Editor’s note: Angela Lambert is a research analyst in the Computing Practice at Technology Business Research, Inc. She provides analysis of NetApp’s most recent quarterly earnings report and the growing competition with EMC. Both firms have a big – and growing – presence in the Research Triangle Park area.

HAMPTON, N.H. – NetApp’s struggles to offset EMC’s strong emergence in the channel led to the first quarter of revenue decline in more than three years on Wednesday.

EMC is leveraging its scale and recognizable storage brand to chip away at NetApp’s (Nasdaq: NTAP) comfort zone, launching its midmarket-centric VNXe product and creating channel-ready bundles through VSPEX. As a result, NetApp delivered highly underwhelming results: Revenue declined by 0.9% year-to-year, representing the first time NetApp reported growth below 19% year-to-year since the third quarter of 2009. Storage product revenue fell 7% in 2Q12; the segment’s revenue growth had been in gradual decline since 2Q10 when it posted 54.2% growth. However it had still managed to post an average of 28.1% revenue growth over the past four quarters.

NetApp provided little explanation on the sudden decline in revenue, although mature market demand and increased competition appears to be a factor, as Americas revenue declined 2.7% and EMEA fell by 2.5%. EMC (NYSE: EMC) has made a push to increase storage sales through channel distribution throughout the Americas and EMEA, and its success is evident by virtue of NetApp’s decline. NetApp APAC revenue was up 10.5%, but growth has slowed considerably in the region considering APAC growth averaged 44.5% over the past four quarters.

The sudden decline in NetApp’s revenue suggests the vendor is coming back to earth after an extended period of revenue growth that exceeded the storage industry average. Computing industry benchmark reports by Technology Business Research, Inc. estimated year-to-year revenue growth for the storage industry at 1.4% in 1Q12, marking NetApp as a clear leader in growth. However, competitor EMC’s push to develop its distribution channel helped drive storage revenue growth of 6% this quarter, suggesting NetApp is facing increasing competition in the storage space.

NetApp Is Pushing on Its Channel Partners

NetApp is expanding and incentivizing its global network of channel partners to combat increasing competition and decreased demand, positioning the vendor for increased volume sales. Increasing sales volume is particularly important as NetApp simultaneously pushes sales of lower-priced entry-level solutions to midmarket customers, meaning the storage vendor will have to sell more units to grow its top-line revenue. However, NetApp’s strategy to drive growth in the midmarket will ultimately position it for growth through system upgrades and expansion.

After EMC’s channel growth put a dent in NetApp’s growth trajectory, NetApp is refocusing its channel strategy to focus on the key needs of its global partners, particularly as the vendor launches a new storage system for the midmarket. NetApp launched the GetSuccessful Cloud Services Program in conjunction with the release of its latest entry-level storage system, the FAS2220. The program is designed to connect hardware resellers with NetApp’s cloud services partners, generating greater opportunity to meet client needs. NetApp is also rolling out promotions and special financing to its resellers specifically to drive unit sales of its new entry-level systems.

In June, NetApp and Cisco announced the FlexPod Premium Partner Framework to encourage channel partners to ramp up sales and marketing of FlexPod cloud systems. NetApp with hardware partner Cisco is enticing top-performing channel partners with sales tools, marketing campaign assistance, and validated designs to spur enthusiasm for system sales. As of June, NetApp identified 22 qualified channel partners for the program across North America and Europe.

In addition to rolling out new partner programs, NetApp is also expanding its channel partner roster. At the end of 2Q12 NetApp announced a partnership with Comstor, a division of global IT distributor Westcon Group, to distribute FlexPod systems across EMEA. The deal will assist NetApp in increasing its revenue from emerging markets, particularly India.

Remaining Competitive in Flash Technology

NetApp is making moves to ramp up its integration of flash technology to keep up with trends in increasing storage efficiency. NetApp rival EMC announced its intention to acquire flash technology firm XtremIO in May, prompting NetApp to secure its own flash technology development alliance in late July. NetApp will collaborate with Fusion-io to establish compatibility between the Fusion ioMemory platform and its own Data ONTAP operating system.

NetApp currently offers the Virtual Storage Tier (VST), which combines flash storage with traditional hard disk drives to increase performance and availability of critical workloads. Through its Fusion-io partnership, NetApp will integrate Fusion-io data acceleration technology into its VST, driving greater efficiency of workload tiering. Further development of NetApp’s flash capability will be valuable to the vendor’s future growth due to the intersection of customers’ demands for increasing performance and reduction of resource consumption – manpower, money, and energy.

(C) TBR