Editor’s note: Stephen Belanger, Research Analyst at Technology Business Research, analyzes NetApp’s latest earnings and near-term future. NetApp (Nasdaq: NTAP) reported earnings growth Wednesday. The company operates one of its largest campuses in Resarch Triangle Park, N.C.

HAMPTON, N.H. – As the value proposition of data center solutions continues to shift towards software and services, NetApp’s hardware revenue will remain challenged.

In 2Q13, NetApp reported corporate revenue growth of 5% year-to-year to $1.52 billion. TBR believes NetApp’s strong branded revenue performance, which reportedly increased 9% year-to-year in 2Q13, was driven primarily by the company’s clustered data ONTAP operating system. Additionally, NetApp achieved positive year-to-year revenue gains across each of its business segments including products, software and services; however, product revenue fell 18.2% year-to-year from 1Q13. TBR believes the firm’s hardware revenue challenges in 2Q13 reflect broader industry budgetary limitations and the shifting value proposition of data center solutions away from hardware and toward software and services.

  • NetApp is combatting difficult global data center market conditions through a workload-centric portfolio and messaging strategy.

Ongoing spending challenges in the global data center market had a detrimental impact on NetApp’s performance in 2Q13, particularly on its hardware revenue. TBR believes that to limit the impact of these challenges, NetApp is leveraging R&D investments and partnerships to position its portfolio around a workload-centric approach that simplifies growing IT complexity. By positioning solutions as ideal for particular workloads (or sets of workloads), NetApp will increase the value proposition of its portfolio and appeal to customer demand for improved performance and efficiency.

In 2Q13, NetApp strengthened its partnership with Cisco to enhance the FlexPod portfolio by introducing FlexPod Datacenter for enterprise and service provider customers, FlexPod Express for midmarket businesses and FlexPod Select for data-intensive workloads. FlexPod Select is the first FlexPod solution developed for specific workloads such as high-performance and Hadoop applications, which are both resource-intensive. In 2Q13, NetApp reported FlexPod revenue growth of more than 30% year-to-year. In 2H13, TBR believes NetApp will be better positioned to target customers that are primarily concerned with performance, enabling the firm to increase ASPs by messaging the ROI and availability improvements of FlexPod Select for data intensive workloads.

In June, NetApp announced a new version of its storage operating system, clustered Data ONTAP 8.2, which reportedly has the fastest adoption rate of any of the firm’s major releases. While the firm added many new features to the OS, TBR believes the addition of granular quality of service (QoS), in particular, will further the firm’s workload-centric strategy. Granular QoS enables customers to control the resources each workload uses. This feature will increase the management capabilities of performance spikes, which will eliminate the fear of performance reductions that can occur when consolidating several workloads on a single cluster.

TBR expects NetApp will continue to invest in technologies that improve the performance of its solutions for specific workloads, primarily data intensive applications, as well as marketing initiatives that convey the added value of workload-optimized solutions to differentiate its solutions while driving ASP and revenue growth.

  • NetApp is hiring executives and investing in its channel network to drive indirect sales revenue and stave off competition related to rival vendors’ recent channel initiatives.

NetApp is working closely with channel partners and large-scale distributors including Arrow, Avnet and Cisco to support its global customer base and drive market share gains. In comparison to rival data center vendors, NetApp’s channel partners account for a larger portion of its corporate revenue, with indirect sales contributing approximately 80% of total revenue in 2Q13. TBR believes competitors that are undertaking channel initiatives will increasingly threaten NetApp’s channel-centric strategy.

For example, EMC recently announced plans to replace its aging Velocity Partner Program with the EMC Business Partner Program in January 2014. NetApp is investing in the channel to drive sales in underpenetrated markets, increase market share and counter rival vendors’ channel initiatives.

In June, NetApp announced the appointment of Peter Howard as its Worldwide Channel Strategy and Sales vice president. TBR believes NetApp will capitalize on Howard’s previous experience developing and executing company strategies to drive changes in its channel network and fine-tune its vast indirect sales force. Additionally, NetApp partners with large-scale technology vendors to provide partners with proven solutions in key technology areas such as cloud and big data. In 2Q13, NetApp expanded its cloud-centric partnership with Microsoft and announced plans to invest $15 million in the NetApp Partner Program for education resources, training and sales incentives for its channel partners.

Furthermore, the firm emphasized plans to increase the responsibility of partner account managers, which we expect will result in improved channel collaboration and help partners achieve sales goals.

A key piece of NetApp’s sales strategy is to utilize channel partners to increase its presence in less-penetrated geographies, primarily emerging markets. In 2Q13, the firm appointed Mark Ridley, Dell’s former country manager of Africa, as Regional Director of Africa. Indirect sales account for 100% of NetApp’s revenue in Africa and channel responsibilities extend beyond distribution and integration to include higher-value opportunities such as consulting and professional services.

TBR believes Ridley’s appointment will ensure that partners are capable of effectively providing the full range of NetApp’s solutions, which is essential because they represent the firm’s only sales resources in the region. We expect the firm will continue to invest in its channel presence in emerging markets around the globe in 2H13 and 2014, which will augment its mature market install base and drive market share improvement.