Spending Slowdown Slams NetApp

NetApp has been forced to lower its revenue and earnings targets for the first quarter, joining a growing list of storage vendors struggling with a tough spending climate. (See NetApp Reports Preliminary Q1, Overland Struggles With 'Softness', HP's Storage Slowdown, and Storage Shades Sun's Q4.)

The vendor, which will release quarterly results on August 15th, now expects first quarter revenues between $684 million and $688 million, down approximately 14 percent to 15 percent on the previous quarter. Although this figure is 10 percent to 11 percent higher than the year-ago quarter, NetApp had originally forecast revenues in the region of $745 million to $753 million.

On a GAAP basis, NetApp also lowered its first quarter earnings forecast to between 8 and 9 cents, compared to its previous target of 14 and 15 cents. Non-GAAP earnings are expected to be between 19 and 20 cents, down from 24 to 25 cents.

The move is the second time NetApp has lowered its first quarter guidance, and it reflects current trends in the enterprise storage market overall, according to NetApp execs. (See Storage Spending Knocks NetApp.)

Chief among these is a slowdown in enterprise spending on disk storage in the U.S. and Western Europe. "I really believe that the overall [disk] storage market has in fact slowed versus last year," said NetApp CEO Dan Warmenhoven on a conference call last night. He admitted that he is not happy with the vendor's performance. "We're obviously very disappointed with the results of our first quarter."The CEO highlighted weaknesses in markets traditionally seen as cash cows by storage vendors. "Financial services was pretty weak, especially in the U.S.," he said. "Manufacturers in the U.S. were slow, telcos in the U.S. were slow -- the pharmaceutical sector was actually down and quite soft."

The NetApp chief also voiced his concern that the vendor has been relying too heavily on a handful of key markets and top accounts. "This concentration made us more susceptible to a slowdown in spending."

In a note this morning, FBR Research analyst Clay Sumner urged NetApp to rethink its approach to its biggest clients. "NetApp had 18 'top accounts' in FY04, 23 in FY05, 35 in FY06, and 'about 40' in FY07," he wrote, adding that this number needs to grow to 50 by the end of this financial year.

On last night's call, Warmenhoven was keen to emphasize that rivals IBM and EMC did not impact NetApp's first quarter performance. (See NetApp Stokes Competitive Fires and EMC Cuts to the Core.) "I am confident that this is not a competitive problem," he said. "In the enterprise sector, I dont know if anyone would say that there is strong [storage] growth."

Despite these comments, not all storage vendors seem to be struggling with the spending climate to the same extent as NetApp. EMC, for example, cited U.S. revenue growth of 20 percent year-over-year in its second quarter results, prompting CEO Joe Tucci to comment that, "In the Americas, I am pleased to report that we saw some pick-up in spending in U.S. enterprise accounts over Q1." (See EMC Reports Q2 Results.)In a note released this morning, Bear Stearns analyst Andrew Neff pointed to broader potential issues within NetApp's strategy. "We remain concerned about execution missteps and contradictory feedback from other major storage vendors." (See IBM Storage Earnings Up.) "Though NetApp was previously confident about resuming its 25 to 30 percent growth trajectory after reducing its outlook in May, its second straight disappointment could be a harbinger of deeper problems."

Other analysts nonetheless feel that NetApp is still in a relatively solid position. "Field checks indicate NetApp's competitive position remains strong and bookings/revenue growth over the next few quarters will bear out our thesis," wrote Daniel Renouard of Robert W.Baird & Co., in a note this morning.

In early trading today, shares of NetApp fell 44 cents (2.15%) to $20.05.

— James Rogers, Senior Editor Byte and Switch