Editor’s note: Krista Macomber is an analyst with Technology Business Research.

HAMPTON, N.H. - NetApp will protect its revenue and operating profit in 2H13 while ensuring long-term success in key technology areas by restructuring its workforce.

NetApp (Nasdaq: NTAP) maintained an approximately flat revenue base on a year-to-year basis in 1Q13, with declines to product revenue offsetting gains to the software entitlements and maintenance and services revenue bases of 7% and 8% year-to-year, respectively. The company continues to successfully drive its OnTap-led value proposition in an industry steadily moving toward commoditized hardware and software-defined IT environments, as evidenced by software-related revenue outpacing corporate revenue in growth during the quarter.

However, professional services revenue fell 12% year-to-year during 1Q13, indicating that NetApp remains a product-centric company and heavily reliant on its channel partners to deliver consulting and other services that are critical to customers as they navigate key industry disruptors, including rapid big data growth and adoption of new cloud-based IT models, on which NetApp is seeking to capitalize.

TBR believes NetApp’s decision to eliminate approximately 7% of its employee base, or 900 employees, indicates that the company is working with great urgency to correct its slipping operating margin, which occurred despite slow revenue growth and a 170 basis point year-to-year gross margin improvement in 1Q13.

NetApp is targeting improved operating margin performance to reassure Wall Street and better hone its investment in important technology areas such as flash storage and clustered Data OnTap, as well as long-term growth initiatives.

However, we anticipate reduced software, engineering, and sales staff will limit NetApp’s near-term ability to drive innovation, and execute on cloud- and big data-related sales opportunities in a climate of tight IT budgets and increasing competitive pressures in its core midmarket customer base—thus mitigating the intended effects during 2013.

Clustering and OpenStack Support Is Crucial 

NetApp will successfully focus investment during 2013 on evolving its core OnTap value proposition to better support virtualized and cloud-based environments, as a means to protect against the efforts of competitors ranging from EMC to Dell to monetize on demand for single-pane-of-glass management platforms.

Efficient and user-friendly management is becoming increasingly important as a differentiator across the IT stack, as it is critical to driving the workload-specific efficiencies that customers are requiring despite growing IT complexity within the market. NetApp is responding by leveraging its Data Ontap clustering capabilities to promote a message of performance and availability in virtualized environments, while tapping rising demand for flexible and cost-effective custom-designed infrastructure by working with the OpenStack community to offer cloud-based file share capabilities.

NetApp also will expand in small and midsized enterprise accounts by monetizing on rapid big data growth and adoption of mobile computing.

As competitors including EMC, HP and IBM invest to capitalize on storage opportunities in the midmarket—NetApp’s core customer base—NetApp is investing in big data and mobile computing-related solutions and touting its core value proposition of scalability and cost-effectiveness to expand in small and midsized enterprise (SME) accounts by positioning at the heart of customers’ productivity, efficiency and security concerns.

NetApp is aligning its E5500 Storage System, rolled out in March, with enterprise big data and high performance computing (HPC) storage requirements by cultivating a message of continuous uptime achieved through automation, simplified administration, and proactive diagnostic capabilities, alongside a competitive price-performance proposition.

NetApp is also addressing SME mobile computing requirements with offerings such as its NetApp Connect application, which provides simplified authentication and setup for ease-of-use, but still enables customers to be reassured of the security of their data, as data is still stored on an on premises OnTap-based storage array.

(C) TBR