​Editor’s note: The long-term viability for NetApp will be determined by disciplined execution on transformation-focused and competitive displacement opportunities in 2016, concludes Technology Business Research Analyst Krista Macomber after a review of NetApp’s latest earnings. NetApp has a major presence in Research Triangle Park, N.C.

HAMPTON, N.H. – NetApp continues along a challenging road, balancing the need to invest significant R&D and SG&A dollars in portfolio and go-to-market monetization with ongoing revenue challenges resulting from declining demand for legacy storage technologies.

Additionally, NetApp is working through ongoing recovery from missteps in strategic markets, including a delay to offering all-flash storage arrays.

Specifically during 1Q16, NetApp’s revenue declined 10.4% year-to-year to $1.4 billion, as gross and operating margins shrank 590 basis points and 140 basis points year-to-year, respectively, hindered by a 40% year-to-year decline to revenue from mature solutions, including NetApp’s legacy Data ONTAP 7 mode operating system. [NetApp reported earnings after the markets closed Wednesday.]

However, NetApp (Nasdaq: NTAP) has taken significant steps over the past four quarters, including largely refreshing its executive ranks, better arming channel partners to spark customer migration to strategic platforms including Clustered Data ONTAP, closing its acquisition of all-flash storage array vendor SolidFire, and launching a cost restructuring initiative, that position NetApp to improve its long-term stance in a rapidly shifting competitive landscape.

2016 is NetApp’s year to apply its newfound focus on disciplined execution to capitalize on competitive displacement opportunities present as peers including Dell, EMC, HPE and Lenovo navigate business restructuring during 2016, and as niche competitors face a market increasingly dominated by price competitiveness, a shift to converged and “as-a-service” IT resources, and an increasingly challenging funding environment.

In this climate, NetApp’s standing as one of the few remaining mature, pureplay storage vendors is highly opportunistic, as customers prioritize spending on addressing data-centric IT and business challenges. Capturing this opportunity for NetApp will require navigating remaining persistent challenges. Executing on an integrated data fabric strategy will become more challenging as NetApp seeks to build out strategic platforms such as E-Series SAN and SolidFire all-flash arrays that are not built on NetApp’s core platform and differentiator, its ONTAP operating system.

Additionally, TBR believes it is important for NetApp to increase focus on addressing burgeoning demand for hyperconverged platforms – a market that NetApp does not currently participate in, but that TBR’s Hyperconverged Platforms Market Landscape 1Q16 indicates will grow at a 50% CAGR from 2015 to 2020, increasingly displacing NAS systems, NetApp’s core market. The forthcoming refresh of Data ONTAP later in 2016 is a significant opportunity for NetApp to increase its standing as a transformation enabler for customers, and as a strategic ally to key partners.

  • NetApp invests in SANtricity to expand share-of-wallet and target new customers during their transition to next-generation IT models

As customers increasingly converge their NAS and SAN environments, and seek to reduce storage management complexity, NetApp has been working, since its 2011 acquisition of Engenio, to build from its historical concentration in customers’ NAS and into SAN deployments. NetApp has experienced modest success in expanding its addressable customer base, but headwinds, including heavily-entrenched competitors such as EMC, persist. NetApp seeks to further its traction in the SAN market by refining support for analytics workloads with its SANtricity OS.

In March 2016, NetApp enhanced its SANtricity operating system, which runs on NetApp’s Engenio-based E-Series arrays, to better support data-heavy workloads. Notably, NetApp has invested to facilitate increased IOPS and reduced latency, with a focus on targeting customers’ growing analytics needs.

NetApp has better positioned SANtricity to support customers’ IT modernization initiatives, but wrapping the platform into the vendor’s broader data fabric vision will be made challenging because SANtricity does not integrate with CDOT by default. Providing customers a clear path to leverage open APIs to connect SANtricity and CDOT is a means for NetApp to overcome this hurdle.

NetApp is late to market with its SANtricity update when compared to its peers however, requiring fast customer adoption to ensure these investments are successful. Customers are actively migrating legacy SAN and NAS environments to cloud and hyperconverged alternatives in the pursuit of increased agility and cost-effectiveness, and building out analytics implementations to achieve new business advantages. Sharp execution will be required as customers consider a plethora of different technologies, including hyperconverged.

NetApp remains absent from the hyperconverged market however, causing further challenges for the vendor as customers seeking hyperconverged alternatives will turn to other vendors to fill their demands.

  • NetApp reallocates resources to restructuring its channel programs for sharpened execution on next-generation storage opportunities

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 that is designed to streamline its legacy operations and ramp sales of strategic products such as Clustered Data ONTAP.

In particular, the company is investing in restructuring its channel programs to enhance engagements with partners around next-generation solutions, as it endures staff reductions. This indicates that NetApp will continue to rely on the channel, and in fact shift more sales responsibility on to channel partners, as it seeks to profitably increase monetization of recent portfolio investments.

Rapid storage industry disruption requires product innovation in new areas, and investment in evolved go-to-market models. However, NetApp’s investments in SG&A and R&D remain in decline year-to-year as the company seeks to improve the efficiency of its cost structure, especially in legacy portfolio areas. Despite these efforts, NetApp’s gross and operating margins declined in 1Q16 as legacy revenue streams declined at a faster pace than NetApp pared back expenses.

NetApp’s strategy is to drive efficiencies in its legacy businesses and, through the support of channel partners, ramp up sales of next-generation areas of its business, in order to correct this picture and retain its long-term viability. NetApp has a particular opportunity to maximize returns from, and loyalty of, its partners while attracting new partners to its roster as partners navigate disruption not only to traditional IT selling models, but also to long-standing business models of NetApp competitors.

(C) TBR