Article

Users stand by NetApp -- For now

Beth Pariseau
In the wake of a report by Network Appliance Inc. (NetApp) yesterday that it will miss its financial goals for the first quarter of its fiscal year 2008 by a significant amount, users say they're not ready to make any judgments about the company long term. However, they said NetApp could increase its business by getting new products and features delivered faster or bundled differently.

According to NetApp officials in a conference call yesterday, the company has been focused on relatively few large enterprise accounts in the U.S. and Europe, and those accounts showed spending slowdowns in the April through June quarter. CEO Dan Warmenhoven said the company would be working to expand its customer base, but also said that higher storage capacities per unit with newer products mean storage purchases are happening less often among the company's existing customers.

This analysis jibes with several large enterprise NetApp customers, though each gave different reasons for their spending slowdowns.

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"We're a seasonal business," said Michael Israel, senior vice president of information services at Six Flags Theme Parks Inc. "We do our major buying in the third and fourth [fiscal] quarters when the parks are closed."

According to Peter Amstutz, chief of network design for Defense Contract Management Agency (DCMA), which manages contracts for the U.S. Department of Defense, his business has similar patterns. "We tend to hold capital equipment money in case of labor shortfalls and spend it if it's available in the last quarter of the fiscal year," he said.

This matches another point made by NetApp, which was that it mistakenly took record bookings in April, around the end of the fiscal year, for a sign that spending was rebounding.

However, users also said the way they're managing their storage is having an effect on spending patterns. "We're getting much more aggressive about reclaiming allocated but unused capacity," Israel said. Perhaps ironically, the company is tracking its storage utilization with internal NetApp tools.

This also echoes what some 680 storage managers said in Storage magazine's most recent Purchasing Intentions survey done in March, 2007. According the respondents, storage buyers are adding the same amount of capacity this year as last year, the first time in five years that no increase was seen, and focusing more on building out existing arrays with more drives than on buying new frames.

The nature of newer storage products in general is also hurting NetApp's ability to sell one application service provider in the Midwest whose director of operations asked to remain unnamed because of legal policies prohibiting him from being named in the press.

"Two years ago we were buying 24 terabyte [TB] units," he said. "The last one we bought was a 156 TB unit. With a product that size, we're probably not going to need to purchase more capacity until the first [calendar] quarter of next year."

Users urge speed with development of new products, features

According to a storage manager for a large financial company, who declined to be named because he is not authorized to speak with the press, his company and other large enterprise counterparts he's compared notes with have been waiting on the delivery of new midrange storage systems from NetApp, a product he said has been dubbed the 2000 series that will be a replacement for the FAS270.

"People might be waiting for those products, which have big advantages over the 270 for remote and branch offices in large companies," the user said.

The user has received test units of the new products that include a 2020 and 2050 model. The product is more compact than the 270, at 2U for the 2050 and 4U for the 2050. It also has updated Intel 86 processors, more memory and faster drives than the 270, as well as remote management built in, which has been a "big issue" with managing the 270 at remote sites, he said.

NetApp would neither confirm nor deny that the product is in existence. "It's already shipping, they released it beginning in July," according to the user.

He added that he'd like to see NetApp hurry up its delivery of SAS disk shelves for its arrays.

According to Amstutz, NetApp "has about a year to get it right" with data deduplication for some 384 TB of disk-based backup his agency has in place. He is strongly opposed to post-process data deduplication, saying it won't be a cost savings if he still has to lay every piece of data down on disk before deduping. "We have enough capacity to get by without it right now since we're on a three-year technology cycle," he said. "But it's going to be a big factor at our contract renewal."

Finally, the director of operations for the Midwestern application service provider said he'd like to see a different delivery pattern for NetApp's products altogether. "They want to be a software company, but that means that with every little piece of functionality, they want to charge a hefty amount of money for it. I might be more interested if they packaged or embedded more functionality into their products rather than buying it onesie twosie -- they could even jack up the base price a little bit. I'd be willing to pay a little more to have more features included."

Users will watch market share

Generally, users said they aren't ready to make any adjustments to their outlook about the company just yet. "[Financial reports] don't particularly concern me unless it's a continuous trend and I see them losing market share," according to Amstutz.

Market share was the metric for evaluation cited by most of the users who said they would become concerned if it seemed like NetApp was acquiring a bad reputation in the industry and losing accounts. So far, according to NetApp's report, that has not been the case.

As for the long view, the jury remains out. Some Wall Street analysts reacting to the earnings outlook did express concern that these problems could be a long-term issue for the company, citing the fact that spending slowdowns did not seem to effect rivals EMC Corp. and IBM. Shares in the company were down from $28.71 at the close of the market Thursday night to $23.02 in trading on Friday.

Storage analysts, meanwhile, are less concerned. "EMC's storage growth was 12% year over year in the same period that NetApp just reported, 1% above NetApp," pointed out Brian Babineau, analyst for the Enterprise Strategy Group (ESG) in an email to SearchStorage.com.

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