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Storage sales immune to recession. . .so far

Financial analysts' research shows organizations are still buying storage despite an overall slowdown in IT spending, thanks to deduplication, disaster recovery and compliance. But one analyst says the third quarter "may be ugly."

Storage budgets haven't taken a big hit despite economic conditions, say financial analysts. However, research issued this week sent mixed signals on which direction storage spending is taking.

A survey of computer hardware and storage resellers conducted by Robert W. Baird & Co. indicated they considered storage a strong spot despite overall "subdued" sales for the second quarter that ended June 30. Resellers had "expectations for slight improvement" in the third quarter, according to Baird. However, a storage industry earnings preview issued by Pacific Growth Equities said second quarter spending went about as expected, but this quarter "may be ugly."

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HBA vendors QLogic and Emulex this week issued preliminary reports on their earnings for the second quarter – with mixed results. QLogic said its revenues would be from $4 million to $8 million higher than its previous guidance, while Emulex said revenue would be from $5 million to $12 million below expectations.

In Baird's survey of 57 U.S. and international enterprise resellers with combined annual revenue of $11 billion, 27% said they were above their expectations for the quarter, 43% were on plan and 30% were below expectations. "These are the weakest results we have seen since we began the survey in 2004," Baird analyst Jayson Noland wrote in his report on the results. He added that prospects looked slightly better for this quarter with 33% of the VARs expecting improvement and 50% expecting conditions to remain challenging. "Storage was cited as an area of strength by a wide margin [in the second half of the year]," Noland wrote, forecasting networking, and server and desktop virtualization as other strong areas with non-blade servers and PCs looking bleak.

Storage resilient despite slowdown

Overall, Noland cited storage as "a key category of relative outperformance." The survey indicated VMware, NetApp, CommVault, Dell and Data Domain had strong quarters and NetApp is well positioned for the next year -- 80% of its resellers in the survey expected to sell more NetApp storage over the next 12 months.

According to a note by Pacific Growth's Kaushik Roy, LSI, Hitachi Data Systems, Data Domain, Symantec, Hewlett-Packard and IBM joined QLogic in having good second quarters, while Sun and Emulex sales lagged. Roy writes that a slowdown could be coming, with budget freezes on the West Coast and in the Midwest to go with earlier spending slowdowns in the Northeast and Detroit regions. Globally, he wrote that IT demand in Europe is strong with Germany, the Nordic countries and Eastern Europe making up for a weak market in the U.K. He maintains Asia and the Middle East markets remain strong.

"Data storage products in general have been somewhat resilient to the macro slowdown – so far," Roy wrote. "Disaster recovery, business continuity and compliance seem to be the drivers for enterprise spending. Everyone is aware of the growth of the Web 2.0 companies and those companies are driving the growth of the unstructured/Internet data, which are consequently driving the growth of data storage products. Data deduplication continues to be a hot area, as is energy efficiency. We feel Solid State Drives (SSDs) in the enterprise systems are more hype at this time, although every vendor plans to offer them in the high-end and mid-range systems in the next 12 to 18 months."

Noland and Roy agree that data deduplication is a hot spending area, and Aaron Rakers of Wachovia Capital Markets chimed in with a note on Data Domain, claiming "dedupe continues to be the most rapidly adopted technology in the storage market."

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