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Upticks in This Key Market Give Hope for IBM and HP Enterprise Shareholders

By James Brumley - Mar 26, 2020 at 7:55AM

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With the right help, some old-school tech giants still have something left to offer the market.

Although markets only began crashing about a month ago, it's difficult to remember a time when the negative financial effects of COVID-19 weren't at the top of everyone's mind. That's the result of the sheer scare surrounding the coronavirus outbreak. Likewise, fear is making it difficult to believe the world will ever be the same. But, things will return to (mostly) normal sooner or later, and capitalism will pick up where it left off, even if it's at a slower pace.

Lost in all the COVID-19 noise over the past month were a pair of curious reports from technology market research houses IDC and Gartner, both of which bode well for IBM and HP Enterprise. Those reports indicate that sales of servers during the final calendar quarter of last year were up somewhere between 5.1% and 14% year over year, depending on how you count them.

It's not a game-changing development for either of the struggling technology outfits, but it's something for each to build on.

A modern server bank

Image source: Getty Images.

Hyperscaling drives server purchases

Both reports included plenty of footnotes, not the least of which is that despite the strong end to the year, overall server revenue still slipped 2.5% in 2019, according to Gartner's numbers. Gartner and IDC both mentioned hyperscaling as a key driver of demand. Hyperscaling is a way a network of servers can easily be expanded (or reduced) to match demand.

Overall though, the fourth quarter's revenue and unit data may actually understate the true depth of demand now that the tech world and consumers have fully embraced the cloud. The results were up against the year-ago competition. For the final quarter of 2018, IDC said server revenue was up 12.6%, and Gartner calculated that server sales improved 17.8% in the fourth quarter a year earlier.

Despite having a tough act to follow, 2019's second-quarter numbers still indicated growth.

That growth wasn't evenly distributed, however. Technically, HP Enterprise and its new venture with H3C Group lost market share to smaller original design manufacturers (ODM) direct providers, as did Dell. On the flip side, HP Enterprise and H3C Group collectively shipped more units year over year. The disparity reflects falling server prices.

Most curious of all about IDC's and Gartner's reports, however, were the inroads IBM made with partner Inspur. Big Blue sold on the order of $1.8 billion to $1.95 billion worth of server hardware during the final quarter of 2018 (depending on which report you read), but it improved those numbers to just a little less than $2.3 billion a quarter ago. Inspur's unit sales improved as well, as much as 9.3% as measured by IDC.

Here are Gartner's estimates of server sales in the final quarter of last year, by company, breaking down the data by revenue and units sold. Notice that Gartner's data separates IBM's and Inspur's revenue, but not unit data (as does IDC's below). Also note that Gartner's numbers for HP Enterprise don't jibe with IDC's, possibly reflecting differences in how each research outfit counted H3C's place in the market. 

Company Q4 2019 Server Revenue Q4 2018 Server Revenue Q4 2019 Server Unit Shipments Q4 2018 Server Unit Shipments
Dell Technologies (DELL 0.17%)/EMC  $3.99 billion  $4.43 billion 549,552 580,580
HP Enterprise (HPE 0.41%)  $3.55 billion  $3.89 billion 417,699 424,422
IBM (IBM 0.69%)  $2.29 billion  $1.78 billion N/A N/A
Inspur   $1.83 billion  $1.80 billion 296,934 293,702
Huawei  $1.49 billion  $1.82 billion 267,157 260,193
Lenovo (LNVGY -1.46%)  N/A   N/A  233,893 191,032
Others  $9.86 billion  $8.19 billion 2,113,167 1,723,032
Total  $23.01 billion  $21.90 billion 3,878,402 3,472,961

Data source: Gartner Inc.

Here are IDC's calculations for the server market's biggest names in Q4. This data confirms what Gartner saw. That is, HP Enterprise and IBM -- with or without their partners -- saw tangible improvements with their server businesses.

Company

Q4 2019 Server Revenue Q4 2018 Server Revenue Q4 2019 Server Unit Shipments Q4 2018 Server Unit Shipments
Dell Technologies  $3.99 billion  $4.43 billion 549,488 580,579
HPE/New H3C Group  $4.14 billion  $4.28 billion 507,228 484,668
IBM  $2.30 billion  $1.96 billion NA NA
Inspur  $1.74 billion  $1.55 billion 270,567 247,600
Lenovo  $1.42 billion  $1.46 billion 233,896 190,721
Huawei  $1.28 billion  $1.26 billion 216,734 211,618
ODM Direct  $6.47 billion  $4.69 billion 1,054,743 689,394
Others  $4.02 billion  $3.96 billion 570,667 582,070
Total  $25.35 billion  $23.58 billion 3,403,323 2,986,651

Data source: International Data Corporation.

Something to believe in

Don't read too much into one quarter's worth of numbers. Also bear in mind that as much progress as HP Enterprise and IBM appear to have made on the server front, they're sharing that success with partners. Both also operate other businesses. IBM and Inspur's joint $2.3 billion in server hardware sales during the fourth quarter are only a fraction of the $21.8 billion in top-line revenue the company reported for its final fiscal quarter of last year. HP Enterprise drove $6.9 billion in sales last quarter, making the server-driven swing a bit more meaningful for the company. But still, it needs help that a merger with Xerox might provide.

Nevertheless, the separate-but-similar reports from IDC and Gartner confirm there's something both IBM and HP Enterprise can build on at the same time the reports tacitly suggest tech spending is still going strong.

Barring the onset of a recession (and maybe not even then), as recently as November Gartner was calling for public cloud revenue to improve 17% this year, while Dell'Oro Group estimated last year that the server market itself would grow at an annual pace of 7% through 2023. Technavio reports the worldwide data center market will expand at a compounded annual growth rate of 17% over the course of the same period. The driver is the data deluge that's only going to swell, particularly once 5G connections become the new norm.

As much as we've come to rely on cloud computing and remote data centers, it appears we've still only scratched the surface.

James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$134.93 (0.69%) $0.92
Hewlett Packard Enterprise Company Stock Quote
Hewlett Packard Enterprise Company
HPE
$14.86 (0.41%) $0.06
Xerox Corporation Stock Quote
Xerox Corporation
XRX
Gartner, Inc. Stock Quote
Gartner, Inc.
IT
$314.46 (2.10%) $6.47
Lenovo Group Stock Quote
Lenovo Group
LNVGY
$17.93 (-1.46%) $0.27
Dell Technologies Inc. Stock Quote
Dell Technologies Inc.
DELL
$48.30 (0.17%) $0.08

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