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The fortunes of server vendors have returned it seems, as worldwide server revenues and shipments marked the second consecutive quarter of year-over-year growth, that too after five straight quarters of decline, per International Data Corporation (“IDC”).

According to the data compiled by the research firm, worldwide server revenues jumped a whopping 19.9% year over year to $17 billion in third-quarter 2017, while overall shipment grew 11.1% to 2.67 million units.

IDC noted growth at every segment with revenues of volume servers rising 19.3% year over year to $14.2 billion, while the mid-range server registered growth of 26.9% to $1.4 billion. Also, high-end system revenues reached $1.3 billion, representing growth of 19.4%, mainly benefiting from the launch of International Business Machines’ (IBM) z14 this quarter.

Also, x86 servers retained their growth momentum during the quarter. IDC figured out a 20.4% year-over-year rise in x86 server revenues, reaching $15.4 billion, while revenues from non-x86 servers witnessed an increase of 15.1% to $1.5 billion.

Hyperscalers, New Processors Availability Fueled the Upsurge

Per IDC, the upsurge in the third quarter was driven by strong demand from hyperscale data-center service providers which made a huge push in server deployment. According to the firm, Amazon (AMZN - Free Report) continued with its server deployment efforts which contributed to the majority of volume demand.

In the quarter, IDC noticed that Alphabet (GOOGL - Free Report) and Facebook (FB - Free Report) ramped up their server deployments to grab market share in the cloud service space, which also boosted overall demand for servers.

The second major reason outlined by IDC was the availability of Intel's (INTC - Free Report) new Skylake processors and “Purley” platform, and Advanced Micro Devices’ (AMD - Free Report) EPYC processors. It should be noted that hyperscale data-center service providers have waited for months for these processors.

Top Vendors

With respect to individual server manufacturers, on the revenue front, Hewlett Packard Enterprise (HPE) retained its leading position with 19.5% market share, followed by Dell’s 18.1%. During the quarter, Dell managed to drastically narrow down the market share difference with HPE, chiefly benefiting from “the strong synergy between its server team and the storage team incorporated from the EMC acquisition”, per IDC.

Moreover, HPE is now focusing on enterprise market and “pivoting away” from the firm’s hyperscaler business, which has been denting its short-term revenues. However, according to IDC, this will help the company strengthen its position in the enterprise market. However, HPE’s loss has benefited Dell in grabbing market share in the hyperscale segment.

Going forward, the third position was a tie between IBM and Cisco (CSCO - Free Report) . 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 revenues, then IBM holds the third position with 6.4%, while Cisco has the fourth position with 5.8%. Lenovo secured the fifth place, with a market share of 5.1%.

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

In addition to the above, in terms of volume, Dell and HPE jointly secured the top position, with market share of 18.8% each. However, if we look at the actual number of units shipped, Dell continues to lead with 503,000 units compared with HPE’s 501,400 units.

Lenovo, Inspur Electronics, Super Micro and Huawei occupied the third position, which ended the quarter with market shares of 5.7%, 5.6%, 5.1% and 5%, respectively.

Regional Performance

Region wise, IDC noted server market growth across every region, with Asia/Pacific (excluding Japan and China) witnessing the fastest growth with 30.6% increase. This was followed by China recording 23.9%, USA 19.7%, Europe, the Middle East and Africa (EMEA) 19.5%, and Canada 14.5% reporting increase. Further, Japan and Latin America registered improvement of 8.5% and 2.4%, respectively, during the recently-reported quarter.

Bottom Line

Looking forward, we believe the global server market will continue to grow in the quarters ahead, mainly due to the further push of hyperscale server deployments by cloud service providers. 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 influence 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 the overall performance of vendors will improve over the next few quarters.

Currently, HPE, IBM and Cisco 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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