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Server Sales Soar

The server market is soaring, judging by two market research reports assessing sales for the second quarter of this year. That's great news, given some recent speculation about another possible sag in the economy.

Beneath the raw numbers just released by Gartner and IDC lay significant news about the dynamics of the server arena. Here, the takeaways are that commodity servers -- particularly AMD Opteron and Intel Xeon boxes -- are booming, and that Linux servers are gaining serious traction, approaching $1 billion in quarterly revenues.

The release of the market data was also the occasion for dueling statements from two Tier 1 vendors. IBM's public-relations agency painted the Gartner numbers as good news for itself but a sign of a "squeeze" on HP and Sun. Meanwhile, HP issued a statement crowing about its No. 1 position in IDC's ranking of unit shipments (that's true, but HP was nevertheless second to IBM in overall revenue from server sales).

Let's look at the hard numbers. Both Gartner and IDC peg worldwide server revenues for the second quarter of 2004 at $11.5 billion. Gartner says that number marks a 7.7 percent increase from the second quarter of 2003. IDC calculates year-over-year revenue growth at 6.9 percent, also noting that this April through June is the fifth consecutive quarter of positive overall revenue growth.

While server revenues grew at that single-digit clip, unit shipments rose 24.5 percent to more than 1.6 million servers worldwide, according to Gartner. When shipment numbers rise faster than the dollars figures, it means that lower-cost boxes (i.e., commodity servers) are driving much of the growth.

That was indeed the case: For example, units sales of Opteron-based servers soared 81 percent in the quarter, IDC says. The recent introduction by Intel of a 64-bit Xeon should further stoke this market moving forward. The largest market segment is still the 32-bit x86 server, which grew 10 percent, according to Gartner.

That big-bucks/lower-volume and low-dollars/higher-volume dichotomy also explains the split in the Tier 1 rankings among the leaders in sales and shipments. IBM led the revenue rankings, with Q2 server sales of $3.5 billion and a 30.7 percent market share, according to both Gartner and IDC. IBM was followed in descending order by HP, Sun and Dell. (Their revenue and market-share figures were: HP, $3.2 billion, 27.3 percent; Sun $1.5 billion, 13 percent; Dell, $1.1 billion, 9.8 percent.)

However, as far as unit sales, HP edged out IBM, indicating that its sales skewed more toward commodity class boxes, whereas Big Blue was able to maintain its emphasis higher up the value chain.

For VARs, it's potentially bad news that Dell has experienced the strongest growth rate among Tier 1 vendors for the past several quarters. This Q2, its shipments rose 29.2 percent. However, Sun showed the highest unit growth, shipping 38.4 percent more servers than in the same period last year.

While HP paints its unit-sales crown as a big coup, its Q2 figures come in the wake of some turmoil for the venerable technology vendor. The company was beaten up pretty badly a few weeks ago, when it reported a 5 percent decrease in year-over-year revenue for its enterprise server and storage (ESS) group. That news led to the firing of two HP execs and company hand-wringing, which blamed the poor performance on a troublesome new order-processing and supply-chain management system.

Because of Wall Street's quarterly focus, HP was under the microscope for what's essentially a short-term glitch. Assuming the order-processing system gets fixed faster than you can say Carly Fiorina, most of HP's underlying server business doesn't look so bad. Within the ESS group's reported quarterly revenue of $3.4 billion (with an operating loss of $208 million), dollar sales of x86 servers grew 2 percent and Unix servers rose 8 percent.

However, there is one potentially worrisome long-term trend. That's what's happening in what HP calls its "business critical servers." This is the mid- and upper-range of HP's server line, including its Integrity, HP 9000 and AlphaServer families. Here, quarterly sales declined 8 percent.

Those machines are currently based variously on HP's home-grown PA-RISC processor, the old Digital Equipment Alpha, which HP inherited when it acquired Compaq, and the Intel Itanium 2 (which HP helped develop).

Moving forward, HP is in the midst of implementing a technology roadmap that calls for it to move all those mid- and high-end machines, and all of their customers, to the Itanium 2 architecture.

Clearly, HP's ability to resuscitate sales of its business critical servers hinges on how well it executes on its transition to Itanium 2. On the plus side, it's speaking clearly and forcefully about what it plans to do. Now, it must execute quickly on the transition. In doing so, it will have to counter the buzz that IBM is rapidly building for its new line of eServer p5 machines. Those boxes are based on Itanium's competition, the IBM Power 5 processor. Additionally, Power 5 is already a dual-core CPU; the Itanium 2 won't be dual core until its Montecito successor is ready some time in 2005.

HP has a few other twists it must deal with. It has got to convince existing customers wedded to PA-RISC and Alpha -- two stellar architectures that are slated to go out of existence -- that they should make the move to Itanium 2, rather than look elsewhere.

It hss also got to make its case to potential purchasers that Itanium 2, with its high-end EPIC (for explicitly parallel instruction computing) architecture, is sufficiently differentiated from Intel's new 64-bit version of its Xeon processor. That should be doable, since Itanium 2 is a non-x86 architecture specifically designed to compete with (and, from Intel's perspective, beat) RISC parts like IBM's Power 5. Moreover, Intel says that last year for the first time it sold more than 100,000 Itanium 2 processors, indicating rising adoption for the CPU.

It'll take more than another quarter to say for sure just how well HP is doing at this task. During the nearer term, given the see-sawing nature of the economy, most of us are keeping an eye out for the third-quarter numbers from Gartner and IDC, in hopes that the July through September period avoids a server swoon. We'll await those figures with bated breath.

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