Server Market Up In Q4 On Demand From Data-Center Operators

The fortunes of server vendors have returned it seems, as worldwide server revenues and shipments marked the third 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 26.4% year over year to $20.7 billion in fourth-quarter 2017, while overall shipment grew 10.8% to 2.84 million units.

IDC noted growth at every segment with revenues of volume servers rising 21.9% year over year to $15.8 billion, while the mid-range server registered growth of 48.5% to $1.9 billion. Also, high-end system revenues reached $2.9 billion, indicating rise of 41.1%, mainly benefiting from the launch of International Business Machines’ (NYSE:IBM) z14 in third-quarter 2017.

Also, x86 servers retained the growth momentum during the quarter. IDC figured out a 24.7% year-over-year rise in x86 server revenues, reaching $17.5 billion, while revenues from non-x86 servers witnessed an increase of 36.4% to $3.2 billion.

Hyperscalers Fuel Maximum Growth

Per IDC, this upsurge in the fourth quarter has been driven by strong demand from hyperscale data-center service providers which made a huge push in server deployment. According to the firm, Amazon (NASDAQ:AMZN) , Alphabet (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) continued their server deployment efforts to grab market share in the cloud service space.

The second major reason outlined by IDC was the availability of Intel's (NASDAQ:INTC) Purley processors, and Advanced Micro Devices’ (NASDAQ:AMD) EPYC processors. It should be noted that hyperscale data-center service providers have waited a long time for these processors.

Dell Narrowed Market-Share Gap With HPE

With respect to individual server manufacturers, on the revenue market-share front, Hewlett Packard Enterprise (NYSE:HPE) and Dell jointly secured the first spot. IDC calls it a statistical tie when the difference among vendors is 1% or less. Therefore, if we look at the actual revenues, then HPE holds the first position with 18.4%, while Dell has the second position with 17.5%.

During the fourth quarter, Dell managed to drastically narrow down the market-share difference with HPE, as the company “continues to capitalize on expanded opportunities from its merger with EMC (NYSE:EMC)”, per IDC.

Moreover, HPE is now focusing on the enterprise market and moving away from the firm’s hyperscaler business, which has been denting its short-term revenues. However, its loss helped Dell grab market share in the hyperscale segment.

Moving ahead, IBM has secured the third position, with a market share of 13%. Notably, the company reported a massive 50.3% jump in server revenues backed by solid demand for its recently-launched z14 processors.

The fourth position is a tie between Lenovo and Cisco (NASDAQ:CSCO) . If we look at the actual revenues, then Lenovo holds the fourth position with 5.3%, while Cisco has the fifth position with 5.1%.

Furthermore, IDC provided revenues and shipment data for the 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 secured the top position with market share of 20.5%, while HPE holds the second spot with market share of 16.9%. Lenovo, Huawei, Super Micro and Inspur Electronics occupied the third position, ending the quarter with market shares of 6.4%, 5.9%, 5.6% and 5.4%, respectively.

Growth Across All Regions Except Latin America

Region wise, IDC noted server market growth across every region except Latin America. Canada and Asia/Pacific (excluding Japan and China) witnessed the fastest growth with 69.7% and 38.2% increase, respectively. This was followed by China recording 33.8%, the United States 29.6%, Europe, the Middle East and Africa (EMEA) 17.4%, and Japan reporting 4.3% increase. However, Latin America registered a year-over-year decline of 5% in the quarter.

Brighter Prospects Ahead

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 (a 4.5% increase in 2018) 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 expect that the overall performance of vendors will improve over the next few quarters.

Currently, HPE and Cisco carry a Zacks Rank #2 (Buy), while IBM has 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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