NetApp sees more stable IT spending around server virtualization, storage cloud

NetApp offered Wall Street investors its first predictions on revenue in about a year during NetApp 2009 Analyst Day, predicting customers will replace aging infrastructure.

NetApp Inc. CEO Tom Georgens said he's looking for his company to be one of the storage players to remain standing despite a wave of IT industry consolidation.

At yesterday's NetApp 2009 Analyst Day, Georgens addressed rumors that have been floating around Wall Street about NetApp as a potential acquisition target given widespread industry consolidation. "I believe true growth companies at scale in the IT industry will be few and far between," Georgens said. "But it is our goal and our desire to be one of those few IT vendors of scale."

Georgens, who stepped up from president to replace retiring CEO Dan Warmenhoven in August, expressed confidence in NetApp as well as a recovery in IT spending that has been a result of the recession. He added that IT budgets in the next calendar year will be more firm than heading into 2009, although not quite at their pre-recession levels.

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"We'll bounce back from where we are today, but I don't believe we'll return to where IT spending as a percentage of revenue was before," he said. Instead, Georgens said the storage cloud will drive more organizations to outsource IT operations, and customers will look to service providers and systems integrators to improve efficiency.

NetApp even provided a forecast for future quarters after declining to predict sales for close to a year as the global economy took a nosedive. NetApp predicted revenue between $870 million to $885 million for this quarter and from $910 million to $930 million the next, which would be up approximately 5% sequentially each quarter. NetApp execs said they're looking to return to their normal operating model of 16% profit margins and take one percentage point of market share over the next six months.

Server virtualization seen as budget driver

Georgens said customers have a better idea of how they'll spend their IT dollars than they did earlier this year, and are beginning to contemplate redesigning what he described as an "aging infrastructure" in data centers. He contrasted this with the dot.com economic downturn in the early 2000s, in which organizations were still working with new infrastructures and could put off new purchases longer. "Before the dot.com downturn there was massive technology build out, but that's not true this time," he said. "We've been seeing a lot of one year renewals … which tells me there's an aging infrastructure out there."

Several NetApp customers said server virtualization will continue to push organizations to increase their investment in storage.

"I think what we're seeing is the next cycle in [server] virtualization," said NetApp user Tom Becchetti, who asked that his company not be identified because of policies preventing him from representing it in the press. "Most companies have been virtualizing servers for at least a year or two, and have seen the benefits. To fully exploit these benefits takes new and better hardware."

Reinoud Reynders, IT manager for the University Hospitals Leuven in Belgium, agreed. "In general, I believe that today that companies replace their equipment much faster than 10 years ago," he said. "A mainframe could be used for 10 years, a Unix server maybe for more than five or six years. Now with virtualization, green IT and data explosion, you make money when you replace your equipment much faster.

Jeff Boles, senior analyst and director, validation services at Hopkinton, Mass.-based Taneja Group, said NetApp's architecture is a good fit for organizations heavily into virtual servers.

"As consolidation takes place in user environments, especially around server virtualization, storage is starting to be seen as the weakest link," he said. "That may be driving customers to NetApp because of the simplicity of its product line, with a single management paradigm across all hardware models."

Elephants in the room: Data Domain and Ontap 8

NetApp's ability to scale its systems was another focus during NetApp 2009 Analyst Day, and executives emphasized the recent release of clustered network-attached storage (NAS) with Data Ontap 8. However, it will take a few dot-releases of the new operating system before the clustered NAS IP that NetApp bought with Spinnaker Networks in 2003 is fully integrated into Ontap.

"It all comes back to GX convergence with them right now," said Andrew Reichman, a senior analyst at Cambridge, Mass.-based Forrester Research. "They haven't shown much customer or technical success so far, and they're spinning their wheels to get [Ontap 8] up to speed while their competitors are beefing up high-performance NAS offerings. I look at that as a key concern for them right now."

Georgens also said NetApp will do just fine without Data Domain, for which it was outbid by rival EMC in July. "Data Domain was not about dedupe—it was about backup," he said. "NetApp has a disproportionate rate of secondary storage attachment when it's the primary storage vendor, but 80% of the market doesn't use NetApp for primary storage."

Since NetApp lost Data Domain, there have been rumblings that it would acquire another backup company – perhaps CommVault Inc.

"NetApp does still have to diversify long term – one area I'm watching for is innovation," said Brian Babineau, a senior analyst at Milford, Mass.-based Enterprise Strategy Group. "Give me some non-WAFL-based products that are innovative. That's what Data Domain was supposed to be."

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