Storage Spending Knocks NetApp

NetApp feels the heat from US spending slowdown, lowers Q1 guidance

May 25, 2007

3 Min Read
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NetApp has joined the list of storage vendors to fall foul of the IT spending slowdown, and speculation is mounting that the firm is coming under pressure from rivals IBM, HP, and EMC.

A number of vendors have already felt the impact of a cautious U.S. spending climate -- a trend which continued in NetApp's annual results, which were released last night. (See NetApp Announces Q4 Results, HP's Storage Slowdown, Overland Struggles With 'Softness', LSI Promises Better, and Isilon: The Honeymoon's Over.)For the full year, NetApp reported annual revenues of $2.8 billion, up 36 percent on 2006, although the firm has lowered its first quarter guidance in response to the spending slowdown. "Without the benefit of normal backlog, we do not expect our usual level of revenue during Q1," explained NetApp CFO Steve Gomo during a conference call last night, adding that the firm is lowering its Q1 revenue forecast by between 6 and 7 percent -- a $70 million shortfall.

The vendor has also changed its hiring strategy, and is planning to increase its headcount by between 200 and 250 people in Q1, compared to 487 in the prior quarter.

On the conference call, NetApp CEO Dan Warmenhoven added that "everything kind of slowed down" during the month of March. "We're clearly not immune from macroeconomic forces and [we have] stretched out our sales cycles."

In response to a question from an analyst, Warmenhoven cited recent comments by former Federal Reserve chairman Alan Greenspan, who suggested that the U.S. economy may enter recession in the second half of the year. "It's very clear that the U.S. enterprise accounts got very cautious," he said, adding that recent stock market trends indicate a more positive economic outlook.Analysts are now starting to wonder whether NetApp is also coming under pressure from rival vendors such as IBM and EMC. "Though we subscribe to NetApp's macro-economic commentary, and our checks do coincide with company comments that an upward trend took place in April, we believe competitors will question whether competitive headwinds are incrementally surfacing for NetApp," said A.G. Edwards analyst Aaron Rakers, in a guidance note released today.

CEO Warmenhoven faced a barrage of questions on this topic during last night's call. "It had nothing to do with any competitor. It had nothing to do with anybody like IBM," he replied. NetApp's "percentage of wins" remained fixed versus EMC and rose against HP, he said.

NetApp president Tom Mendoza also indulged in some saber-rattling against EMC, which has lowered its pricing in an attempt to lure NetApp customers. "The fact of the matter is that we're attacking them on many of their home courts," he said. "We are finding ourselves up against them in very much their strongholds."

On the product side, NetApp's total number of storage systems shipped rose 13 percent sequentially, led by shipments of the high-end FAS6000, which rose 35 percent, and the midrange FAS3000, which was up 19 percent on the prior quarter.

CEO Warmenhoven explained that NetApp has also started selling its ONTAP GX operating system to companies outside the high performance computing arena, but added that the vendor's emerging products division saw mixed results.NetApp's VTL product, for example, "pulled back a little" after a strong Q3, and the vendor is encountering a lack of demand for its encryption offerings. "The encryption products continue to win technical proofs of concept, but are faced with persistent lack of buying urgency from customers," said Warmenhoven.

The vendor's fourth quarter revenues were $801.2 million, up 34 percent on the year-ago quarter, just above analyst estimates of $798.49 million. Quarterly earnings per share were 23 cents on net income of $89.6 million, up from $59.2 million and 15 cents per share in the prior year.

On a non-GAAP basis, the vendor posted earnings of 30 cents on net income of $114.2 million, up form $89.3 million and 23 cents in Q4 of 2006, in line with analyst estimates.

In trading today, shares of NetApp fell $5.60 (14.71 percent) to $32.46.

James Rogers, Senior Editor Byte and Switch

  • A.G. Edwards

  • EMC Corp. (NYSE: EMC)

  • Hewlett-Packard Co. (NYSE: HPQ)

  • IBM Corp.0

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