Emerging Markets and Virtualization Drive Q3 Server Sales

December 3, 2007 Timothy Prickett Morgan

Server lines, perhaps with the exception of IBM‘s System z and System i servers, did pretty well in the third quarter, according to the latest market share statistics from Gartner. The upgrade cycle in data centers and departments for 64-bit, energy-efficient, and virtualization-capable servers, coupled with raw growth in processing capacity in emerging markets like China, India, and Russia, boosted both server shipments and revenues in the third quarter on a global basis.

As previously reported in their financial filings, Hewlett-Packard had a very good quarter for server sales in its fiscal fourth quarter ended October 30, Dell did better than it has done in a while, and IBM and Sun Microsystems had mixed results. Gartner’s numbers reflect this and also put some hard numbers on just how well and how poorly each vendor has done in the most recently completed calendar quarter.

Across all vendors and geographies, server makers pushed just under $13.4 billion in server iron worldwide in Q3, up 2.6 percent from the year-ago quarter. Server shipments grew over three times as fast, however, with more than 2.2 million units going out the door in the quarter, up 8.7 percent. This exceeds the very good sales rate for server iron in the second quarter, when Gartner reckons that server revenues worldwide grew by 5.1 percent to $13 billion and that unit shipments rose by 2.7 percent to just over 2 million units. Up until the second quarter, server unit shipment rates had been decelerating to the point of flattening. Server sales in the second quarter of 2007 hit a level that the market has not seen since 2000, and the fact that the third quarter was even better just goes to show how much iron is out there from the dot-com boom or immediately after it and how badly customers want to get rid of it as they add new workloads and expand existing ones.

“This quarter the server market grew both in units and revenue, driven by X86 market volumes in the quarter, while RISC-Itanium Unix server revenue grew at 8 percent,” explained Errol Rasit, the senior analyst at Gartner who worked on the quarterly numbers at Gartner’s Dataquest unit, in a statement accompanying the server share stats. “Underlying market dynamics such as growth from emerging markets, coupled with an ongoing demand for increased capacity, are stronger than any inhibitors such as server virtualization. Any implications from financial market instability were not visible in the server market in the third quarter.”

Well, for now, anyway. And let’s hope it stays that way. Moreover, while I will be happy to be wrong, it still seems likely that in the long run, the virtualization effect will eventually create a dramatic downdraft on future server shipments, and that will cause vendors to pour as many features as they can in their iron to position them as the ideal boxes for server virtualization. We are at the front end of the virtualization curve for X64 servers, and this transition will take time–which is good news for all server makers. The thing to remember is that the installed base of servers worldwide is in the range of 25 million to 30 million machines, and is dominated by aged X86 iron. At a sales rate of 2 million machines per quarter, even with a server virtualization compression ratio of four virtual machines for every physical box running standalone today, not all workloads can be easily virtualized and it will take years–maybe four or five–to churn through the base. The speed at which companies migrate from older and less efficient X86 and RISC iron to more efficient, compact, and virtualized X64 and RISC iron depends in large part on how their workloads are growing, how the larger economy is affecting their IT budgets, and how many projects with a relatively quick return on investment are in the IT backlog that need more processing and network capacity. When all is said and done, we could end up with anywhere from 15 million to 30 million servers in the world, running anywhere from 45 million to 60 million virtual machines. You can bet that server makers are hoping for the larger number, and IT shops are hoping for the smaller number.

In the third quarter, Gartner puts IBM at the head of the pack in terms of revenues, but IBM’s 8.1 percent decline–the result of poor Systems z mainframe and System i midrange sales–dropped Big Blue to $4.03 billion in sales in the quarter and a 30.1 percent share of the server pie. HP’s server sales in Q3 rose by 13.9 percent to $3.75 billion, giving HP a 28.1 percent share of the pie. This is the closest that HP has come to beating IBM’s share of server revenue in any quarter since the Compaq merger in 2001. Dell was on the revenue comeback trail, with $1.58 billion in sales, up 12.6 percent, and Sun’s strategy of selling more expensive but virtualized X64 and Sparc servers is paying off with some revenue growth as well, with Sun booking $1.46 billion in sales, up 11.4 percent. Dell had 11.8 percent of the $13.4 billion pie in Q3, compared to Sun’s 11 percent. The Fujitsu-Siemens partnership rounded out the top five server makers in terms of revenues, with $655.9 million in sales, up a more modest 3.4 percent. Other server makers accounted for $1.88 billion in sales, down 5.5 percent compared to the second quarter of 2006. What seems clear from this is that IBM’s falloff in mainframe sales dragged down the whole market in terms of revenues, and this was caused mainly by the slowdown in the financial services sector where IBM peddles a lot of mainframe iron and because customers know a new mainframe line based on the quad-core z6 processor is coming in 2008. Ditto for System i declines–companies who run i5/OS workloads know a Power6 line is coming in early 2008, and they are not opening their wallets unless they absolutely need more capacity today.

In terms of server shipments, HP is still the top of the heap and extended its dominant position even more in the third quarter. (In fact, HP is approaching the market share that the HP-Compaq merger was supposed to deliver in 2002 but never did thanks to a recession and an IT meltdown.) Gartner calculates that HP shipped 649,958 servers in the quarter, up 20.2 percent and giving HP 29.3 percent of all shipments in the quarter. Dell was the number two shipper, with 484,650 units, up 5.4 percent from a year ago. IBM’s shipments declined by 3.9 percent to 319,674, and mainframe footprints were absolutely not the reason. IBM is selling richer configurations of X64 and RISC servers as part of a server virtualization and consolidation marketing effort, and with the largest customer base of server buyers and the richest and most tested virtualization offerings in the market (including X64 products from partners), it is not at all surprising that IBM is seeing shipment declines first thanks to the virtualization effect. Sun had a similar 4.5 percent decline in shipments, to 79,320 units, in the quarter, and for much the same reason. Fujitsu-Siemens saw shipments rise by a stunning 17.4 percent to 76,506 units, and Gartner offered no explanation. It could be that Fujitsu-Siemens is getting traction with its X64 and Sparc products in Japan, Europe, and North America all at the same time. But based on the trade-off between revenue growth and shipment growth, it would be a reasonable guess that Fujitsu-Siemens customers are moving from relatively large boxes from several years ago to smaller ones that have more oomph and can be virtualized as well. (Gartner attributed Fujitsu-Siemens’ shipment boost to its X64-based Primergy line in Europe, but it is probably not this simple.) Other vendors in the market comprised 610,704 sales in Q3, growing by 8.8 percent and accounting for 27.5 percent of the 2.22 million units shipped in the quarter.

The blade server form factor continues to gain traction, and accounted for 10 percent of server shipments in the quarter, up 13.8 percent. HP’s c-Class BladeSystem blade servers have sparked a turnaround in the company’s blade business after it fell behind IBM’s BladeCenter machines two years ago. HP grew blade server shipments by 91 percent in the quarter. Gartner added that Sun’s re-entry in the blade market has moved the company into the number four slot–presumably behind IBM and Dell–in the blade racket, giving Sun the same position it has in the server market at large. IBM’s share of blade server shipments is larger than its share of the server market overall, but Gartner did not provide precise figures for any of the vendors this time around.

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