Is Storage Recession-Proof?
Despite a crippling credit crunch and soaring food and energy prices, the storage market seems to be chugging along.
After six weeks or so of corporate earnings reports, the storage sector appears to be holding up better than other IT segments like the server and PC markets, according to analysts.
"Storage is healthy," said Jayson Noland, senior analyst for computer hardware and storage at Robert W. Baird & Co. "It seems to be faring better than most categories in our view."
Part of the reason, he said, is that storage purchases are harder to put off than other IT expenses because of soaring data growth and the need to preserve and protect data because of regulatory compliance and e-discovery requirements.
"Storage is less discretionary because of the rapid growth of data," said Noland. "In many cases, a business is unable to delay the purchase of additional storage."
Noland added that VMware and server virtualization growth are also boosting storage sales. As servers become virtualized, he said, users are forced to confront the question, "What do we do with storage?"
Brian Babineau, senior analyst at Enterprise Strategy Group, said an accelerated depreciation clause in the recent economic stimulus package has also helped boost hardware spending by lowering future depreciation expenses and thus boosting future profits. "I think this played a roll in some of the positive results of hardware vendors," he said.
Once the economy recovers from the current slump, rising demand will keep the storage market humming, he said.
Doing More With Less
Interestingly, asked to name winners and losers from the current crop of earnings reports, both Noland and Babineau gave the highest marks to Data Domain (NASDAQ: DDUP), a company which helps reduce storage hardware costs through data de-duplication. Data Domain reported a 160 percent jump in first-quarter sales last week.
"They've got the right technology at the right time," said Noland.
De-dupe has become one of the hottest storage technologies, and other vendors, both large and small, have begun offering de-dupe capabilities and other technologies that help boost storage utilization and reduce capacity needs, like thin provisioning.
Data Domain "will see more competition as NetApp, EMC and Quantum build momentum in the de-duplication market," said Babineau.
EMC (NYSE: EMC) and HP (NYSE: HPQ) both had strong quarters, said Noland and Babineau, while NetApp's (NASDAQ: NTAP) growth decelerated as it faces growing competition in its once-dominant markets.
Noland cited 3PAR (NYSE: PAR), Compellent and LeftHand Networks as other intriguing vendors. "Storage seems to lend itself well to little islands of innovation," he said.
Babineau said the biggest question mark for the storage sector remains Sun (NASDAQ: JAVA).
"The biggest loser has been Sun, as it appears they are having trouble managing the profitability of the business," he said. "From a storage standpoint, it is still unclear whether or not the open storage strategy will lead to any recurring revenue that is material to the business."
One of the most closely-watched earnings reports for the storage sector will come next week, when Dell (NASDAQ: DELL) reports its first quarter since the $1.4 billion acquisition of EqualLogic. The deal closed in late January, so Dell's results on May 29 will include a full quarter of EqualLogic sales.
Can the storage market's resilience continue despite the weakness in the broader economy? Babineau and Noland think so.
"I don't expect any change," said Noland. "Storage is hot."