Editor’s note: In previewing NetApp’s latest earnings report on May 25, Technology Business Research Analyst Krista Macomber says the tech storage firm will endure declines as it invests to secure market relevance.
HAMPTON, N.H. – Market consolidation requires portfolio modernization for pure-play viability at NetApp.
Customers’ accelerated shift to next-generation IT platforms such as converged systems and software-defined IT is rapidly disrupting the storage market. NetApp retains a focus on its data fabric roots as the storage market continues to consolidate. The company is moving through 2016 armed with a more aggressive restructuring plan designed to streamline its legacy operations and ramp sales of strategic products such as Clustered Data ONTAP.
TBR believes these restructuring efforts helped slow operating profit year-to-year declines from 18.6% in 4Q15 to 11.6% in 1Q16 and revenue year-to-year declines from 10.6% in 4Q15 to 7.4% in 1Q16, with NetApp earning approximately $1.4 billion in revenue in 1Q16. A challenging road remains ahead, marked with growing pressures on NetApp’s profitability and revenue streams in the short term, and persistent, yet slowing, revenue declines in the long term.
In 2016 NetApp (Nasdaq: NTAP) began restructuring its channel partner program to shift the focus from NetApp’s interactions with its partners to its partners’ interactions with customers. The vendor also formulated long-term channel strategies, including strengthening existing partnerships and increasing flash and converged adoption through channel sales, and hired new channel executives.
These steps are strategic, since NetApp derives the majority of its revenue through the channel, and maximizing its success in next-generation storage is critical to long-term growth. Channel and portfolio investments are costly, however, and TBR believes NetApp will seek ongoing funding for these initiatives by paring back spending and boosting efficiencies in other areas of the business. We believe executing on these restructuring initiatives enabled NetApp to lessen revenue challenges in 1Q16, and as these strategies progress, revenue streams will become more stable.
As the storage industry consolidates through niche and mainstream storage vendor acquisitions, and as customers’ data centers grow increasingly converged, evolving its roster of technology partners and how it works with these partners will be essential to NetApp’s success. NetApp will need to invest in next-generation storage solutions to remain an attractive partner in the evolving storage market.
For example, as customer data centers increasingly shift toward more converged and hyperconverged solutions, NetApp’s lack of investment in the hyperconverged market will prove detrimental to its partnership goals. We believe finding new means to cost efficiencies and accelerating growth in next-generation storage throughout 2016 will be necessary for NetApp to continue improving its financial performance and provide for future longevity.
(C) TBR
