NetApp’s Storage Sales Slammed By Slowdown

The slowing economy took a bigger than expected bite out of NetApp’s (NASDAQ: NTAP) quarterly sales, the latest evidence that the data storage market isn’t immune to the worst recession in decades (see EMC Braces for Tough Storage Market).

NetApp’s January quarter sales were down 16 percent from the year-ago quarter to $746 million, but excluding a $128 million hit from a dispute with the federal government, sales would have been $874 million, down $10 million from the year-ago quarter and about $30 million below the Thomson Reuters consensus forecast.

The company — which was recently named Fortune magazine’s best place to work — also said it is cutting 6 percent of its workforce to maintain profitability.

The company declined to give an outlook for the current quarter, saying economic conditions had resulted in “reduced visibility.”

The NAS pioneer said its growing SAN business was a strong point in the quarter, and de-duplication and server virtualization are also driving storage sales.

Perhaps the biggest surprise was investors’ reaction — the stock was trading 7 percent higher this morning on a day that stocks fell sharply over disappointment that a $790 billion government stimulus plan appears to contain little in near-term economic benefits.

Pacific Growth Equities analyst Kaushik Roy said in a research note this morning that NetApp’s results weren’t a surprise, even though storage remains less affected by the economy than other IT sectors. He said customers appeared to be trading down from high-end to midrange systems, while pricing pressures and growing revenues from the company’s partnership with IBM (NYSE: IBM) also hurt gross margins.

Roy said a recent run-up in NetApp shares were due in part to acquisition rumors. “We believe the acquisition rumors have no truth to them,” he wrote. “We believe NTAP’s competitive position remains strong, but we do not expect NTAP to gain significant market share in the foreseeable future.”

RW Baird analyst Jayson Noland said weakness among NetApp’s biggest customers was partially offset by strong channel sales, which now account for 69 percent of sales, 11 percent more than a year ago.

Storage Winners and Losers

With earnings reporting season largely over, Roy, Noland and Enterprise Strategy Group analyst Brian Babineau told Enterprise Storage Forum that they see storage vendors as relatively well positioned for the tough economy, and that none appear to be at risk of running out of cash.

“The macro impacts everyone,” said Roy. “The question becomes who is managing the company better and who is in a better position in a poor macro environment.”

EMC (NYSE: EMC) is well positioned, he said, while some smaller vendors like 3PAR (NYSE: PAR) are “doing okay.”

However, NetApp faces fundamental challenges, Roy said, and he is also cautious about Sun Microsystems (NASDAQ: JAVA) despite a solid fourth quarter. He said he is “skeptical about Sun’s execution in its storage group and … in general.”

“The good thing about tech companies is that most of them have decent/healthy amounts of cash and/or generate decent amounts of cash,” Roy said. “I don’t see any company in my coverage that is in danger of running out of cash.”

Noland agreed that enterprise storage remains “a relatively positive area of IT spend in 2009. I don’t view any of my companies as in danger of running out of cash, though some are constrained by debt loads.”

Those that are constrained by debt loads include Brocade (NASDAQ: BRCD), Hutchinson (NASDAQ: HTCH) and Seagate (NASDAQ: STX), Noland said.

Babineau said Data Domain (NASDAQ: DDUP), 3PAR and Compellent (NYSE: CML), which also reported results last night, “showed the best results. Granted, these companies are still dealing with the law of small numbers, but are still showing fairly decent growth estimates, meaning customers are finding value in investing with them.”

“The most disappointing results have come from CommVault (NASDAQ: CVLT), NetApp and IBM, where year-over-year comparisons were not that good. However, keep in mind that IBM and NetApp are working with much larger numbers and growth is much harder. EMC, Symantec (NASDAQ: SYMC) and Riverbed (NASDAQ: RVBD) all had decent results.”

Babineau was also skeptical about Sun. “Their open source results were positive, but I don’t believe that these solutions had a financially material impact on the business,” he said.

Babineau said one issue facing companies like Quantum (NYSE: QTM), Overland (NASDAQ: OVRL) and Dot Hill (NASDAQ: HILL) is their large overseas cash positions, which could mean a 35 percent tax hit if it is repatriated. Brocade CEO Mike Klayko wrote an opinion piece on the issue recently in the Mercury News.

“If companies are forced to bring back cash, they will lose 35 percent of it in taxes,” said Babineau. “If they choose not to, they may have to raise debt — a tough proposition in this market. Cisco just had to do this, as a chunk of its cash is overseas. I will be keeping a close eye on Quantum, Overland and Dot Hill from a cash position standpoint. They are all generating cash, but either have to deal with debt or other situations that could constrict how they use cash going forward.”

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Paul Shread
eSecurity Editor Paul Shread has covered nearly every aspect of enterprise technology in his 20+ years in IT journalism, including an award-winning series on software-defined data centers. He wrote a column on small business technology for, and covered financial markets for 10 years, from the dot-com boom and bust to the 2007-2009 financial crisis. He holds a market analyst certification.

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