Editor’s note: Storage technology firm NetApp releases its latest earnings this week, and the news is expected to reveal continuing challenges for the new CEO of the company, which maintains a large presence in RTP. Stephen Belanger, an analyst at Technology Business Research, offers his insight.
HAMPTON, N.H. – TBR believes NetApp’s (Nasdaq: NTAP) declining hardware business hindered corporate revenue and profitability improvement in 2Q15.
During NetApp’s 2Q15 earnings announcement on August 19, TBR expects the vendor will report a revenue decline of 11% year-to-year to $1.3 billion. Despite healthy spending by customers in the enterprise storage market, NetApp’s short-term results will be pressured by challenges in converting its customer base to the latest version of Clustered Data ONTAP due to the complexity of migration for larger clients.
TBR believes this is depressing the company’s hardware revenue by weakening its ability to retain its existing customer base, as well as to generate new customers amid strong competition by vendors such as EMC and IBM.
TBR expects all of NetApp’s business segments, Product, Software Entitlements and Maintenance, and Services, to show revenue declines in its 2Q15 earnings report. The largest decline (15.2% year-to-year) will be seen in the Product group due to rising public cloud adoption, hardware commoditization, pricing competition and continued OEM business challenges.
In June, NetApp ousted CEO Tom Georgens in an effort to reverse its revenue declines. Georgens is replaced with temporary CEO George Kurian, who was in charge of strategy and development for NetApp’s Product and Solutions portfolio since September 2013. NetApp plans to search for a new, permanent CEO, and TBR expects the new CEO will be tasked with directing NetApp’s investments and strategy to achieve revenue growth within two years.
In addition to its executive changes, NetApp is also making changes to its workforce. Specifically, in May NetApp announced a workforce realignment initiative to improve efficiency, reduce costs and realign its workforce to high-demand areas such as cloud and analytics. Job cuts of approximately 500 employees will be completed by the end of 2015, which TBR believes will help NetApp drive long-term margin improvement.
NetApp’s short-term results will remain pressured by continued challenges transitioning its customer base to Clustered ONTAP due to complexity issues, which will pressure its core hardware revenue. To promote adoption of Clustered ONTAP, NetApp will use a combination of direct support of larger clients and increased channel partner training so they can support smaller clients.
Further, stabilizing its customer base will support NetApp’s long-term positioning by freeing up resources that can be redirected back to sales and R&D in high-demand areas such as cloud, flash, SDS and analytics.
NetApp has been repositioning its portfolio and go-to-market strategies to address the ongoing market shift from piece-part hardware products to integrated, cloud-based platforms. The vendor has already demonstrated its ability to pinpoint a specific customer demand and quickly establish a foothold in the segment. For example, NetApp has been successful in capturing and growing share of the flash market in the media and entertainment industry.
The new CEO will be challenged to repeat this success in other areas, such as repositioning NetApp’s go-to-market strategy to better address business outcome requirements expressed by line-of-business decision makers.