This week, the Wall Street Journal reported a healthy rebound in server sales. Total shipments in Q1 of 2010 increased 23% compared to the same quarter one year ago. This rebound in product revenues is highly aligned with the data TSIA reported from the Q1 Service 50 snapshot in our webcast back in April. Product revenues are clearly rebounding: that is the good news.
“Now”, as Paul Harvey would say, “for the rest of the story.” Server shipments increased 23% but server revenues only increased 6%. The growth rates of shipments vs. revenues is shown in the image below:
Now, let’s project how 2010 could play out. Let’s say the economic turnaround continues and companies keep spending on IT infrastructure. To keep it simple, let’s say server shipments continue to increase by 23% for the rest of the year. Also, let’s assume the ratio between increased shipments and increased revenues remains the same. If these trends do remain constant for the year, the gap between shipmen growth and revenue growth will continue to widen as shown in the graph below. This dynamic creates a very real “margin gap.” This means server companies like IBM, HP, Oracle, and Dell are shipping more product but bringing in less revenue. This means less product margin dollars floating around to fund things like “sales and marketing.”
The economy maybe recovering, but we, in the technology industry, are not automatically heading to easier financial times. I’m just saying: LOOK AT THE DATA. LOOK AT THE TRENDS.
“The dogma’s of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty and we must rise with the occasion. As our case is new, so we must think anew and act anew.”