Server Sales Slow Across The Board

December 5, 2016 Timothy Prickett Morgan

The major suppliers of servers to the datacenters of the world that are public have turned in their financial results in recent weeks, and those numbers do not look good even though they are nothing as alarming as what we saw ahead of the recession in 2001 through 2003 or the Great Recession that started at the end of 2007 and we think ended maybe two and a half years later. We may or may not be heading into a national or global recession in the coming year or maybe the one after that, but as far as the server market is concerned, we are halfway there right now.

The technical definition of a recession is to have two consecutive quarters of decline in a key metric, in the case of the U.S. economy, it is the measured gross domestic product. You can also probably make the case that two consecutive quarters of rising unemployment constitutes a recession, too, and slackening GDP and employment figures tend to go together. With so much uncertainty in the world, the threat of protectionist policies from the incoming Trump administration that represent big change (and therefore risk that economies don’t like) could shock the U.S. economy and then others where the supply chain for so many products that are made by companies headquartered in the U.S. I am not smart enough to know what America is supposed to do to try to protect its economy and give all people jobs and purpose in a world gone wild with multinationals that are racing us all to the bottom. But what I do know is that any change will cause disruption, and usually with unintended consequences. You can be careful and move slowly or not at all, or just barge in like the proverbial bull and see what happens. We look poised for the latter here in the States, and therefore the world. And that means that IT vendors and IT departments that are subject to the vicissitudes of the economy had better hang on tightly.

So, one quarter down for servers, and we still have a fourth quarter ahead for the year that probably will not see growth. And maybe not the first and second quarters of 2017 because there are so many processors and coprocessors coming out in the middle to late parts of the year. Those who can’t wait will argue for deep price cuts and those who can, will. And that will probably mean revenues fall faster than shipments, particularly among enterprises that can wait rather than buy in the next three quarters. If it were me trying to figure out what to do, I would be waiting for the “Skylake” Xeons, the “Zen” Opterons, and the Power9 processors if that was at all feasible.

According to IDC, which counts factory revenues out of the OEM and ODM server makers (meaning revenues out of the warehouse and into direct customers and into the channel, not at the end user level), server makers pushed 2.38 million machines in the third quarter ended in September, a decline of 4.6 percent compared to the year ago period. Revenues fell by 7 percent to $12.5 billion. Constricted spending by enterprises was cited by IBM, Hewlett Packard Enterprise, and Intel in their most recent quarterly reports, and others also took the enterprise hit. Hyperscalers and cloud builders also pulled back, although from IDC’s data, the ODMs that sell directly to the hyperscalers and cloud builders did well and it looks like Dell, HPE, and Lenovo, which also sell custom servers for the massive datacenters that these clients operate, did not do as well. (If the ODMs were up selling to these upper echelon customers, as they were with revenues up 6.8 percent to $1.3 billion in the quarter, then someone had to be down for the entire service provider segment to be down.)

IBM, thanks in large part to the coming to the end of the z13 generation of System z mainframes, stomached a 32.9 percent revenue decline in the third quarter, to $864.4 million. It is significant for those of us who are encouraging the Power Systems business to grow that sales of non-X86 servers were off by 30.1 percent to $1.3 billion. IBM has 64.3 percent share of the non-X86 server segment, and our guess is about a third of that is Power Systems, which looks like it may have declined by as much as the mainframe business did.

Gartner does break out the RISC/Itanium Unix business separately, and according to its statistics, the entire world consumed only 14,485 such machines in the quarter, down by 37.7 percent, generating revenues of a paltry $658.2 million. IBM’s revenues in the RISC/Unix segment were off 40.6 percent to $364.6 million, against shipments of 7,623 units, down 28.7 percent. Any time revenues are declining faster than units, that is a bad thing. (Well, any time there is decline, that is a bad thing.) We have no idea how well or poorly the IBM i on Power Systems business did, but it is our guess that it did not decline like that of the AIX portion of the base. And these poor revenue figures come despite a big jump in Linux-on-Power sales. Even the big “Summit” and “Sierra” supercomputers that IBM is building for the US Department of Energy for the fall of next year won’t help much, since they will have fewer than 7,000 units across both systems. Yes, that will help boost the revenues, but it is a one-time bump unless IBM can be more aggressive about commercializing the nodes in these systems. Big Blue has been trying, as we have previously discussed.

As we look into 2017, we are hopeful that Power9 gets formally adopted by Google and Rackspace and that IBM gets a bump up from the supercomputer and machine learning sectors for the Power platform, and that IBM i and AIX shops that have been sitting on the sidelines, waiting for new iron with better economics and technical capabilities, get into the game. But we think it is going to be a couple of long quarters before that might happen.

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