Server Revenues Fall For 5th Straight Quarter: Gartner & IDC

The nightmare of server vendors continues as the industry witnessed another quarter of year-over-year decline in global server market revenues in first-quarter 2017, according to the two research firms – Gartner Inc. (NYSE:IT) and International Data Corporation (“IDC”). Notably, this was the fifth consecutive quarter of decline for the industry. Prior to that, it had witnessed seven straight quarters of year-over-year growth.

What the Report Says

According to preliminary data released by Gartner, worldwide server revenues decreased 4.5% year over year to $12.509 billion in the first quarter, while overall shipment declined 4.2% to 2.602 million.

The year-over-year decline was mainly due to reduced demand in enterprise and SMB segments “as end users in these segments accommodate their increased application requirements through virtualization and consider cloud alternatives," according to Jeffrey Hewitt, research vice president at Gartner. However, hyperscale data center segment continues to witness growth.

IDC’s views were also more or less similar to Gartner. IDC reported a 4.6% decline in server revenues, with first-quarter revenues coming in at $11.809 billion. Shipments inched up 1.4% to 2.214 million units. Per the research firm, wait for deployment of Intel Corporation's (NASDAQ:INTC) new Skylake processors by most hyperscale service providers, elevated DRAM pricing and slowdown in high-end server sales adversely affected first-quarter server revenues.

With respect to individual server manufacturers, both the firms have a similar view on the top two vendors. With respect to revenues, according to Gartner and IDC, Hewlett Packard Enterprise (NYSE:HPE) retained its leading position, followed by Dell.

The research firms had different views when it came to the third, fourth and fifth positions. As per Gartner, International Business Machines (NYSE:IBM) , Cisco (NASDAQ:CSCO) and Lenovo were at the third, fourth and fifth position, respectively.

On the other hand, according to IDC, the third place was a tie between Cisco, IBM and Lenovo. This was so because IDC declares a statistical tie when the difference among vendors remains one percent or less. Therefore, if we look at actual market share, then Cisco holds the third position, followed by IBM and Lenovo at the fourth and fifth position, respectively. Furthermore, IDC provided revenue and shipment data for ODM Direct group of vendors.

Both the research firms agreed that it was Dell which registered year-over-year jump in revenues, as well as shipments. Per Gartner, Dell witnessed growth of 4.8% and 0.5% in revenues and shipments, respectively; while per IDC, revenues increased 4.7% and shipment inched up 0.1%.

In addition, according to Gartner, in terms of the number of units shipped, Dell moved to the number one spot, with a market share of 17.9%, pushing Hewlett Packard Enterprise to the second spot with 16.8% share.

Region wise, Gartner revealed that except for the Asia Pacific, every other region witnessed a fall in either revenues or shipment. According to IDC, Asia/Pacific (excluding Japan) (APeJ), Canada, and Central and Eastern Europe were the only regions, which registered year-over-year growth in revenues.

Coming to x86 servers, per IDC, shipments for x86 servers remain flat year over year. Revenues from these servers were $10.6 billion, while non-x86 server revenues plunged 30.9% to $1.3 billion.

Bottom Line

Although there are differences in the two research firms’ figures, the comments signify that 2017 will also be a tough year for server vendors. Per Lloyd Cohen, director of Worldwide Market Analysis, Computing Platforms at IDC, "Two-socket machines are attractive for datacenter deployment in terms of both power usage and cost per server. Their growth rate may slow down over the short term and, because they control a significant portion of the overall server market, the overall server market growth rate will be dampened worldwide."

Moving ahead, although there is huge growth opportunity in the hyperscale server infrastructure space, with more and more companies shifting to cloud-based storage, we believe that the sluggish tech spending environment could continue to hurt the overall server market in the near term.

Looking at the current macroeconomic environment, we believe that the overall performance of vendors will remain weak in the next few quarters. Therefore, it is advisable that investors stay away from investing in this space.

Currently, Hewlett Packard Enterprise has a Zacks Rank #3 (Hold), while International Business Machines and Cisco carry a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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