NetApp 'Kinda Screwed Up'

CEO says bungled product transition rather than competition hurt its earnings

August 18, 2005

4 Min Read
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Network Appliance Inc. (Nasdaq: NTAP) execs insist the problems causing their disappointing sales last quarter were self inflicted.

CEO Dan Warmenhoven Wednesday night repeated the claim he made two weeks ago that a product transition rather than competition hurt NetApp last quarter, and he took the blame for the poor timing behind the rollout of the FAS3000 midrange system (see NetApp Sags in the Middle and NetApp Promotes SATA).

Warmenhoven did admit an attempt to step up midrange SAN competition with EMC Corp. (NYSE: EMC) played a big role in the blunder.

This is increasingly becoming a two-horse race,” Warmenhoven said of the midrange storage landscape. “We’re becoming an alternative to EMC. The mix has shifted from file server NAS to Fibre Channel across the board, and we’re taking it to them. We’re the only two vendors that offer the complete array of low end to high end, primary and secondary storage, SAN and NAS. We’re competing across the board.”

Warmenhoven insists, though, that it was neither EMC nor a comebacking Hewlett-Packard Co. (NYSE: HPQ) that hurt NetApp last quarter (see HP CEO Calls for Better Storage). He says the FAS3000 hurt sales of NetApp’s higher-end FAS960 and NearStore disk backup products. Warmenhoven says customers wanted to evaluate the new systems before making any buying decisions, and there were too few evaluation units available when NetApp announced the product in May.“I take responsibility for the product transition,” he said, calling the problems short term. “I’ve been here 11 years, we’ve done seven or eight product transitions, and we didn’t miss a one. We always came out with the high end first, sometimes concurrently with the midrange, but the high end always came out. This is the first time we did just the midrange, and I underestimated the extent of the collateral damage it caused with other products.”

Why did NetApp come out with a midrange system only? “I kinda screwed up,” Warmenhoven says. “We became very focused on becoming more competitive with EMC Clariion. We are really focused on growing our SAN business.”

NetApp’s SAN concentration comes at a time when it appears to be losing ground to EMC in NAS. EMC moved ahead of NetApp in NAS market share in the first quarter of this year, according to IDC

(see Atempo Protects IBM). NetApp disputed those figures, because IDC placed Content Addressable Storage (CAS) into the NAS category (see NetApp Quibbles With IDC)

And NetApp’s earnings call came hours after EMC said it acquired global namespace startup Rainfinity, giving it a feature NetApp will lack until it acquires it from another startup or completes integration of technology it purchased from Spinnaker in 2003 (see NetApp Annexes Spinnaker).

Warmenhoven says a new release of NetApp’s DataOnTap software this fall will have some Spinnaker features built in, but NetApp admits the products won’t be fully integrated before next year (see NetApp Makes Virtual Upgrade).The results NetApp reported Wednesday were in line with its Aug. 4 forecast. Revenue was $448.4 million -- a 25 percent increase from last year and a 1 percent decline from the previous quarter (see NetApp Reports Earnings). NetApp’s net income was $62.1 million or $0.16 earnings per share (EPS). NetApp’s original forecast in May called for revenue of $465 million to $479 million for EPS of $0.16 to $0.17.

NetApp Wednesday also revised its guidance for this quarter, forecasting revenue growth of 25 percent to 28 percent. Its previous guidance was for 32 percent to 35 percent growth this quarter.

”This is still a high bar,” Merrill Lynch & Co. Inc. analyst Shebly Seyrafi wrote today in a note to clients, “especially with HP’s recent better than expected sales in its midrange systems and competition from EMC heating up.”

Other details from NetApp’s conference call:

  • SATA drives made up 47 percent of the capacity NetApp shipped last quarter, up from around 42 percent in the previous quarter.

  • iSCSI revenue growth slowed, increasing 11 percent sequentially after 17 percent sequential growth in the previous quarter.

  • The company still plans to hire 300 people each quarter this year. It filled 200 jobs last quarter, with 100 offers still out.

    — Dave Raffo, Senior Editor, Byte and Switch

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