Editor’s note: Another weak quarter financially led NetApp to announce 500 layoffs this week with many of those taking place at its campus in RTP. The storage technology device firm is facing increasing competition and is relying on “flash” offerings to rebuild revenue even as it cuts costs. Technology Business Research analyst Stephen Belanger offers his insight into what the company will do next.

HAMPTON, N.H. – NetApp’s revenue declined on a year-to-year basis due to decreasing storage spending, OEM challenges and increased competition from EMC and IBM.

In 1Q15 NetApp’s revenue declined 6.6% year-to-year to $1.5 billion due to product revenue declines of 12.4% over the same period to $913 million.

TBR attributes the vendor’s revenue decline to weak global storage spending, hardware commoditization, continued OEM business challenges and competition from rival vendors such as EMC and IBM.

NetApp continues to use stringent cost controls to support profitability, reducing expenses 0.7% year-to-year in 1Q15. However, the vendor was unable to reduce spending enough to offset revenue declines, which caused operating margin to fall 310 basis points year-to-year to 10.5%.

NetApp is increasing its rate of employee layoffs in an effort to support profitability and realign its workforce around strategic, software-led growth areas such as cloud, software-defined storage (SDS) and analytics. TBR believes the vendor is focusing on layoffs in ailing business segments such as legacy hardware and in administrative roles. NetApp plans to lay off approximately 500 employees by the end of 2015, and will incur a charge of $25 million to $35 million related to the job cuts in 2Q15. TBR believes layoffs will persist beyond 2015 but at a lesser rate as NetApp completes the realignment of its workforce. With streamlined expenses, its successful ONTAP operating system, and strengthened initiatives around professional services, flash storage and vertical-focused solutions, TBR believes NetApp will slow its revenue decline and sustain its position in the storage market.

NetApp grew its maintenance and flash revenue in 1Q15

In 1Q15 NetApp’s Hardware Maintenance Support revenue growth continued to outpace the revenue performance of its core hardware and software products. Hardware Maintenance Support revenue has increased consistently at a double-digit, year-to-year rate over the past two years. In 1Q15 NetApp’s revenue from Hardware Maintenance Support contracts increased 10% year-to-year to $323.1 million, supported by the company’s strategy to expand upstream and attract enterprise customers, which is driving demand for service agreements. Although Professional and Other Services revenue declined 9.8% year-to-year to $76.7 million, TBR believes NetApp’s Professional and Other Services revenue will improve in the long term as NetApp increasingly attracts enterprise service agreements from larger-scale customers.

NetApp is expanding its flash portfolio and continues to gain momentum in the flash storage market. In 1Q15 NetApp launched new solutions built around its all-flash-FAS (AFF) 8000 Series product, which will help channel partners reduce time-to-market through prebuilt solutions. TBR believes the product launches and product refreshes will help the vendor slow its recent product revenue declines. However, limited storage hardware spending, continued OEM business challenges and increasing technology competition will present headwinds.

NetApp targets media and entertainment workloads to spark sales of its StorageGRID offerings and all-flash arrays

NetApp is developing vertical-centric solutions to provide efficiency and performance improvements for specific workloads. In May NetApp showcased solutions for the media and entertainment industry, which faces growing IT challenges related to increases in video resolutions and digital delivery platforms. NetApp demonstrated solutions that are designed to provide greater storage efficiency, manageability and usability for these media and entertainment customers.

NetApp has successfully gained a foothold in the media and entertainment vertical, having installed over 300 petabytes of capacity at more than 100 media organizations over the past three years. NetApp leverages its StorageGRID Webscale object storage solution and all-flash arrays appeal to target the media and entertainment vertical. StorageGRID Webscale provides customers with a hybrid cloud solution for multipetabyte data repositories while NetApp’s EF all-flash arrays enable customers to speed up video editing workloads.

NetApp’s recent portfolio developments, which provided improvements in areas such as data mobility, flash storage and video bandwidth, appeal to video companies seeking better HD/4K production, media life cycle management, viewer analytics and security.

TBR believes NetApp will continue to develop workload-centric, vertical-focused solutions to differentiate from key competitors such as EMC.