Editor’s note: NetApp (Nasdaq: NTAP) has repositioned its portfolio to take advantage of opportunity by emphasizing its cloud, analytics and converged capabilities. Research Analyst Stephen Belanger takes an in-depth look at the storage technology firm, which has a major presence in RTP.

HAMPTON, N.H. – NetApp has repositioned its portfolio to take advantage of opportunity by emphasizing its cloud, analytics and converged capabilities.

NetApp is strengthening its portfolio capabilities through product investments and partnerships to help customers navigate cloud and analytics technologies. In 3Q14, NetApp demonstrated its commitment to cloud and analytics with the release of Cloud ONTAP and its converged infrastructure partnership with Unisys.

TBR believes NetApp’s 3Q14 earnings indicate initial success in these next-generation technologies, despite declines from legacy businesses such as OEM continuing to drag down corporate revenue.

During 3Q14 NetApp’s revenue decreased by 0.5%, year-to-year to $1.5 billion, due to continued OEM revenue declines. Branded revenue growth of 1.8% year-to-year was driven by NetApp’s increased emphasis on branded products such as its E-series and FAS systems in an increasingly commoditized marketplace. The vendor’s operating margin of 12.5% grew year-to-year and sequentially in the quarter. TBR believes NetApp’s targeted investment strategy, focused squarely on key areas such as cloud, flash and analytics, enabled the firm to bolster its portfolio in strategic areas while simultaneously supporting its bottom line.

TBR believes NetApp, as a pure-play storage vendor, is better positioned to endure market challenges than its larger conglomerated competitors, as spending for storage systems is supported by rapid growth in big data and cloud computing. Furthermore, we expect NetApp to benefit from its investments and partnerships in areas such as cloud, analytics, flash, converged infrastructure and software-defined storage. These technologies will continue to experience strong demand and drive transformation in the storage market. Some examples of NetApp’s repositioning to these IT trends include portfolio updates such as Cloud ONTAP, FlashRay and OnCommand Cloud Manager software, as well as strategic partnerships with Unisys and Cisco for converged infrastructure solutions. Competition will continue to threaten NetApp, particularly from EMC, as well as HP, Dell, HDS and smaller all-flash vendors. TBR believes NetApp’s ability to offer all of its products around Data ONTAP as a common operating system is a competitive advantage. The Data ONTAP advantage, coupled with the explosive growth of data being generated, and NetApp’s portfolio, position the vendor for long-term success.

  • NetApp leans on key technology partners to target converged infrastructure revenue opportunities

NetApp relies on technology partners with complementary server and networking technologies to fulfill growing customer demand for converged infrastructure solutions. Converged infrastructure solutions appeal to IT customers for a number of reasons including being easy to purchase and manage, fast and simple to deploy, and providing improved workload performance. TBR research shows that data-centric workloads are the primary focus of converged systems, led by big data analytics, database and data warehousing. NetApp prioritizes key data-centric workloads while working closely with converged partners including Unisys and Cisco to develop solutions and target the fast-growing converged segment of the global data center market. TBR believes working with partners for converged solutions enables NetApp to counter large-scale rivals including IBM, HP and Dell, through a best-of-breed technology partnership strategy.

During October, Unisys and NetApp announced a partnership that combines Unisys’ Forward server platform with NetApp’s storage systems. TBR believes the partnership is an example of how NetApp seeks partners that provide differentiated capabilities, as Unisys uniquely targets mission-critical Linux and Windows workloads with its x86-based Forward platform. The Unisys partnership will help NetApp capture converged systems demand by augmenting its existing FlexPod partnership and providing new options for customers seeking converged solutions with NetApp storage hardware, particularly for mission-critical workloads that traditionally required proprietary systems.

NetApp and Cisco continued to experience strong traction with their joint FlexPod solutions in 3Q14. NetApp reported FlexPod shipments increased 50% year-to-year, as the company successfully took advantage of rising adoption of converged infrastructure solutions. However, TBR believes the vendors’ June 2014 announcement that FlexPod would not support VMware’s NSX software-defined networking technology will present significant headwinds, as NSX is expected to emerge as a leader in the still nascent SDN market. Instead, FlexPod will support Cisco’s SDN technology, Application Centric Infrastructure (ACI). While this decision will benefit Cisco by supporting adoption and awareness of its SDN solutions, it will threaten to lock NetApp out of deals with customers that want NSX instead of ACI. TBR believes this exhibits one inevitable NetApp disadvantage: having to rely on technology partners for server and networking hardware.

  • NetApp bolsters its hybrid cloud portfolio with new product launches

Hybrid cloud saw a flurry of investment and partnership activity by NetApp in 2014, highlighted by the Cloud ONTAP product announcement in October and partnerships with Microsoft and Equinix in July. NetApp enhanced its ONTAP storage operating system with the launch of Cloud ONTAP to further improve the competitive advantage the OS provides. TBR believes the Cloud ONTAP announcement reflects NetApp’s belief that hybrid clouds will be the backbone of IT going forward. Cloud ONTAP will enable customers to transition between public clouds from any of the major providers such as AWS and Microsoft Azure and on-premises private cloud environments easily and quickly.

The Cloud ONTAP platform enables IT administrators to run instances of NetApp’s Data ONTAP operating system in the public cloud and connect these instances to on-premises hardware. This functionality is currently limited to AWS, but is expected to expand to include Verizon Cloud and Microsoft Azure. Furthermore, new OnCommand Cloud Manager software will enable hybrid cloud data management by providing a simple graphical user interface for customers to provision clustered Data ONTAP instances between private cloud environments and public cloud providers. TBR believes NetApp’s continued hybrid cloud portfolio initiatives and ONTAP innovation position the vendor at the forefront of the hybrid cloud market, which will be a key factor in NetApp’s future success as cloud technologies increasingly disrupt traditional IT consumption models.

(C) TBR