IBM and HPE's Server Businesses Aren't Just Pressured By the Cloud Anymore

 | Jun 09, 2017 | 7:56 PM EDT
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Following a long string of quarters in which the server sales of enterprise IT firms such as IBM Corp. (IBM) , HP Enterprise Co. (HPE) , Lenovo and Cisco Systems Inc. (CSCO) have felt the ill effects of public cloud infrastructure adoption, it's generally well-understood how the preference of companies likes Amazon.com Inc.  (AMZN) , Alphabet Inc.  (GOOGL) , Facebook Inc.  (FB) and (increasingly) Microsoft Corp.  (MSFT) to design their own servers and have them supplied by Asian contract manufacturers (ODMs) has become a headwind for the old guard. Especially as more and more business software workloads are either migrated to a public cloud, or built from the start to be run on one.

What might not be as well-appreciated yet, and which is driven home by some estimates and sales figures released this week, is how the IT giants are also now pressured by the aggressive efforts of one of their peers to take share. Namely, Dell Technologies Inc. (DVMT) , which is making full use of the expanded resources it has as its disposal after merging with storage giant EMC last year.

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On Tuesday, June 6, IDC estimated global server revenue fell 4.6% annually in Q1 to $11.8 billion. The next day, Gartner estimated Q1 server sales fell 4.5% to $12.5 billion (a slightly different methodology appears to be responsible for a higher revenue estimate). Neither number was all that surprising, given the firms respectively estimated 4.6% and 1.9% declines for Q4.

It also wasn't too surprising that sales of servers designed by cloud giants and supplied by ODMs grew strongly following a Q4 lull, as the likes of Amazon and Facebook continued spending heavily on capex. IDC estimated sales of such servers, which it refers to as ODM Direct, grew 41.8% to $1.2 billion (10.4% of industry revenue). It added one unnamed cloud firm single-handedly accounted for over 10% of the 2.21 million servers shipped during the quarter.

What was, surprising, though is that both firms reported Dell, the world's second-biggest server vendor, saw meaningful sales growth in spite of the headwinds faced by peers. IDC estimated Dell's server sales grew 4.7% to $2.37 billion, leading its market share to rise to 20.1% from 18.3% a year ago. By contrast, the firm had estimated Dell's server sales were roughly flat in Q4. Gartner gave Dell a 19% Q1 share, up from 17.3%.

Dell confirmed its share gains on June 8 when the company reported its server and networking revenue grew 5% in the April quarter to $3.2 billion. The company added sales of its mainstay PowerEdge enterprise servers, which run on Intel Corp. (INTC) and (to a lesser degree) AMD Inc.'s (AMD)  x86 CPUs, grew by double digits. That offset lower "high-volume cloud" server sales.

IDC thinks HPE's Q1 server share fell to 24.2% from 27.5% (still good for first place), with revenue dropping 15.8% to $2.86 billion. The company announced last week its server revenue fell 14% in its April quarter. Like Dell, HPE's cloud sales have been falling, as a major client (believed to be Microsoft) relies more on internal and open-source designs. Both Dell and HPE have also noted their cloud server sales tend to carry lower margins; the latter suggested on its earnings call it might pare its investments in this space to focus on higher-margin opportunities.

IBM had an even tougher time in Q1. IDC thinks Big Blue's server sales, hurt not only by cloud adoption and Dell but also by mainframe cyclicality and share losses for its Power server line relative to x86 servers, fell 34.7% to $745 million, with its share dropping to 6.3% to 9.2%.

That allowed Cisco to grab third place from IBM. IDC estimates the networking giant's server share grew fractionally to 7%, in spite of a 3% decline in revenue to $825 million. Cisco has blamed recent pressures for the business on an industry shift towards rack servers relative to blade servers, while insisting it's making efforts to the ship.

Lenovo, which bought IBM's x86 server unit in 2014, rounded out the top-5. The Chinese tech giant was granted a 6.2% share, down from 7% a year ago, with revenue estimated to drop 16.5% to $727 million.

Overall, HPE, IBM, Cisco and Lenovo saw their server share fall 690 basis points in Q1 to 43.7%. That's easily worse than their performance in Q4, when IDC estimated their combined server share fell 490 basis points to 48.7%.

Clearly, Dell's rejuvenation is making a bad situation worse. Since closing the EMC merger last September, the company has been pitching enterprises on an end-to-end IT lineup that pairs Dell's servers and networking hardware with EMC's storage hardware and software, as well as the virtualization and infrastructure management software provided by EMC's VMware  (VMW) unit. The company has also moved to integrate Dell and EMC's salesforces and reseller partner efforts. In addition, some Dell and EMC resellers have felt pressured to boost to their sales to remain one of the merged company's preferred partners.

All of these efforts are certainly paying off in the server market. Going forward, the launch of Dell's 14th-generation PowerEdge servers (announced in May) could provide a fresh boost. They promise improved hardware and software-based security features, better high-speed flash storage support and revamped management software tools and tech support services. This week, HPE countered by unveiling x86 servers promised to have an unmatched ability to protect a server's firmware, as well as greater support for "persistent memory" modules that combine DRAM with flash storage.

Along with Dell, HPE, Cisco and Lenovo will likely get a server sales boost from Intel's anticipated mid-summer launch of Xeon CPUs based on the company's Skylake architecture. IBM, which no longer sells x86 servers, won't be so lucky. But either way, the server businesses of all four companies have to contend with major challenges that a chip refresh can only provide temporary relief for.

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