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Server Revenues Fall for 2nd Straight Quarter: Gartner & IDC

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The year 2016 has certainly not been a good one for worldwide server vendors so far. According to recently released data for second-quarter 2016 by two independent research firms – Gartner Inc. (IT - Free Report) and International Data Corporation (“IDC”) – global server market revenues have witnessed a year-over-year decline.

Notably, this is the second quarter in a row that the industry has registered a fall. Prior to that, it had witnessed seven straight quarters of year-over-year growth.

What the Report Says

According to the preliminary data released by Gartner, worldwide server revenues decreased 0.8% year over year to $13.553 billion despite overall shipment growth of 2% to 2.756 million. The research firm cited “Variations of growth by data center segments and exchange rate issues” as the main reasons for the result.

IDC’s views were also more or less similar to Gartner. IDC reported a 0.4% decline in server revenues with second-quarter revenues coming in at $13.430 billion, while shipments increased 2.6% to 2.4 million units.

According to IDC, sluggish investment in hyperscale data center and tough year-over-year comparisons due to the end of the Intel Corporation (INTC - Free Report) -led enterprise refresh cycle were the main reasons behind the dismal performance.

With respect to individual server manufacturers, both the firms have a similar view on the top five vendors. As far as revenues are concerned, Hewlett Packard Enterprise (HPE - Free Report) retained its leading position, followed by Dell, International Business Machines (IBM - Free Report) , Lenovo and Cisco (CSCO - Free Report) per Gartner and IDC.

However, as per Gartner, it was Dell that registered year-over-year growth in revenues (9.9%) as well as shipments (8.9%). The company mainly benefited from its aggressive selling strategies across the Asia-Pacific region, mostly in China.

As per Gartner, revenues from x86 servers grew 5.8% year over year on a 2.1% increase in shipments. Dell grabbed majority of the benefit from the increase in shipments, which helped it to move to the number 1 spot in the global server shipment market, registering 8.9% year-over-year growth.

The company’s market share expanded 120 basis points (bps) to 19.2%. Dell replaced Hewlett Packard Enterprise, which witnessed an 18.7% fall in shipment, resulting in a drop in market share to 17.2% from 21.6%.

Region-wise, Gartner revealed that, except for the Asia-Pacific, every other region witnessed a fall in either revenues or shipment. In the Asia/Pacific region, however, revenues grew 6.1% while shipments were up 5.6%.

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Bottom Line

Although there are differences in the two research firms’ figures as well as in the reasons cited for the weak performance, they concluded that the hyperscale data center segment is likely to be the key long-term growth driver in the server market.

Kuba Stolarski, Research Director, Computing Platforms at IDC stated, "The server market is progressing exactly as expected, with close to flat growth in the second quarter, following a difficult first quarter, but growth in volume servers is still healthy, which is a good sign for the market moving forward”.

Stolarski further added, “As we prepare for the second half of 2016, we expect to see market growth led by cloud datacenter buildouts from key hyperscalers. Looking out further, the market will be impacted by digital transformation initiatives, including the Internet of Things and cognitive computing, and by a continuing shift towards software-defined infrastructure."

Although there is a huge growth opportunity in the hyperscale server infrastructure space with more and more companies shifting to cloud-based storage, we believe that the sluggish tech spending environment could continue to hurt the overall server market in the near term.

Intel, Hewlett Packard Enterprise, International Business Machines and Cisco, all carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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