Article

NetApp uncertain of future storage revenue growth

Dave Raffo

NetApp Inc. did better than expected last quarter, but company executives admit they don't know what kind of sales to expect this quarter.

NetApp reported $912 million in revenue Wednesday evening. That was at the low end of its forecast but above financial analysts' consensus expectation of $905 million.

On their conference calls with analysts, NetApp executives said that SAN sales were strong, as were software and services revenues. Overall, storage systems shipped rose 20% from last year with entry-level storage systems up 45%, FAS6000 high-end storage systems up 16% and midrange sales down slightly, due to a transition to a new FAS3100 series.

NetApp president Tom Georgens said that sales of the company's V-Series virtualization platform and SANScreen management software were also strong.

But the NetApp crystal ball for this quarter is a bit murky, so the vendor gave no official guidance. CEO Dan Warmenhoven did state his expectations, but doesn't want to be held to them.

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"It is very difficult to predict the depth and duration of the downturn," Warmenhoven said. "The uncertainty around customer IT spending intentions reduces our confidence in the validity of our pipeline. Therefore, we do not have the normal forecasting basis to provide revenue guidance for [this quarter] or beyond."

That being said, Warmenhoven added that NetApp had the capacity to have a $1 billion revenue quarter. "Our best guess is the revenue will be flat to slightly up from this past quarter."

Warmenhoven and other NetApp executives on the call wondered what 2009 IT budgets would look like. That's a concern they share with the entire industry. An IDC report released Wednesday predicted a decline in IT hardware spending for 2009. The good news is that IDC expects storage spending to rise. The bad news is that the expected increase is 0.8% – down from IDC's previous forecast of 3.9% growth for storage spending.

While most of its competitors finish the current quarter at the end of December, NetApp's fiscal quarter also includes January, and that's the month that its executives are worried about because the 2009 IT budgets kick in.

"I think we will do well in November, and I think we will do well in December," Warmenhoven said. "But January for us is always hard. I think it's going to be particularly hard this year as customers try to close their budgets."

In terms of rough months, Warmenhoven said that NetApp did well in October, although most of its competitors said there was a slowdown because of the current financial crisis. He said that after a tough September, NetApp increased sales 7% from last year in October.

NetApp execs said they are focused on picking up market share instead of having any hard revenue goals, but financial analyst Kaushik Roy of Pacific Growth Equities expects that market share gains will also be tough to come by.

"While NetApp October results were better than most had feared, we believe the company may still be overly optimistic about future market share gains," Roy wrote in a note to clients today. "Competition from EMC, Dell, and Hewlett-Packard is getting tougher for NetApp in our opinion and we do not expect NetApp revenues from partner IBM to increase going forward since IBM is pushing its own products."

Enterpise Strategy Group analyst Brian Babineau said that surviving October was the tough part for NetApp last quarter. "They hit the low end of their guidance, which is better than most expected," he said. "And they had to deal with October in their quarter. Most other vendors ended their quarter at the end of September, so they didn't see the ugliness until the very end. NetApp had to live through it."

Because most organizations have little "excess capacity installed," Warmenhoven expects some storage spending to continue while certain types of projects get scrapped. "The underlying demand for basic primary storage is going to stay pretty constant," he said. "This is still a consumable. You fill it up, you need some more. "But that is not the big driver of high growth," he continued "The big driver of high growth lately has been secondary storage, and that's the big unknown. We don't know whether customers are going to keep pushing for rapid ROI projects, like eliminating tape, or whether they're going to sit still."

According to NetApp executives, the buildup of the company's sales force is complete. The vendor added 381 employees last quarter, but the head count will likely be thinned by attrition over the next six months.


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