NetApp Faces Integration Challenges

Network Appliance pointed to solid second-quarter results last night as evidence that it has resolved the problems that dogged the rollout of its new FAS3000 midrange storage system. (See NetApp Reports Q2.) But the vendor also identified challenges ahead with the delay of its new operating system and the longer sales cycle for security products.

Overall, our business bounced back solidly from the business transition issues we experienced in the first quarter,” said Steve Gomo, NetApp’s CFO, speaking on a conference call last night. Sales of the FAS3000 accounted for around a third of all units shipped during the quarter.

That's in contrast to the vendor’s first quarter, which was marred by disappointing sales. In August, CEO Dan Warmenhoven took the blame for the poor timing behind the rollout of the FAS3000. (See TACC Receives NSF Reward, NetApp Sags in the Middle, and NetApp Promotes SATA.)

Despite the latest results, not all the system issues have been resolved. Tremendous demand for the FAS3000 “strained our supply chain for the first two months of the quarter,” Gomo acknowledged. To resolve this, the FAS3000’s contract manufacturer ramped up its production, according to Gomo. “We have reached a more balanced relationship between supply and demand."

The FAS3000 is not the only NetApp product experiencing a difficult birth. Warmenhoven confirmed that the launch of Ontap GX, the firm’s next-generation operating system, is being delayed by a quarter. This, he said, is “due to the complexity of integrating millions of lines of code.”Warmenhoven also explained why Decru, which was acquired by NetApp earlier this year, contributed less than 1 percent to second-quarter revenues. (See NetApp Buys Decru.) “The deployment planning is protracted,” said the CEO. “Because they take their time to decide where in their infrastructure they want our products.”

Despite these blips, analysts feel that the FAS3000 device is now a key weapon in NetApp’s armory. In a guidance note this morning, analyst firm Robert W. Baird & Co. predicts a further uptick in sales when IBM starts selling the device next month. “Field contacts suggest this relationship will be a big driver of incremental revenue/EPS for Network Appliance in the coming years,” writes Baird's Daniel J. Renouard.

But over at Goldman Sachs, analysts warn that NetApp appears to be on a collision course with rival EMC. “Both see their advantage increasingly in software,” the analyst firm wrote in a guidance note. “Both are going after each other’s core areas.”

The storage industry, explained Goldman Sachs in its note, “looks surprisingly resilient in the face of today’s modest tech spending.” But whether heightened competition between NetApp and EMC manifests itself in cost savings for users as the vendors wrestle for market share remains to be seen.

— James Rogers, Senior Editor, Byte and SwitchOrganizations mentioned in this article: