Server vendors struggle with hard times

It was bad news across the board for the major server vendors in their most recent financial quarters. Without exception, all the major suppliers suffered double-digit declines in revenue as organisations reined in spending on hardware and looked to exploit their existing resources more efficiently.

The latest worldwide unit shipment figures from market research company Gartner Dataquest suggest this trend is set to continue. Worldwide server shipments totalled 1.09 million during the first calendar quarter of 2002, a barely visible rise of 0.6%. Of all the major vendors, only Dell recorded positive year-on-year growth in shipments.

"Businesses are not ready to spend on tech products unless it's absolutely crucial," explains Gartner server market analyst Shahin Naftchi. "Customers mostly purchase the least expensive systems to meet their short-term needs and can show a return on their IT investment."

Of those reporting financial results at the end of March, PC and low-end server vendor Gateway was worst hit. Gateway's revenues for its first financial quarter more than halved, falling 51% to $992 million, down from more than $2 billion in the same quarter in 2001. A contributing factor is the company's recently introduced ‘value pricing' policy, which has brought down the average price of each unit by more than $100.

Compaq Computer also fell victim to the overall downturn in IT spending and server price erosion – with revenues for its first quarter declining 16% – but the company did manage to post a profit of $44 million. Despite considerable customer confusion and shareholder wrangling about the company's pending merger with competitor Hewlett-Packard, the company said it recorded more than $1 billion in new account wins during the quarter.

Sun Microsystems' woes, however, were more deep-rooted. For its third fiscal quarter, the company's revenues dropped 24% to $3.1 billion from $4.1 billion in the same quarter of 2001. Sun has suffered a certain degree of customer defection – and consequently eroded market share – after delays in moving its server lines to the new UltraSparc III chip architecture. According to financial analysts, however, Sun's financial health seems rosier in the long term. The company has managed to increase its operating margins from 36% in its second quarter to 41% in its third.

Systems and services giant IBM did not escape the downward trend. Overall, the company's revenues fell 12% during its first quarter, and all business divisions suffered a decline in sales. Worst hit was IBM's hardware division, where revenue nose-dived by 25% and net losses more than doubled.

IBM's chief financial officer John Joyce pointed to some more specific reasons for the downturn in the company's hardware revenues. Sales of both IBM's mainframe line, the zSeries, and its high-end Unix server line, the pSeries, declined by 20% and 24% respectively as customers deferred purchasing and squeezed the capacity of existing systems. MIPS (millions of instructions per second) sales, an indicator of how much mainframe capacity customers have bought, were down 4% for the quarter.

Even revenues at IBM's normally buoyant Global Services division declined by 1%. IBM executives offered a variety of reasons for the company's poor performance across the board, including "deferred purchase decisions", "price pressures" and "continuing [depressed] industry demand" for poor sales of its mainframes, mid-range Unix servers and personal computers.

Veteran IBM watcher Bob Djurdjevic of Phoenix, Arizona-based Annex Research was less forgiving, however. "In all the years that we've been following [IBM's] quarterly reports … we do not ever recall seeing such a uniformity of gloom," says Djurdjevic.


Server vendors
  Description   period   Period end   Revenue ($m)   Rev change   Net Inc ($m)   Prev net Inc ($m)  
Compaq Computer Corp PCs, systems &IT services 1Q02 31-Mar 7,728.00 -16% 44 -131
Gateway Inc PC &PC servers 1Q02 31-Mar 992.2 -51% -123.2 -502.9
IBM Corp Systems &IT services 1Q02 31-Mar 18,551.00 -12% 1,192.00 1,750.00
Sun Microsystems Inc Workstations, servers, web s/w 3Q02 31-Mar 3,107.00 -24% -37 136
Unisys Corp Systems &services 1Q02 31-Mar 1,362.50 -16% 32.7 69.3
* All currencies converted into $US at current exchange rates

Avatar photo

Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

Related Topics