NetApp Sags in the Middle

Network Appliance Inc. (Nasdaq: NTAP) had a tougher-than-expected time selling its new midrange systems last quarter. CEO Dan Warmenhoven blames internal competition among NetApp systems, while financial analysts suspect outside competition is taking its toll (see NetApp Lowers Forecast).

Warmenhoven Thursday night said NetApps preliminary results for the quarter that ended July 31 show revenue in the range of $446 million to $449 million compared to previous guidance of $465 million to $479 million. The new guidance represents a decline of approximately 1 percent from the previous quarter although still an increase of 25 percent or so from the same quarter last year.

Warmenhoven says customers took longer to evaluate NetApp systems last quarter following the rollout of new FAS3000 Fibre Channel-plus-SATA systems (see NetApp Promotes SATA). NetApp’s higher-end FAS960 and NearStore R200 disk backup systems also sold poorly in the quarter, which Warmenhoven attributed to customers buying FAS3000s instead.

He claims orders for the FAS3000 that closed within two days of the quarter’s end would have made up the $20 million to $25 million difference between forecasted revenues and actual revenues.

“Almost 90 percent of the FAS3000 systems shipped in the third month of the quarter,” Warmenhoven says. “Many customers went back to the evaluation stage when they heard of our new midrange system.”Despite his contention that at least $20 million worth of deals closed in August, Warmenhoven refused to speculate that the current quarter might be better than expected. He also denies NetApp lost share in the quarter to competitors.

“There’s no change in competitive win rates,” he said.

Piper Jaffrayand Merrill Lynch & Co. Inc. downgraded NetApp today because of the news. Merrill Lynch analyst Shebly Seyrafi wrote of an overall decline in growth midrange systems in a note to clients. “Last quarter, we saw much slower growth rates from EMC Corp. (NYSE: EMC), Hitachi Data Systems (HDS), and now NetApp in the midrange,” Seyrafi wrote.

Others say the midrange is still the hot spot for networked storage, but there’s greater competition there. “On the high end, there’s only three competitors [EMC, Hitachi, and IBM Corp. (NYSE: IBM)], while the midtier still has a bunch of competitors,” EMC EVP of storage platforms Dave Donatelli said Thursday at EMC’s analyst day.

There’s certainly no slowdown in the growth of midrange product rollouts. EMC, Hewlett-Packard Co. (NYSE: HPQ), Hitachi, and IBM have introduced new midrange systems since May (see EMC Cultivates Clariion, HP Plans EVA Facelift, Hitachi Plans Midrange Rollout, and IBM Drives 4-Gbit/s).Other competitors also might be turning up the heat on NetApp. Piper Jaffray’s Les Santiago believes cheaper SATA drives makes it tougher for NetApp to sell its NearStore R200. "We believe the increased competition in the secondary storage market is also responsible for NearStore’s slowdown,” Santiago wrote today in a note to clients.

That competition comes from storage vendors such as EMC, IBM, and Sun Microsystems Inc. (Nasdaq: SUNW); tape vendors Advanced Digital Information Corp. (Nasdaq: ADIC), Quantum Corp. (NYSE: DSS), Overland Storage Inc. (Nasdaq: OVRL), and Storage Technology Corp. (StorageTek) (NYSE: STK) looking to move into disk; and backup appliances from startups such as Breece Hill LLC, Data Domain Inc., Diligent Technologies Corp., Intradyn Inc., Sepaton Inc., and Unitrends Corp.

— Dave Raffo, Senior Editor, Byte and Switch