Softness in client device and raw storage sales creates challenges for IT spending in 2023

The IT market is going through a downturn and I wanted to try to explain where this softness comes from and what it means for sales in the rest of 2023. My Figure above shows the quarterly values for vendor revenues and net profit of the last 9 quarters. In total annual sales for all – including OEM – vendors were $7.1 trillion, which was 0.5% down on the previous year (comparing the sum of Q2 2022 to Q1 2023 revenues with Q2 2021 to Q1 2022). In Q1 2023 itself sales were level with those in Q1 2022 at $1,729 billion. Net profit (the blue line in the Figure) was $286 billion in Q1 2023 – 13% up on Q1 2022; however for the annual period net profit was down 18% at $933 billion.

Looking at the issue from the point of view of IT offerings there are major differences (see my Figure above). In particular:

• Raw storage products (HDD, NAND and DRAM) all showed steep declines in sales for the quarter and year to Q1 2023; the steepest decline was in NAND (flash) storage devices, which declined 51% for the quarter and by 21% in the year,
• Storage systems, PCs, tablets, peripherals and smart phones also experienced a decline on both measures – the most serious of which was in the PC market, which declined by 27% and 13% respectively,
• Sales of gaming, cloud computing (IaaS, PaaS and SaaS) and infrastructure software all grew in the quarter and annual periods – the strongest growth was in gaming (28% and 4% respectively) and
• Outsourcing and managed service both grew slightly on both measures.

The fact that most of the growing areas are for vendors supplying services, rather than users and companies buying IT components, indicates growing movement away from capital – and towards operational – spending; demonstrating increasing pressure from inflation and the weak post-pandemic economy. The decline in PC and other client devices is related to the over-spending on these products during periods of lock-down in the pandemic. The dramatic decline in spending on raw storage devices is a sign of the over-spending by IT manufacturers in the last few years when these products were difficult to acquire due to disruption to supply chains.

I also looked in to the performance of IT suppliers, selecting the largest by revenue irrespective of whether they sell to end-users or to other vendors (OEM suppliers by my definitions) and ranking them by their revenue growth in Q1 2023. There are some interesting differences. In particular:

• Sony – I don’t include Sony’s revenues from Music or Pictures in my calculations. Of the offerings I do count in the quarter imaging and (especially) gaming did well,
• Amazon – the stand-out leader of the cloud IaaS and PaaS market, AWS is benefiting from the shift from capital to operational spending; however the cloud market is reaching its peak – so it will have to redouble its efforts to maintain high revenues and profit margins in future periods,
• Microsoft – growth in revenues from Azure and enterprise services and (not so much) gaming have helped it to keep its head above water as declines in its Windows, Surface and other PC-related products,
• Tech Data – now named ‘TD Synnex’, the company has seen some settling of its revenues as a consequence of the merger and
• Samsung – unfortunately Samsung’s main markets (smart phones, tablets and semiconductors) are almost all in decline, which resulted in a quarterly sales decline of 21% in South Korean Won (26% using current dollar calculations).

To match current market demand suppliers should look to expand their service offerings to be bought from operational expenditure budgets. For hardware suppliers now is the time to hold firm until we return to more normal market demand once the disruptions of the pandemic subside.

I show the growth rates for the quarter and year for a selection of countries in both local currency (the full lines) and in current dollar calculations (the doted lines). This is what I discovered:

• Japan, Norway and (surprisingly) the UK have shown the strongest growth in annual terms among the 45 countries I cover in my research. Due to the drop in the value of their currencies against the $US, growth based on current exchange rates was far lower,
• Russia – due to its illegal invasion of the Ukraine has been widely ostracised from international markets; it is not a surprise that its spending on IT offerings has fallen significantly in the quarter and year and
• Hong Kong has also seen a greater-than-average fall in IT spending; its currency has held up well against the $US over the last year, while the Chinese Yuan Renminbi has fallen by 8% over the period.

In addition to the falling value of the currency in many countries, many are also suffering from growing inflation, increasing the cost of IT products and services. While these increases are somewhat hidden by the effects of Moore’s Law (by which computer hardware doubles in performance every eighteen months), higher costs are pushing many buyers to adopt services rather than continuing to invest in their own data centers. Government stimuli in those countries/regions that are big enough (the USA, China and the EU for instance) may have some positive effect on IT market growth in coming years; however I expect things to get worse before they recover.