The decision to replace NetApp CEO and board chairman Tom Georgens caught many industry observers by surprise this week with the sudden execution, but few dispute the need for new leadership.
The company's growing string of disappointing financial results, the long and difficult transition to its latest clustered Data OnTap (cDOT) operating system, and the failure to capitalize on hot storage technology areas such as all-flash arrays and hyper-convergence left many uncertain when or if NetApp can reverse its fortunes.
Industry analysts said NetApp needs to look outside the company for a new CEO. NetApp’s board on Monday elevated George Kurian, the company’s vice president of product operations, to CEO and named Mike Nevens, its lead independent director, as chairman. Nevens said the board plans to conduct a CEO search. Kurian is the lead internal candidate, according to a NetApp spokesperson.
"I don't have much faith in NetApp's direction as a whole," the CTO of one of the NetApp's service provider customers lamented via an email. He asked not to be identified for fear of burning bridges, because his company still uses NetApp's E-Series arrays for archives and backups. The service provider has moved to Tintri primarily for production tier storage.
A struggle to compete in the flash market
The service provider's attempts to use NetApp's all-flash products illustrate an oft-cited problem that has haunted the vendor. The CTO recounted a shoot-out with NetApp's All-Flash FAS (AFF) arrays, where the product's controllers limited the performance of the flash drives. Cheaper alternatives provided IOPS and throughput "that put the AFF to shame," the CTO said.
NetApp's potential competitive array designed exclusively for flash, FlashRay, has been late in coming to market. Meanwhile, major vendors such as EMC and IBM bought their way into the all-flash array market with acquisitions of XtremIO and Texas Memory Systems respectively. Others, such as HP, orchestrated successful overhauls of existing products, and startup Pure Storage caught fire with its internally built array.
"They really missed the boat on FlashRay and deciding to build versus buy," said the customer. "They have such a strong war chest, they could've had a fantastic flash offering -- and been much better positioned."
Instead NetApp has suffered from the "not invented here" syndrome, relying on internal research and development at times when they could have gotten a jump in the market by acquiring technology, according to several industry analysts.
"That strategy has finally brought the company to its knees because I don't think the blood-letting is over yet," said Arun Taneja, founder and consulting analyst at Taneja Group. "All of these big companies have to undergo massive changes because every layer of the infrastructure is under attack right now."
Taneja said even when NetApp made the "brilliant" acquisition of Spinnaker Networks in 2003, recognizing that scale-out storage was the way to go, "all the political infighting took over." He noted it took years to get the product out, as EMC bought Isilon and took command of the scale-out NAS market.
NetApp shipped clustering capabilities with Data Ontap in 2008, but the clustered operating system didn't reach feature parity with the legacy Data Ontap until late last year. Georgens acknowledged the disruption the "re-architected and modernized" Ontap has had on the direct and indirect pipeline.
Jayson Noland, a financial senior analyst at Robert W. Baird & Co., said only approximately 10% of the installed base has shifted to cDOT, and one channel partner told him the transition can take months and cost millions of dollars in certain cases. Some customers will look elsewhere, figuring the transition is similar to going to a new platform. Those who do make the difficult transition to cDOT are committed to NetApp for years to come, he said.
"They're going to have a reliable installed base, albeit a potentially smaller installed base," Noland said. "But, it's going to be really hard for them to ever show real meaningful growth from here. It's hard for them to innovate with that old code base. The startups take NetApp talent, sales people, marketing people and engineers. They have a really good balance sheet, but they don't have the same firepower that EMC or HP or Dell or some of these guys that are just bigger companies," he said.
Noland noted that cash represents over a third of NetApp's market cap, and they can either buy back stock and create a dividend or make a strategic move that carries risk.
"When cash is that much of your market cap, you can't just sit on it. You should do something with it," said Noland.
Noland said institutional investors have told him NetApp needs to sell the company. He said Cisco and IBM have been rumored suitors for years, but he does not see them as likely candidates today.
Henry Baltazar, a senior analyst at Forrester Research, said Oracle's name may also crop up because the company doesn't have significant storage market share, even though it has storage products through its Sun Microsystems and Pillar acquisitions.
"NetApp's revenue has been flat, and that's not a good sign. But they're still the number two storage player out there, so there is some value in that, especially for other companies that may not have strong storage assets," Baltazar said.
Analysts say new NetApp CEO should be a fresh face
David Floyer, co-founder and CTO at Wikibon, said NetApp needs a CEO who will either develop an aggressive plan to embrace flash and produce new products, or take "the best cash cow strategy" and prepare the company for a sale.
"The first one is high risk, high reward. The second one is obviously low risk, and they'll probably be bought for their customer base," Floyer said. "Which is the right one? That's the $64,000 question."
Echoing the sentiments of some other industry analysts, Floyer said he felt profound sadness over NetApp's struggles, "because they did bring so much good innovation to the marketplace, and it's one of the really good places work and has great ethics."
Taneja noted that NetApp created the NAS market, and he has great respect for Georgens, who he characterized as a good person and capable man. "But, there's time to move on, and I think it's four years too late," he said.
Analysts suggest NetApp should bring in fresh leadership to replace Georgens.
"There's no question in my mind for that company to go forward, they must get somebody from the outside," Taneja said. "It has to be somebody who's going to come in and basically bash a few heads and make sure that the people that are going to stay there understand that they have to play by a different set of rules and the company is going to endorse outside technologies."
Laura DuBois, program vice president for IDC's storage practice, said via an email that NetApp should have made product and portfolio moves in response to the rapidly changing storage industry two or more years ago. She said the company needs a CEO with turnaround experience, and although Kurian appears to be a strong technical leader, "There are strong cultural pressures internally which may make it difficult to drive the change that is needed."
Alan Dayley, a research director at Gartner, said Kurian strikes him as fitting into NetApp's conservative mold, with the approach, "Let's go ahead and get things working for what we have in place."
"To me, it's a continuation of the old regime in a sense," Dayley said. "It would behoove them to look outside and bring in somebody that has a different perspective. George has a really good product background. I think they really need to have somebody that has a much more dynamic go-to-market sales or marketing background."
Dayley said NetApp has time to turn the ship around, but must refine and expand its message into additional areas such as hyper-convergence or true software-defined storage.
"It can't be status quo," he said. "They need to upscale it to match what the other storage vendors, especially the smaller ones like Nimble, Pure or Nutanix, are doing because those are the ones that are really causing damage more so than an EMC."
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