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Low-Cost Servers Drive First-Quarter Sales Growth

The market grew 7% in the first quarter, according to Gartner, as IBM and Dell posted gains of more than 20% while Hewlett-Packard's sales fell.

The server market grew by 7% in the first quarter of 2004, a research firm said Tuesday, largely due to by sales of low-cost systems priced at less than $5,000.

But not every server seller found the quarter sweet, said Mike McLaughlin, principal analyst with Gartner. "IBM was up, HP was down, and Dell passed Sun for third place," McLaughlin said.

IBM and Dell both saw their server sales increase more than 20% over the same quarter last year, according to Gartner's numbers. IBM posted a revenue gain of 21.8% and increased the number of servers it sold by 30.7%, said McLaughlin, while Dell's revenue was up 24.2% and its server volume by 42.5%.

But where there are winners, there are also losers. Hewlett-Packard and Sun got the short end of the stick in the first quarter, said McLaughlin. HP's server revenues fell 13.2% even as the total number of servers it sold rose by 16.4%. Sun's revenue fell 16.7% even though it also sold more systems-- 26.3% more--than a year ago.

"HP is still transitioning to Linux," said McLaughlin in explaining Hewlett-Packard's problems, "and Sun is still trying to find its direction."

IBM and HP were 1-2 in revenue, posting estimated sales of $1.5 billion and $1.1 billion, respectively. Dell was third in U.S. sales with $662 million, and Sun took fourth with $520 million.

Overall, IBM owns 33.4% of the server market by revenue, an increase of nearly four percentage points over the first quarter in 2003. HP's share dropped to 22.7%, a fall-off of more than five percentage points. Dell boosted its share by just over two points, to 14.8%, and overtook Sun for third place. Sun's share now stands at 11.6%.

IBM's strong showing was due in part because of major sales of its eServer zSeries, the top-of-the-line mainframe system it sells to major companies. "IBM had a huge mainframe first quarter this year," McLaughlin said.

But the biggest growth wasn't on the high end. Sales of systems priced less than $5,000, which account for 80% of all servers shipped and 25.7% of all revenue, grew more than 39% in systems sold and 40.4% in money made, the highest year-to-year increases of any price group.

The small and midsize business market for servers is hot, said McLaughlin, because "so many small businesses are finally seeing the benefit of integrating into a server environment." Dell in particular took advantage of the low-cost trend, "and made a ton of money off low-end Web servers" this quarter, said McLaughlin.

Dell also benefited from the rise in sales of Linux-based servers, which now make up 12.4% of all server revenue. Dell saw its Linux sales figures jump nearly 50%. "Dell had a huge Linux push that showed in the numbers," said McLaughlin.

Total revenue from Linux server sales increased 38.7% from the same quarter last year, while sales of Windows-based servers--still the leader with 36.8% of the market--climbed just 21.6%.

Typically, server sales in the first quarter of a year dip compared with the previous quarter, which historically is the hottest three months of the year.

"Last year's fourth quarter was a huge quarter," McLaughlin said, "and although we weren't expecting sales to be flat this quarter, they're up a bit more than we thought."

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