Enterprise Server Refresh Cycle Gathers Momentum

June 8, 2015 Timothy Prickett Morgan

The server refresh cycle is picking up steam, with the market turning in one of the best spurts of growth in the first quarter in many a year and reversing a slight downward trend in server revenues across all vendors and machine types that has been putting pressure on vendors for the past several years since the big bounce after the Great Recession recovery. Some big deals at hyperscale companies, in fact, allowed sales in Q1 2015 to more or less match levels set in the second and third quarters of last year.

According to the IDC quarterly server tracker, vendors shipped 2.3 million server units to customers and channel partners in the first quarter ended in March, an increase of 8.4 percent compared to the year-ago period. Revenues were up even more sharply, rising 17.2 percent to $12.83 billion, thanks in part to a big bounce in IBM mainframe sales in the wake of the launch of the System z13 launch in January and initial shipments in the last few weeks of March. Those new z13 mainframes helped push up sales of high-end machines (those that cost $250,000 or more) to $2.1 billion in the quarter, up 44.7 percent year-on-year. The volume server segment (machines that cost under $25,000) continued to represent the bulk of revenues, and sales for these machines rose by 13.6 percent to $9.7 billion in the quarter. Midrange machines, which in IDC’s casing of the market cost between $25,000 and $250,000, continued to represent what historically is a small portion of sales, at $1 billion in the quarter, but thanks in large part to heftier system configurations for server virtualization and in-memory computing, the midrange actually grew revenues for by 7.2 percent in Q1. Hopefully, IBM will get some traction with its new Power E850, launched a month ago and participate in the midrange growth, but as we have pointed out, the Power E850 does not support IBM i, only Linux and AIX, so IBM i won’t be part of that wave.

Gartner, which tracks server sales at the end user level rather than factory revenue into end users and the channel, reckons that the numbers were more or less the same, showing balanced flow through the channel. Gartner calculates that server revenues into datacenters and data closets and under desks accounted for $13.39 billion in sales, up 17.9 percent, with shipments hitting 2.7 million machines, up 13 percent. After shedding the System x business to Lenovo last fall, IBM is no longer among the top five system shippers, and by the way, neither are Cisco Systems, Oracle, or Fujitsu. Hewlett-Packard was the top shipper of systems in the first quarter, with 534,559 machines kicked out the door, followed by Dell with 507,433 machines, Lenovo with 220,379 machines, Huawei Technologies with 105,803 units, and Inspur Electronics with 91,847. You can see that the step functions are pretty steep down with volumes. The three vendors that are in the bottom of the top five are all Chinese system makers, and that is no coincidence. China is trying to bolster its indigenous systems business, and Lenovo buying the X86 server unit from IBM is just part of that story.

Here is how Gartner breaks down server revenues for the first quarter of 2015:

HP is so far out in front of Dell and IBM that neither will likely catch up to them, but it is not outside the realm of possibility that a few years hence that Cisco and Lenovo could reach a level that IBM is at right now here in the first quarter. And it is important to note that IBM had a stellar quarter for System z sales against an easy compare this time last year, and that its revenues will no doubt trend down and level off a bit even if sales of Power8 midrange and high-end systems increase and the entry Power8 systems pick up a little steam of their own.

We don’t have any idea what the Power Systems-IBM i combination is doing out there, but we do have the RISC/Itanium systems running a Unix variant as some sort of proxy. In this market, overall shipments were down 2.9 percent to a 21,739 machine and revenues were down 3.1 percent to $1.15 billion. This is a far cry from the height of the dot-com boom, when Unix machines represented over 45 percent of system sales (and iron was a hell of a lot more expensive, and even moreso when adjusted for aggregate compute capacity). Within this Unix segment, which apparently does not include Power Systems running either IBM i or Linux, Gartner believes that IBM sold 10,704 machines (down 3.4 percent year-on-year) and brought in $644.7 million in revenues (down 2.8 percent). In its own financial results, IBM has said that the Power Systems business had increased by 1 percent in the first quarter–Gartner adds in software and some configured systems elements, which is why the numbers are different–and at the COMMON conference last month, Alex Gogh, the vice president of global sales for IBM server solutions, told attendees that the Power Systems-IBM i platform experienced double-digit growth in the first quarter. We have no idea how much revenue that represented, but we will be hazarding some guesses in a future story.

The interesting thing to contemplate is what IBM looks like without its System x business and how non-X86 systems stack up against X86 iron in the datacenter. Here is what happens if you plot these three curves using IDC data since the first quarter of 2009, which was the bottom of the Great Recession just after server sales had swooned in the second half of 2008:

There are a few interesting things in that chart above. For one thing, the X86 and non-X86 portions of the market were roughly the same size–around $5 billion–just before we started pulling out of the Great Recession. And then look at the divergence between the black and green lines. The other interesting thing–and I have never plotted these two curves against each other before–is that IBM’s overall server business tracked very closely to the overall non-X86 business. That is because IBM dominates the mainframe market (with nearly all market share) and the Unix market (with more than half of the money generally). But it is funny (strange funny, not hilarious funny) that IBM’s total business, including its System x business, should map so closely to the non-X86 market. Well, until it sold the System x business to Lenovo last fall, and as you can see, the pattern is broken.

The question is how wide that gap between the X86 market and non-X86 market can get. For the trend to continue, about half of the revenues for non-X86 iron will disappear in a few years, but it could plateau as it did, more or less, in 2011. It is hard to predict. The Power Systems business could be resilient, and the mainframe could keep plugging along. That is surely what IBM is hoping, now that it has no skin in the X86 server game.

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