The problems of the storage market might not amount to a hill of beans compared to the trillions at stake in the U.S. mortgage market crisis, but some analysts think storage vendors could be in for some rough going for a couple of quarters.
The storage market has been cruising along despite a myriad of headwinds for the U.S. economy (see Is Storage Recession-Proof?), but analysts from Pacific Growth Equities and R.W. Baird noticed some signs of slowing recently that they say may continue a while.
In a second quarter earnings preview, Pacific Growth analyst Kaushik Roy said checks indicate that Europe and Asia remain generally strong, but in the U.S., weakness appears to be spreading.
“Three months back, within the U.S., the IT spending slowdown was somewhat limited to the Northeast and the Detroit regions, but the West coast was holding up well,” Roy wrote. “Now we are starting to hear about IT budget freezes on the West Coast and in the Midwest as well.”
Roy concluded, “Thus we believe that IT spending in the U.S. will get worse significantly in Q3, before it gets better with the possibility of a budget flush in Q4.”
About industry leader EMC (NYSE: EMC), Roy wrote that “fundamentals seem to have deteriorated in the month of June, and we are coming across more pockets of weakness than we came across at the end of the March quarter. For instance, we are coming across some weakness in central Europe, which is more specific to EMC than to the broader IT spending environment. Within the U.S., EMC is more exposed to the enterprise segment and the financial vertical than some of its peers.”
Roy expects in-line results from EMC, which will report quarterly earnings July 23, “but the tone of management in regards to Q3 expectations could be very cautious.”
Still, Roy said a number of vendors appear solid, among them Hitachi Data Systems, IBM (NYSE: IBM), HP (NYSE: HPQ), LSI (NYSE: LSI), Brocade (NASDAQ: BRCD), Qlogic (NASDAQ: QLGC), Dot Hill (NASDAQ: HILL) and Seagate (NYSE: STX).
Disaster recovery, business continuity and compliance are driving enterprise storage spending, he said. “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,” he wrote.
Data de-duplicationcontinues to be a hot area, but Roy thinks dedupe leader Data Domain (NASDAQ: DDUP) will face more competition going forward.
Energy efficiency issues remain important, he said, but solid state drives (SSDs) in enterprise systems “are more of a hype at this time, although every vendor plans to offer them in the high-end and midrange systems in the next 12-18 months.”
IT Spending ‘Subdued’
R.W. Baird analysts Jayson Noland and Joel Inman agree that a slowdown for storage may be in the offing.
The firm’s second-quarter VAR survey found that “results were subdued with expectations for slight improvement in Q3,” the analysts wrote. “We don’t expect a broad-based 2H ramp in IT spend at this point, though we do see storage as a key category of relative outperformance.”
VMware (NYSE: VMW) and NetApp (NASDAQ: NTAP) are tracking well, they said, as are CommVault (NASDAQ: CVLT), Dell (NASDAQ: DELL) and Data Domain.
Noland and Inman said large VMware resellers expect “minimal competitive impact” from Microsoft’s (NASDAQ: MSFT) Hyper-V virtualization offering (see Hyper-V Not Yet Ready for Storage Prime Time).
Still, with a third of respondents tracking below plan, “these results are the weakest we have seen since we began the survey in 2004,” they said.
About half of resellers expect conditions to remain challenging in the third quarter, with a third expecting improvement. Large VARs (more than $100 million) are more optimistic than smaller ones. While they expect IT spending to be delayed through the rest of the year, they noted that storage was cited as an area of strength for the second half “by a wide margin.”
Other strong areas include networking, server virtualization and virtual desktop infrastructure, while PCs and non-blade servers are expected to be weak in the second half.