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Server Market Rebounds in Q2 as Hyperscalers Push Deployment


The fortunes of server vendors have returned it seems, as worldwide server revenues and shipments grew year over year in second-quarter 2017, that too after five straight quarters of decline, per Gartner Inc. IT and International Data Corporation (“IDC”).

Although the numbers of both independent research firms are different, comments from these indicate that the server market may see further improvement in the quarters to come.

According to preliminary data released by Gartner, worldwide server revenues increased 2.8% year over year to $13.938 billion in the second quarter, while overall shipment grew 2.4% to 2.824 million.

An increase of 6.3% year over year in server revenues to $15.7 billion and 1.9% in shipments to 2.45 million units was also acknowledged by IDC. The figures vary due to different approaches in data compilation.

The firms also agreed on the fact that x86 servers retained their growth momentum during the quarter. Per Gartner, x86 server revenues grew 6.9%, while shipment increased 2.5%. On the other hand, IDC figured out a 10.4% year-over-year rise in x86 server revenues.

Hyperscalers Fuel Maximum Growth

Although the firms chose different data-compilation techniques, both highlighted almost similar reasons for the surge. The primary among these was strong demand from hyperscale data center service providers which made a huge push in server deployment. Per IDC, Amazon AMZN made the largest push in server deployment and accounted for more than 10% of the total server shipped during the second quarter.

The second reason outlined by IDC was the availability of Intel's INTC new Skylake processors. It should be noted that hyperscale data center service providers have waited for months for this processor, as a result of which both server market revenues and shipments witnessed a sharp decline in first-quarter 2017.

Gartner also agrees with IDC’s view on strong demand from hyperscalers. Nevertheless, it underlined another reason for the strong recovery in the server market during the recently reported quarter. Gartner noted that data center infrastructure build-outs in the Asia-Pacific region, mostly in China, contributed hugely to overall growth.

Computer and Technology Sector 5YR % Return

Computer and Technology Sector 5YR % Return

Top Vendors

With respect to individual server manufacturers, both firms share a similar view on the top two vendors. Gartner and IDC believe that on the revenue front, Hewlett Packard Enterprise HPE retained its leading position, followed by Dell.

However, the research firms had different views when it came to the third, fourth and fifth positions. As per Gartner, International Business Machines IBM, Cisco CSCO and Huawei were at the third, fourth and fifth spot, respectively.

Per IDC, the third position was a tie between IBM and Cisco. This is because IDC calls it a statistical tie when the difference among vendors is 1% or less. Therefore, if we look at the actual market share, then IBM holds the third position, while Cisco has the fourth position. Lenovo secured the fifth place.

Additionally, IDC provided revenues and shipment data for ODM Direct group of vendors. These vendors continue to witness huge year-over-year growth in revenues as well as market share “as large datacenters find it attractive to custom build their server designs at attractive volume prices,” per IDC.

On the other hand, per Gartner, Huawei witnessed huge revenue growth and gain market share.

In addition, according to Gartner, in terms of the number of units shipped, Dell continue to lead, with a market share of 17.5%, followed by Hewlett Packard Enterprise, Huawei, Inspur Electronics and Lenovo, which ended the quarter with market shares of 17.1%, 6.2%, 5.6% and 5.2%, respectively.

Regional Performance

Region wise, the overall server market performance was mixed. According to IDC, revenues from Central and Eastern Europe, Asia/Pacific (excluding Japan), the United States and Western Europe grew year over year. Growth in the Asia-Pacific region was mostly contributed by China. However, Japan, Latin America, and the Middle East and Africa registered a decline during the quarter.

Bottom Line

Despite differences, the comments by Gartner and IDC hint at bright near-term prospects for server vendors. According to Kuba Stolarski, research director, Computing Platforms at IDC, the hyperscale segment is likely to continue its growth in the quarters ahead.

He believes that "As hyperscalers tend to lead the market on most architectural updates, we expect the rest of the market to catch up over the next several quarters. As the market cycles through this refresh, we are seeing changes in vendor portfolios with new modular system designs and a greater focus on accelerator technologies, as well as the continued evolution of the role of cloud services in corporate IT."

In our opinion, there is a huge growth opportunity in the hyperscale server infrastructure space, with more and more companies shifting to cloud-based storage. Also, Gartner’s latest forecast for IT spending depicts a favorable tech spending environment, which, we believe will positively impact the overall server market in the near term.

Looking at the improving IT spending and server deployment push by data center service providers across different geographies, we believe that the overall performance of vendors will likely improve over the next few quarters.

Currently, IBM and Cisco carry a Zacks Rank #3 (Hold), while Hewlett Packard Enterprise has 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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