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Network Appliance braces for slowdown in storage spending

NetApp CEO Dan Warmenhoven says the vendor's gloomy guidance is due to a softening economy.

Network Appliance Inc. painted a gloomy picture of storage spending during its earnings call last night, and company...

executives are forecasting sales this quarter lower than Wall Street expected.

While reporting a solid 21% year-over-year revenue increase last quarter, NetApp executives said they expect revenue growth to slow to between 14% and 18% this quarter. Their forecast of $915 million to $945 million was well below the consensus among financial analysts of $963 million. CEO Dan Warmenhoven said the conservative guidance has nothing to do with any NetApp failings, but reflects signs of a storage spending slowdown.

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"Our backlog is in a normal position, and our pipeline looks normal," Warmenhoven said. "The question is, in this environment are you going to close all that pipeline? The question is, in this environment how much demand is going to be there?"

Warmenhoven added that the current quarter doesn't feel as "robust" as last quarter, which is traditionally the strongest quarter for storage sales because companies want to make sure to spend their remaining budgets.

Until now, the refrain from storage CEOs during earnings calls has been that they hear about a recession on TV and read about it in the news but haven't seen any evidence of one. NetApp is taking a more cautious view than most of its competitors. "Our guidance is what it is, it's what we think is going to happen," Warmenhoven said.

Concern about high-end sales, GX

Citigroup analyst Paul Mansky downgraded NetApp's shares to a hold because of the gloomy outlook. Other financial analysts appeared less concerned about the guidance – given economic conditions – than the vendor's slow going in trying to pick up share in large enterprises. Most of NetApp's revenue still comes from midrange systems, nearly two years after it made a push for the enterprise with its FAS6000 storage arrays. Analysts expect NetApp to get a boost on the high end when it integrates its OnTap GX clustered file system into its main OnTap operating system, but that probably won't happen before 2009.

In a note to clients today, financial analyst Kaushik Roy of Pacific Growth Equities wrote that NetApp's competitive position remains strong, "although in our opinion it could be a while before [NetApp] gains mindshare at the high end of the market where EMC, HDS and IBM are the market leaders. The delay of the GX operating system could be hurting its position at the high end."

"The company continues to see sluggish demand in top-enterprise accounts," wrote Aaron Rakers, Wachovia Corp. financial analyst, adding that the integration of GX into DataOnTap "will be an important step in the company's move to the higher end market."

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