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Are on-premises hardware purchases really set to surge?

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Published 27-Feb-2018 14:07:53
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Financial Services giant Morgan Stanley has cited reasons why demand for on-premises hardware is set to escalate, but a new user survey couldn’t be more contradictory.

Cloud’s unexpected effect on in-house server and storage demand

Now’s a great time to buy not only IT hardware, but IT hardware stocks too it seems. In a research note issued on 26 February 2018 that challenges conventional wisdom and will make vendors like Dell EMC and HPE rub their hands with glee, Morgan Stanley’s head of North American technology hardware equity research Katy L Huberty spelled out why.

Her piece – IT Hardware Gets a Second Life and a Double Upgrade – cites a number of reasons why hardware sales are expected to boom now that cloud strategies are falling into place. Or, as The Register succinctly summarises it: “You put off buying any while figuring out the cloud, but now you're ready to spend.”

Huberty says that “We estimate that 44% of computing workloads will be done in the cloud by the end of 2021, up from 21% today. Meanwhile, every $1 of revenue growth for the largest cloud service has resulted in about $3 of revenue decline for the major legacy technology companies.

“However, several catalysts are converging to give IT hardware a second life... For this reason, our team recently gave the IT hardware group a double upgrade, shifting our view from cautious to attractive.”

“The last three years have not been kind to many IT hardware companies, which some investors have deemed obsolete in the era of cloud computing,” adds Huberty. “It’s true that enterprises are shifting software applications from on-premise data centres to the cloud…. but industrial innovation could further drive demand for IT hardware.”

Why it may be good time for hardware businesses

Here are the main reasons for Morgan Stanley’s optimistic take on things:

  • While companies plan to migrate a larger share of their workloads to the cloud, they aren't abandoning on-premises computing. Instead, many are adopting a hybrid IT model in which applications move between a public cloud and their own internal data centres. With plans now coming into focus, companies are ready to make necessary upgrades. Morgan Stanley’s proprietary AlphaWise survey of 100 CIOs indicates faster planned IT budget growth than three months ago.
  • Advances such as automation, artificial intelligence and the Internet of Things (IoT)—could further drive demand for IT hardware.
  • To Morgan Stanley, IT hardware is a diverse group, ranging from mobile handsets and ATM equipment to data storage. “We favour enterprise stocks that continue to be priced for zero or declining growth. Against a perfect storm of positive drivers, we think many of these companies can do better.”
  • In a more bullish scenario, IT hardware could benefit from “a secular trend of capital deepening" as companies shift their focus to enterprise technologies aimed at improving productivity.
  • In the US, recent changes to tax law is encouraging companies to repatriate cash and consider the benefits of accelerated depreciation. Enterprises have additional incentive to increase their capital expenditures and depreciate 100% of the costs in year one.
  • The outlook for IT hardware is further bolstered by a weaker US dollar, declining memory prices and improving revenue scale. This adds up to an average 60 basis point gross margin expansion for the [hardware] group, the largest improvement since the initial recovery out of the recession. Being US-based, companies in this group also stand to benefit from a lower effective tax rate.

What are companies’ actual buying intentions?

Coincidentally, TechTarget’s IT Priorities survey for 2018 was also published on 26 February. Rich Castagna, its VP of editorial wrote: “IT managers will have a little more cash in the kitty this year as they cruise the aisles shopping for data centre gear: Nearly half of IT professionals responding to our survey indicated that they expected bigger budgets for the coming year.”

The survey suggests in half of all small, midsize and larger companies IT budgets are going up at around 9% annually. As you might expect, the biggest projected spend for all sizes of companies will go to ‘cloud services’, and other notable areas where companies of all sizes plan to increase their spending include backup and disaster recovery (33%), maintenance and technical support (31%) and software (31%).

But what of Morgan Stanley’s bright take on the prospects for on-premises hardware? “Increasing spending for some tech typically means cutting back in other areas. Servers and storage are basic fare provided by cloud services. So, with cloud spending on the rise, many shops will cut back on acquiring those types of hardware for their on-premises operations.

“Given the proliferation of both of these hardware classes – respondents indicated an average of 1.5 PB of storage capacity, and 37% noted that they currently have 1,000 or more bare-metal or virtual servers – it's not a shock that 38% will cut back on server purchases and 32% expect to buy less storage.”

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Source: TechTarget IT Priorities 2018

So, should I be buying on-premises hardware or not?

All the trends noted above have been apparent to us at Vohkus for some time, and it’s no surprise to see hybrid IT models becoming dominant.

Hyper convergence is acquiring a lot of momentum for the on-premises element of these packages as its price, performance and easy management have huge advantages over many traditional server, storage and networking components. Yet we’re seeing strong demand for individual components too, such as all-flash storage arrays. Their reliability and speed bears little comparison to the systems of yesteryear.

At the same time we’re seeing rapid uptake of cloud under our Meggha brand. Some customers do everything in the cloud and don’t own a server. For others we design, build and host bespoke off-site facilities that use the same technologies as traditional on-premises solutions. For yet more we carry out remote backup or arrange unified communications solutions.

But the fastest-growing element of Meggha is probably managing public clouds like Azure or Office 365 as part of a hybrid strategy alongside the on-premises equipment; we’re able to take on supporting both under a single contract when required.

So the answer to whether you need or should buy new on-premises hardware really is ‘it depends’. Both the Morgan Stanley and TechTarget articles cited above sidestep the question of the customer’s business case, and business cases are by no means consistent between every organisation.

So the question of what’s best to buy for your business can only be answered by you. At Vohkus we can bring an independent perspective to bear and can help you work through the options without being browbeaten by vendors – or analysts. Call us if you’d like some help clarifying your IT investment choices.

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