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NetApp sales down; OEM sales way down

NetApp is having the same problems as the other large storage vendors these days – more data going into the cloud, elongated sales cycles, declines in federal spending and new innovative vendors taking customers from the big guys.

NetApp’s earnings and guidance released Wednesday reflect these struggles. But it also has one problem that its large competitors don’t have. That is IBM. The biggest problem for NetApp these days is its OEM revenue is in free fall. IBM is its biggest OEM partner, selling NetApp’s E Series business acquired from LSI as well as NetApp’s FAS storage under the IBM N-Series brand. IBM has been pushing its own storage over its partners’, and hasn’t been had much success selling either.

IBM’s strategy and struggles are taking its toll on NetApp. NetApp’s OEM business last quarter fell 34 percent from previous year, and is forecasted to drop 40 percent this quarter. That caused NetApp’s overall revenue of $1.65 billion to fall four percent from last year. NetApp’s guidance for this quarter of between $1.42 billion and $1.52 billion fell far below what financial analysts expected.

“IBM reports its storage business down significantly in the last few quarters, over 20 percent [last quarter],” Georgens said. “IBM also has a portfolio of products they can sell that are alternatives to NetApp. We have both those dynamics at play — their ability to sell through has been challenged and our positioning within their portfolio has been challenged.”

Analysts on the call wondered why NetApp continues to sell through OEMs. OEM sales make up seven percent of its overall revenue. Georgens said the vendor is investing less in its OEM relationships, while looking for ways to sell the E Series more through its own channels. He pointed to the EF all-flash array as successful E-Series product sold through the NetApp brand.

Some analysts claim other vendors hurting NetApp, particularly smaller competitors who are considered more innovative. In a note to clients today, Wunderlich Securities analyst Kaushik Roy pointed to flash startup Pure Storage, hybrid storage vendor Nimble Storage, hyperconverged vendor Nutanix, and software startup Actifio among those with disruptive technologies hurting larger vendors.

“While Pure Storage and EMC’s XtremIO all-flash products are gaining traction, NetApp still does not have an all-flash array that has been designed from the ground up,” Roy wrote. “It is well known that all-flash arrays are elongating sales cycles and customers are delaying their purchases of traditional hybrid storage systems. But what may not be well known is that new data structures, new analytics engines, and new compute engines are also stealing market share from traditional storage systems vendors. …

“In our opinion, NetApp needs to acquire technologies from outside to evolve quickly and remain one of the leading technology companies providing IT infrastructure.”

On the earnings call Wednesday, Georgens defended NetApp’s flash portfolio even if its FlashRay home-built all-flash array will not ship until the second half of the year. He said NetApp shipped 18 PB of flash storage last quarter, including EF systems for database acceleration, all-flash FAS arrays and flash caching products.

“I’ll state it flat out. I would not trade the flash portfolio of NetApp with the flash portfolio of any other company,” Georgens said.

However, he did not rule out acquisitions.

“We are open to opportunities that are going to drive the growth of the company,” Georgens said. “In a transitioning market where there are a lot of new technologies and a lot of new alternatives for customers, there are a lot of properties out there to look at. For the right transactions, we’d be very much inclined to [buy a company].”

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