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Why Cisco’s UCS Servers Business Is Growing Fast

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Unified Computing Systems are helping Cisco gain market share

In Part 2 of this series, we touched upon Cisco’s (CSCO) Unified Computing System (or UCS) business for data centers. UCS is a system that converges networking, storage, security, and applications into one infrastructure. This type of integrated infrastructure offers a cost-effective solution to Cisco’s customers.

With the help of UCS servers, Cisco has managed to grow its servers systems business fast. According to a report from IDC, Cisco’s worldwide servers system revenue grew at a year-over-year rate of 31% in 3Q14—much faster than the overall market growth of 4.8%. As the chart below shows, HP (HPQ), IBM (IBM), and Dell are the leading players in this market. Cisco is ranked fourth, while Oracle (ORCL) is ranked fifth in this market.

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HP and IBM have been losing market shares for different reasons

Although Cisco managed to grow its market share on the back of the success of its UCS servers, HP and IBM lost their market shares for a number of reasons. HP’s slight loss in market share was due to lower demand of its Itanium-based Integrity server, which was partially offset by the strength of GP’s x86-based ProLiant servers. HP launched its next-generation Gen9 ProLiant server in August 2014. These servers are equipped with Intel’s (INTC) Grantley platform.

IBM’s case is different. It’s facing a structural decline in its power systems and mainframes. Plus, IBM is in the process of divesting its hardware operations. IBM sold its PC business and x86 servers to Lenovo for $1.25 billion and $2.1 billion in 2005 and 2014, respectively.

If you’re bullish about Cisco’s UCS servers, you can invest in the Technology SPDR (XLK). XLK invests 3.6% of its holdings in Cisco.

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