

Jeffrey Hewitt, research vice president at Gartner, said, "The real driver of global growth continues to be the hyperscale data center segment. The enterprise and small or midsize business (SMB) segments remain relatively flat as end users in these segments accommodated their increased application requirements through virtualization and considered cloud alternatives".

Similarly, IDC reported a 3.6% decline in server revenues with first-quarter revenues coming at $12.382 billion. However, it disagreed with Gartner on shipment data. IDC reported a year-over-year fall of 3% in total shipment to 2.2 million units.

According to IDC, the end of the Intel Corporation (NASDAQ:INTC) -led enterprise refresh cycle, sluggish investment in hyperscale data center and tough year-over-year comparisons due to a major mainframe refresh from International Business Machines (NYSE:IBM) , which inflated the first-quarter 2015 numbers, were the main reasons behind the dismal performance.

With respect to individual server manufacturers, both the firms have a similar view on the top five vendors. According to Gartner and IDC, Hewlett-Packard Enterprise (NYSE:HPE) retained its leading position, followed by Dell, IBM, Lenovo and Cisco (NASDAQ:CSCO) .

Moreover, as per the reports, Hewlett-Packard Enterprise was the only server vendor to register year-over-year revenue growth despite a decline in shipment units. We believe that the company’s restructuring initiatives, which includes the divestment of its majority stake in Mphasis, the spin-off of the Enterprise Services segment to merge it with Computer Sciences Corporation (NYSE:CSC) , and the partnerships with Dropbox and General Electric (NYSE:GE) to focus on the enterprise server market is paying off.

Region-wise, Gartner revealed that except the Asia-Pacific, every other region witnessed a fall in either revenues or shipment. In the Asia/Pacific regions, however, revenues grew 9.7% while shipments were up 8.4%.

As per IDC, revenues from x86 servers increased 2.6% year over year to $10.6 billion despite a 2.9% decline in shipments to 2.2 million. On the other hand, non-x86 server revenues plunged 28.7% to $1.8 billion.

The Bottom Line

Although, there are differences in the two research firms’ figures as well as reasons for the weak performance, they concurred that the hyperscale data center segment is likely to be the key long-term growth driver in the server market.

Kuba Stolarski, Research Director, Computing Platforms at IDC stated, "Now that the cyclical refresh has come to an end, the market focus is shifting toward software-defined infrastructure, hybrid environment management, and next-gen IT domains such as the Internet of Things (IoT), robotics, and cognitive analytics”. Stolarski further added, “In the short term, IDC expects the second half of 2016 to re-energize hyperscale cloud infrastructure expansion with existing datacenters filling out and new cloud datacenters standing up across the globe".

Although there is a huge growth opportunity in the hyperscale server infrastructure space as more and more companies are shifting to cloud-based storage, we believe that the sluggish tech spending environment could hurt the overall server market in the near term.