Storage Spending Slowdown Foreseen

There is growing speculation that the next few months are going to be tough for many firms in the storage sector.

"Given weaker than expected outlooks and comments by Cisco, IBM, and Symantec, we are becoming more concerned about weakness in U.S. enterprise spending," warned Caris analyst Shebly Seyrafi, in a note released this morning.

Last week, during Cisco's first-quarter earnings call, CEO John Chambers also painted a less-than-rosy picture of the U.S. spending climate, highlighting "lumpiness" in a number of key market sectors.

The Cisco exec, who faced a barrage of questions from analysts about stateside spending patterns, singled out financial services, automotive, and retail as the worst-affected sectors. "We think that U.S. enterprises have really squeezed their IT departments," he added.

IBM has been telling a similar story, recently noting that its software sales were affected by the deferral of a number of large transactions at the end of September. Security giant Symantec has also highlighted spending issues, recently revealing that it is taking "a more conservative view" of its December quarter.For months, there have been rumblings of an IT spending slowdown, driven partly by the current climate of uncertainty in the financial markets. Last month, for example, analyst firm Goldman Sachs predicted that IT spending will remain stable this year, but will decelerate in 2008.

Caris' Seyrafi feels that some storage firms are better positioned than others to weather the financial storm.

"Rackable Systems, Isilon, Dell, Brocade, EMC, VMware, and NetApp, are the most heavily exposed stocks in our coverage group to a slowdown in U.S. enterprise spending," he wrote, highlighting the fact that Rackable and Isilon both derive a high percentage of their revenues from U.S. sales.

The current spending slowdown could not have come at a worse time for Isilon, which recently postponed its third-quarter results and swapped out its CEO in an attempt to overcome recent execution issues and get its business back on track.

Despite the economic outlook, other vendors are in a better position than Isilon, according to Caris' Seyrafi. Dell, for example, which also derives more than 60 percent of its revenues from the U.S., is cushioned by its thriving PC division.NetApp, which gets 55 percent of its revenues from its American customers, can also count on other parts of its business. "Our checks indicate that NetApp did well in Europe while it is rebounding in the U.S. from depressed business levels in the July quarter," added Seyrafi.

EMC and VMware are also exposed to any downturn in U.S. enterprise spending, although the analyst expects that the latter will nonetheless continue its upward trajectory.

"VMware's value proposition is still resonating, so we expect strong growth to continue," wrote Seyrafi. "[But] it is vulnerable if physical server unit growth decelerates further because there would be less physical servers on top of which to install virtual servers."

Brocade is another vendor likely to be insulated from enterprises' spending patterns. "Brocade is vulnerable as well, but recent data suggests that Fibre Channel will grow well in Q4," explained the analyst.

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