Editor’s note: E-Scrap News and consulting firm Compliance Standards are collaborating on a quarterly ITAD industry markets survey. This analysis, from Compliance Standards analyst David Daoud, explores early takeaways from the third-quarter survey, which remains open for contributions.
We are in the final phase of our third ITAD quarterly survey and I would like to invite those of you who did not participate this quarter, to please do so as soon as you can so we can confirm the trends we are seeing.
In a nutshell, preliminary data from the third-quarter survey shows some great improvements in the ITAD sector in 3Q, looking at two simple metrics. First, those who have already taken the survey are showing substantial improvement in their revenue figures. Nearly 63% reported year-over-year revenue growth, up from 42% in the previous quarter survey. Only 12.5% reported revenue decreases, while there were more than 42% that reported decreased year-over-year revenues in the previous survey.
Likewise, we are seeing some positive momentum in the business climate during the quarter. Exactly half of those surveyed noted that the business environment in 3Q was better than the prior-year quarter, but for the same question on the quarter-to-quarter basis, that figure is nearly 63%. In other words, 63% of those responding so far reported a better business climate compared with the second quarter on a sequential basis.
So what’s driving this apparent improvement in the ITAD space? And does your organization fit this narrative? Well, many of you are experiencing higher equipment volume flowing into your ITAD business. There has been more confidence and less uncertainty in the economy. There is also a rubber band effect recovery from the low seasons.
But uncertainty still looms, and the pendulum is swinging very slowly. Many respondents reported resale values are still down. Customers are struggling with their pace of decision-making. Decision cycles are longer, even threatening RFPs, which in some cases have already been postponed indefinitely or simply abandoned.
Although we have always praised the data center market as a strong one, the industry is lamenting the decrease in the consumption of data center hardware. As we will articulate below, not all data center segments are doing well. Those that are being built by cloud service providers for dedicated or shared cloud infrastructure are doing much better than those that are owned by enterprises or public sector entities. The shift there is critically important to acknowledge and understand if your ITAD sales organization wants to be effective.
Sales of new electronics slow
So while the pendulum seems to be swinging back to positive, the sector continues to face some serious inhibitors and bottlenecks. What is clear is that the headwinds experienced in the hardware end-of-life sector also affect the brand-new equipment market.
In the third quarter, the brand-new PC sector struggled with a year-over-year shipment decline of between 8% and 9%. Seasonality, however, was intact as the sector experienced quarter-to-quarter positive growth amid the back-to-school season. But the market is still shrinking on an annual basis, and it has been doing so for two years – or eight consecutive quarters.
What is behind such a persistently weak sector and weakening shipments? Well, growing demand is not there. Demand exists, judging by the 70 million-plus units that were shipped in the third quarter, but even that number does not reflect real demand. Remember, vendors share data on the PCs that they ship to all sorts of channels and a substantial portion of those shipments sit on shelves and warehouses as inventory in anticipation of demand. When shipments accumulate and do not translate into end-user sales, eventually inventory will have to be cleared before considering new shipments.
The weakest link here is still the commercial sector, the same sector that ITAD vendors cater to, as the consumer market appears to absorb more low-end PCs such as Chromebooks as kids return to school. The commercial sector has been content with its current installed base. There seems to be no urgent incentive to drive a new replacement cycle, and company bosses have been putting enormous pressures on all functions and divisions to contain cost and reduce spending.
Now, PC analysts say the third quarter may be the bottom, so they expect resumption of growth to begin at the end of this year. I am not entirely convinced of that because the fundamentals of demand still remain the same. Next year, though, there may be some good reasons for companies and individuals to upgrade, if the Intel AI chip delivers on its promise of increased productivity. Intel promised to ship millions of PCs with its AI Chip throughout 2024; let’s see if they can deliver. Some suggest that Microsoft’s upcoming end of support for Windows 10 will help stimulate demand next year, but end of support to the operating system will not take place until October 14, 2025. That’s plenty of time for businesses to procrastinate.
The same fate is being experienced by smartphone makers, with smartphone shipments contracting 4% to 5% this year. Still, the numbers are a bit more than 1.1 billion units this year, but the pie is shrinking and that means the companies that have been supplying to the market may have to consolidate. But for ITADs that service the secondary smartphone market, demand there has grown double digits, fueled by excellent product quality and an inventory of new devices that need to be cleared in the secondary market.
Enterprise bright spots
While the PC and smartphone sectors are experiencing the difficult period of the post-pandemic era, there are still bright spots in the enterprise market, in particular spending on cloud-related projects. There have been clear indications that growth is coming from both dedicated and shared IT environments, where despite decreasing hardware sales in unit terms, the increasing average selling price (ASP) of systems like GPU servers marketed to hyperscalers is leading to an increase in total revenues for these categories of products.
The big picture is that cloud service providers tend to be the bigger driving force of demand for hardware than end-user organizations. In other words, the areas of growth are coming from digital service providers, owners of hyperscale platforms, managed service providers and the like, who are scaling up their IT infrastructure investments to accommodate the demand for dedicated or shared environments among end-user businesses and the public sector. The latter, in contrast, have been increasingly leaning toward the cloud service providers to invest in artificial Intelligence and have therefore scaled back their infrastructure spending. So what you now see is growing attraction to the shared cloud infrastructure, which is likely to drive sales there. In this environment, if you are an ITAD player active in this particular slice of the cloud market, then you should be doing well this year.
Other key conclusions
Here are some other takeaways:
- On the positive side, there are absolutely plenty of opportunities to grab. Industry executives are already reporting good momentum in their business. There has been better origination of products and parts from clients who may be resuming their refresh cycles, and that is likely to increase over time but progressively.
- On the smartphone side, the excess inventory that may be hurting manufacturers of brand new equipment constitute a great opportunity for ITADs to fuel the secondary market with great products.
- The data center world is in good shape, but make sure you know who you are targeting. If you are targeting end users directly, opportunity in that market is shrinking compared with organizations that own data centers and offer cloud-related services either as dedicated platforms for clients or as shared infrastructure. AI is a big enabler and will remain so for years.
- On the negative side, stress points are everywhere. Company CEOs and CFOs are keeping a close eye on anything that’s being spent, and ITAD may not be a big priority. The good news is that ITAD is not necessarily a big cost center. Still, the economy remains mysterious. Though we hear that inflation is getting under control and unemployment is at its lowest, consumers are struggling to make ends meet and the message coming from credit card companies suggests that debts are dangerously accumulating.
- To make things a bit more challenging, we are now in a tough election period and global geopolitics create uncertainty and fear of spending.
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David Daoud is an analyst at ITAD industry consulting and research firm Compliance Standards.