Server revenue continued slide in Q2 on weak demand, says IDC

The server business continued to slide in the second quarter with worldwide revenue and unit sales down, IDC said Tuesday.

Revenue was down 6.2 per cent to $11.9 billion in the second consecutive quarter of year-over-year decline, as demand for servers continued to soften in most geographic regions, the research firm said. Unit shipments were also down 1.2 percent to 2 million, after also falling in the previous two quarters.

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The highest fall in revenue was in midrange systems, which dipped by about 22 percent year-over-year, while volume systems had a 2.4 percent revenue decline and revenue from high-end systems dipped 9.5 percent in the quarter ended June.

The slowing demand is a combination of factors including consolidation, virtualization, and migration initiatives by mainstream small and medium businesses and enterprise customers, and dampening demand for new IT projects in difficult economic conditions. Top server vendors tried to offset weak demand for higher-margin Unix and blade servers with lower-margin rack and density optimized servers, IDC said.

IBM held the number one position in the server market with a 27.9 percent share of revenue, but its share was down from over 29 percent last year. The company's server revenue fell in the quarter by 10 percent year-over-year because of low demand for System x and Power Systems. IBM's System z mainframe running z/OS, however, had a third consecutive quarter of growth, with revenue up by 9.9 percent year-over-year to $1.2 billion. The mainframe accounted for 9.8 percent of server revenue in the quarter.

Hewlett-Packard held the number two position with a smaller market share of close to 26 percent, after a year-on-year decline in revenue of 17.5 percent as a result of poor demand for x86-based ProLiant servers and continued decline in demand for HP Integrity servers.

Dell fared better, growing its server market share to 18.8 percent, its highest ever in any quarter, from 16 percent last year, to retain the third spot. Dell's server revenue grew 10.3 percent in the quarter. Rival Oracle held the fourth position with 6 percent market share followed by Cisco Systems at number five with 4.5 percent share after a close to 43 percent growth in revenue. Cisco had a statistical tie with Fujitsu in the last quarter.

Revenue from density optimized servers, used in large hyperscale datacenters, surged 26.6 percent year-on-year in the quarter to $735 million, while units shipped increased 13.8 percent to close to 200,000 servers. Dell continues to lead in this market with a whopping 60.5 percent share.

In contrast, revenue from blade servers was down 6.2 percent year-on-year to $2.0 billion. Blades accounted for close to 17 percent of total server revenue in the quarter. HP held the top position in this market with 44.8 percent share of revenue.

Demand for x86 servers was weak in the quarter, with revenue down by 1.3 percent year-over-year to $8.7 billion as shipments were relatively flat at 1.9 million servers, according to IDC.

Linux servers benefited from cloud infrastructure deployments and now account for about 23 percent of all server revenue, up by 1.8 percentage points from the same quarter a year ago. Windows server sales were, however, down 5.1 percent, with quarterly server hardware revenue at $5.8 billion, representing 49.3 percent of overall quarterly server revenue, IDC said. Unix server revenue declined 21 percent to its lowest quarterly revenue of $1.8 billion, accounting for about 15 percent of server revenue for the quarter.

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service. Follow John on Twitter at @Johnribeiro. John's email address is john_ribeiro@idg.com.

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Microsoft Surface revenue awful on paper and in the pocketbook

Microsoft revealed Tuesday that its actual revenue for the Surface tablet for the 2013 fiscal year was $863 million, less than the $900 million charged against its profits for discounting the Surface tablet.

Technically, that means that the amount that Microsoft discounted the Surface by was more than its actual revenue for the product. The 8-K document that Microsoft filed with the SEC also reveals that Microsoft spent $898 million more in advertising for Surface and Windows 8 than it did in its previous fiscal year, when sales of the Windows division were $18.4 billion. (In 2011, Windows sales totaled $19.1 billion, when Microsoft was riding high on Windows 7.)

A writedown means that the company reports a change in the so-called "book value" of a particular piece of inventory, a tacit acknowledgement that the market value of a particular good ha decreased. One way of looking at it might be to say that a loaf of bread might be worth $5 the day it was baked, but only $3 a day later. The hope is that writing down or discounting the item in question will prompt sales, as customers perceive the item to be more in line with what they would expect to pay.

To give it an air of freshness, Microsoft cut the price of the Surface tablet by 30 percent, which apparently prompted buyers to buy up the available supply at Walmart.com. But while the site still reports the Surface RT with 32 GB of memory as out of stock, local stores reported having them on their shelves, indicating that Walmart may not be as selling as many as first thought.

It's actually hard to say how many Surface tablets Microsoft sold, given that prices varied widely between the Surface RT and Surface Pro, both before and after the discounts. However, they certainly haven't met expectations.

Geekwire and GigaOM, which reported the 8K disclosures on Tuesday, also noted that Windows chief Steven Sinofsky negotiated a $14 million exit package which prevents him from working at Microsoft's competitors, including Amazon, Apple, EMC, Facebook, Google, Oracle, and VMWare, until December 31, 2013.

After leaving Microsoft last October, Sinofsky now teaches at Harvard, where he's forbidden from disclosing secret information about the company. Instead, Sinofsky's blog has focused on the business processes that the company has used, including his take on Microsoft's reorganization by function, rather than by product or division. As such, he's been somewhat removed from Microsoft's day-to-day struggles, such as the Surface, which he once rode as a skateboard to demonstrate the toughness of its its VaporMg chassis. Now, after Microsoft's reorganization, the Surface is in the hands of Jule Larson-Green, the new head of the Devices and Studios Engineering Group.

Whether it's Sinofsky or Larson-Green running the show, one thing is clear: Surface may not spoil like bread or fruit, but it's apparently gone stale nevertheless.

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Microsoft discloses weak Surface revenue

Microsoft's Surface tablet has earned the company less in revenue than it paid to write down unsold stocks of the device.

The company said in a regulatory filing with the U.S. Securities and Exchange Commission that the Surface had earned revenue of US$853 million in its fiscal year ended June 30. The Redmond, Washington, software company did not disclose how many units of the tablet it had shipped during the year.

Microsoft announced earlier this month it took a charge for Surface RT inventory adjustments of approximately $900 million. The company also saw a $898 million increase in advertising costs, associated mainly with the Windows 8 operating system and Surface, according to the filing.

Aimed to compete with Apple's iPad and other tablets, the Surface RT built around a ARM-based processor and running Windows RT operating system was generally available from October. The Surface Pro, which runs Windows 8 on an Intel processor, became available in February.

Microsoft decided to design and manufacture the product, to the dismay of some partners who were used to dealing with Microsoft as a supplier of software, rather than as a competitor in the computing devices market.

"A competing vertically-integrated model, in which a single firm controls the software and hardware elements of a product and related services, has been successful with some consumer products such as personal computers, tablets, mobile phones, gaming consoles, and digital music players," Microsoft said in the filing, while discussing its competition. The company said it also offers some vertically-integrated hardware and software products and services, but its competitors in smartphones and tablets have established significantly larger user bases.

The Surface has not been a runaway success in the market. Microsoft shipped about 900,000 Surface tablets in the first quarter of this year, giving it a 1.8 percent market share of the tablet market, according to IDC. Apple led with 19.5 million iPad shipments, a market share of almost 40 percent, followed by Samsung with 18 percent share, Asus at 5.5 percent and Amazon.com at 3.7 percent share. Overall, Windows 8 and Windows RT tablets, including from other vendors, continued to struggle to gain traction in the market, and total Windows 8 and Windows RT shipments across all vendors reached 1.8 million units, IDC said.

Microsoft said in the filing that it would continue to invest in the Surface.

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service.
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Strong sales of IP networking equipment drive Alcatel-Lucent revenue growth

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