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Declining storage sales are the new normal

NetApp, Brocade and Hewlett-Packard last week all reported storage revenues that were better than expected, impressing Wall
Street analysts and investors. Yet in each case their revenue declined from last year. The better-than-expected numbers were achieved because of lowered expectations due to sagging storage sales.

NetApp beat its previous forecast in its first quarter following a CEO change, but its revenue continued to shrink from the previous year as it transitions to its clustered Data OnTap operating system.

NetApp revenue of $1.33 billion decreased 10 percent from last year, although it came in above the mid-point of the vendor’s previous forecast. Product revenue (outside of maintenance and service fees) of $664 million was down 25 percent from last year and 27 percent from last quarter, and below expectations.

“We did what we said we would, but we’re clear that we have a lot more work to do,” new CEO George Kurian said on the earnings conference call with analysts.

Kurian, who replaced Tom Georgens as CEO in June, added, “We have a heightened sense of urgency in working with our customers to enable their move to the modern architectures delivered by our portfolio.”

He said NetApp is “aggressively pivoting” towards a product portfolio consisting mainly of software-defined storage, flash, converged infrastructure and hybrid cloud.

One of NetApp’s major challenges is to upgrade customers from Data Ontap operating system to clustered OnTap. Kurian said shipments of clustered systems grew by around 115 percent last quarter and was deployed in 65 percent of the FAS arrays shipped compared to 25 percent a year ago. But those clustered deployments are predominantly with new customers, and clustered OnTap still accounts for only 15 percent of NetApp’s total installed base. That is up from 11 percent in the previous quarter, but there is still a long way to go.

“The percentage of our installed base that has migrated to clustered OnTap has been small,” Kurian said.

Brocade’s storage sales usually reflect those of the large storage vendors who sell Brocade switches and large directors as part of their SANs. Brocade’s storage revenue of $309 million decreased five percent from last year, which was a little better than expected after EMC, NetApp, HP, Hitachi Data Systems and IBM all reported flat or declining storage product revenue.

Brocade CEO Lloyd Carney said his company took a “prudent view of the storage business” with its forecast for last quarter but said he sees the Fibre Channel market stabilizing and “will remain durable for many years.” He also said IP storage and flash are pushing sales of network storage switching.

Carney said as long as data grows, companies will have to add storage.

“I worry about this space when people stop buying more storage,” he said. “When the overall storage market stops growing, then I start to worry. As long as overall storage market continues to grow … year over year, there’s going to be the need for more either Fibre Channel storage or IP-based storage.”

HP’s storage revenue of $784 million was down two percent from last year, which is better than HP has done in recent years. CEO Meg Whitman called it a “strong quarter” for storage.

As usual, HP’s best storage performer was its 3PAR StoreServ platform, which grew in double digits. HP converged storage (3PAR, StoreOnce, and StoreAll) revenue of $393 million grew eight percent, and now makes up most of the vendor’s storage sales.

“We’ve turned the corner in storage,” Whitman said. “3PAR is fulfilling the promise that we’ve all known 3PAR has had for many, many years. So listen, we’re feeling good about this business. We’ve got good momentum, and I think you’re going to see continued strength here over the next few quarters.”

NetApp, HP and Brocade all said they are receiving a boost from flash in storage arrays.

NetApp said revenue from all-flash arrays increased 140 percent from last year and HP reported 400 percent growth in 3PAR all-flash storage, although those all-flash products were in early stages last year. Brocade VP of storage networking Jack Rondini said around 70 percent to 80 percent of flash systems use Fibre Channel and will help keep Fibre Channel relevant.

“The attachment of flash continues to be one of the most disruptive factors in the data center,” Rondini said.

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