Second Quarter Server Market Continues to Accelerate, Future Growth Remains Uncertain, According to IDC

FRAMINGHAM, MA – AUGUST 27, 2008 – According to IDC's Worldwide Quarterly Server Tracker, factory revenue in the worldwide server market grew 6.4% year over year to $13.9 billion in the second quarter of 2008 (2Q08). This is the ninth consecutive quarter of positive revenue growth and the highest Q2 server revenue since 2000. Unit server shipments grew 11.1% year over year in 2Q08 driven by a sustained refresh cycle and an expansion of infrastructures across enterprise, SMB, and cloud computing environments.

Although volume systems revenue grew 2.1% in 2Q08, they underperformed the market for the first time since 4Q06 as server OEM’s experienced strong pricing pressure in the marketplace. Revenue for midrange enterprise servers increased 1.5% year over year and the high-end enterprise server market showed a 22.1% increase year over year. This is the second consecutive quarter that the high-end enterprise segment has outperformed the volume and midrange enterprise market segment.

"The server market has experienced acceleration in revenue growth over the past 4 quarters. Customers around the globe continue to deploy a wide range of technologies to meet their computing needs and as a result IDC saw strong growth in blades, Unix systems, and IBM System z demand across the marketplace. Diversity in market demand demonstrates customers do not believe a single standardized infrastructure is capable of meeting all their computing needs,” said Matt Eastwood, group vice president of Enterprise Platforms at IDC. “At the same time, the pricing challenges many OEMs experienced, particularly in the x86 server market, is a concern as it may foreshadow a slowdown in market demand as enterprise budgets face further scrutiny in the second half of 2008.”

“The refresh cycle we’re currently seeing in the midrange and high-end segments is part of the IT transformation cycle that is continuing as older, scalable systems (with 4 sockets, 8 sockets, or more) are being replaced, either by new scale-up servers or by groups of scale-out servers," said Jean S. Bozman, research vice president in the Enterprise Platforms Group. “The growth in midrange and high-end servers this quarter shows that customers still see value in leveraging these scalable servers, with built-in high availability and RAS features, for some of their most mission-critical workloads and for workload consolidation.”

Overall Server Market Standings, by Vendor

IBM held onto its number 1 spot in the worldwide server systems market with 33.2% market share in factory revenue for 2Q08 growing factory revenue by 13.8% year over year. This growth was driven by solid performance from its System z and System p servers. HP maintained the number 2 spot with 27.4% share for the quarter, growing revenue 3.1% compared to 2Q07. HP’s growth stemmed from strong Integrity server and BladeSystem performance. Dell captured the third position with factory revenue growth of 14.1%, increased their market share by 0.9 points year over year. Sun held the number 4 position with a factory revenue decline of 7.2% year over year.

Top-Level Server Market Findings

* Linux servers posted year-over-year revenue growth of 10.0%, for a total of $1.9 billion in the quarter. Linux servers now represent 13.4% of all server revenue, up from 9.4% a year ago.

* Unix servers experienced year-over-year revenue growth of 7.7%. The high-end enterprise segment of the Unix market was strongest of all three segments (volume, midrange enterprise and high-end enterprise), as worldwide Unix revenues totaled $4.6 billion in 2Q08, representing 32.7% of quarterly server spending. Unix servers account for the second-largest segment of spending, by operating system in the worldwide server market.

* Microsoft Windows server revenue was $5.1 billion in 2Q08, showing 1.7% year-over-year growth and comprising 36.5% of all server revenue in the quarter. Windows servers account for the single largest segment of spending, by operating system, in the worldwide server market.

* IBM's System z servers running z/OS experienced the second consecutive quarter of positive revenue growth, with 31.7% year-over-year growth in 2Q08 to $1.6 billion. IBM mainframes running the z/OS operating system accounted for 11.8% of all server revenue in 2Q08.

"IBM regained the top spot in Unix market share on the strength of its Power-based System p and merged Power Systems families, growing revenue nearly 25.7% in the quarter and gaining 5.1% points in year-over-year comparisons," said Steve Josselyn, research director for Enterprise Platforms at IDC. "Sun took second position with 31.1% share, posting a drop of 5.6% points from a year ago, and HP rounds out the top three with 25.8% share and a gain of 1% point. Overall, the Unix market remains a significant source of revenue and competition among the top three suppliers."

x86 Server Market Dynamics

x86-based systems experienced their slowest growth rate in 23 quarters (since 3Q02), as x86 server market growth decelerated in 2Q08, growing 3.0% year over year to $7.0 billion worldwide. 2Q08 was also the first quarter that spending for non-x86 systems outpaced revenue growth for x86-based systems since 4Q00. Unit shipment growth continued with a healthy gain of 12.4% to 2.0 million servers. Although x86 systems continue to be deployed for an increasing array of workloads across the industry, the pricing climate was clearly difficult as average selling values declined 8.4% year over year. Dell exhibited the strongest x86 revenue growth of the top 5 OEMs, increasing factory revenue 14.1% year-over-year and gaining 2.4 points of share. HP led the market with 33.9% x86 revenue share, followed by Dell in second place with 24.7% revenue share and IBM in the third position with 16.3% revenue share.

“While all the major vendors exhibited strong unit growth, there was significant price competition throughout the quarter,“ said Jed Scaramella, senior research analyst for Datacenter Trends at IDC. “Low-end volume servers, such as 1- and 2-socket systems, are somewhat viewed as commodities and experienced the most pricing pressure. Additionally, the quarter was made noteworthy by the fact that several of the tier-one vendors began shipping their new systems targeting large-scale datacenters. Typically, these are stripped down servers that are designed to operate at maximum power efficiency. All components and features that are not essential, including server redundancy, are eliminated to reduce the capital expenditure of these datacenter customers.”

Blade Server Market Shows Strong Shipment and Revenue Growth

Although blade revenue decelerated slightly in 2Q08, year-over-year revenue growth of 40.8% in 2Q08 was the third fastest over the past 2 years. Overall, bladed servers, including x86, EPIC, and RISC blades, accounted for $1.2 billion in the second quarter, representing 8.8% of quarterly server market revenue. HP held the number 1 spot in the blade market with 53.3% market share and IBM held the number 2 position with 24.8% share. Dell and Sun also exhibited solid blade revenue growth in 2Q08 and increased their respective market share position in the process.

Top 5 Corporate Family, Worldwide Server Systems Factory Revenue, Second Quarter of 2008

(Revenues are in Millions)

Vendor 2Q08Revenue MarketShare 2Q07Revenue MarketShare 2Q08/2Q07RevenueGrowth

1. IBM $4,633 33.2 % $4,071 31.1 % 13.8 %

2. Hewlett-Packard $3,823 27.4 % $3,709 28.3 % 3.1 %

3. Dell $1,740 12.5 % $1,526 11.6 % 14.1 %

4. Sun Microsystems $1,562 11.2 % $1,683 12.8 % -7.2 %

5. Fujitsu/Fujitsu Siemens $531 3.8 % $542 4.1 % -2.0 %

Others $1,648 11.8 % $1,573 12.0 % 4.8 %

All Vendors $13,937 100.0 % $13,103 100.0 % 6.4 %

Source: IDC's Worldwide Quarterly Server Tracker, August 2008

IDC's Server Taxonomy

IDC's Server Taxonomy maps the eleven price bands within the server market into three price ranges: volume servers (servers priced less than $25,000), midrange enterprise servers ($25,000 to $499,999), and high-end enterprise servers ($500,000 or more). The revenue data presented in this release is stated as factory revenue for a server system. IDC presents data in factory revenue to determine market-share position. Factory revenue represents those dollars recognized by multi-user system and server vendors for ISS and upgrade units sold through direct and indirect channels and includes the following embedded server components: Frame or cabinet and all cables, processors, memory, communications boards, operating system software, other bundled software and initial internal and external disk shipments.

IDC's Worldwide Quarterly Server Tracker is a quantitative tool for analyzing the global server market on a quarterly basis. The Tracker includes quarterly shipments (both ISS and upgrades) and revenues (both customer and factory), segmented by vendor, family, model, region, operating system, price band, CPU type, and architecture. For more information, please contact Hoang Nguyen at 508-935-4718 or hnguyen@idc.com.

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