Storage Notes: NetApp, HP, IBM Not Really Impacted By Dell-EMC Deal

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Storage systems manufacturers such as EMC (NYSE:EMC), NetApp (NASDAQ:NTAP), IBM (NYSE:IBM), Hitachi Data Systems and Hewlett-Packard (NYSE:HPQ) have had a tough year in terms of storage hardware product sales, owing to a decline in worldwide spending on information storage. According to data compiled by IDC quarterly reports, global factory revenues for storage systems declined by over 2% year-on-year to $11.2 billion through the first half of 2015. The trend was consistent with 2014 numbers when global factory revenues for external storage systems declined by 0.4% year-on-year to $24.5 billion in 2014.

Over the last couple of years, customer preference is shifting to low-cost original design manufacturer (ODM) storage boxes, which is cutting into the addressable market for large vendors. [1] This has impacted large storage systems vendors, leading to revenue declines. Despite the decline in global factory revenues this year, smaller vendors have witnessed growth. The combined revenues generated by companies outside the top five vendors saw a 9% increase through the first half of 2015. [2] [3]

Below we take a look at how the companies have fared in storage system sales through the first half of 2015 and their strategies to compete with smaller vendors.

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EMC

EMC has been the largest storage systems vendor over the last few years, commanding a nearly 30% share in the external storage systems market. EMC’s share grew from under 23% in 2009 to 31.3% at the end of 2013, before declining to 31% in 2014. Corresponding to the share decline, EMC’s storage hardware revenues declined by 1.5% to $7.6 billion for the full year. Similarly, EMC’s storage hardware revenues have fallen by over 5% through the first half of the year. As a result, its share in the market stood at 28.6% for Q1 and Q2 combined, which is significantly lower than prior year levels. With Dell acquiring EMC for $67 billion, the presence of the combined entity in the storage systems market is expected to consolidate further. Dell’s share in the market has stood at 6-8% over the last few years. The combined entity could have a nearly 35% share in the market, further consolidating EMC’s hold over the storage systems market in the coming years. However, with smaller vendors gaining share at a rapid pace, it is imperative for larger manufacturers to provide customizable and cheap storage solutions to customers to sustain product sales in this slowing market.

See our full analysis for EMC’s stock

Hewlett-Packard Enterprise

Hewlett-Packard announced its split into HP Inc (HPQ) and HP Enterprise (HPE) on November 24, with the enterprise business including storage, servers, networking, financials and  services to be handled by HPE. Hewlett-Packard is the only large company besides Hitachi Data Systems to post an increase in storage hardware revenues in the first half of 2015. Over the last year or so, HP has improved its position in the mid level storage-attached network (SAN) market. It is now the leading seller of mid-range SAN products this year, from being the third largest last year. [4] Moreover, the company is the second largest all-flash vendor in the storage market, which is an improvement from last year. Consequently, HP’s external storage systems revenues were up by over 1% y-o-y to $1.1 billion in the first half of the year, while its share in the market stood at 9.8%, up from 9.6% in 2014. HP gained share due to higher demand in the mid-range market and comparatively higher declines faced by competing storage companies. Storage revenues contributed to about 4.5% of the company’s top line in 2014 and the first half of 2015. We are in the process of revising our model after the split.

See Full Analysis For HP Here

NetApp

NetApp’s revenues have fallen significantly in the first three quarters of 2015. The company’s storage hardware revenue fell by over 14% through the first three quarters of this year to $2.2 billion. As a result, its share in the external storage systems market stood at 12.2% for the period, compared to a 12.8% share in 2014. The company attributed the decline in revenues, the corresponding drop in market share and compressed margins in the storage division to an unfavorable product mix coupled with the negative impact of FX fluctuations – a trend which is likely to continue through the December quarter as well.

The company announced a change in management in June, naming George Kurian as the new CEO. ((NetApp Announces Changes to Executive Leadership Team and Board of Directors, NetApp Press Release, June 2015)) Shortly afterwards, NetApp announced the release of its sub $25k AFF8000 all-flash array. The company intends to compete with smaller flash-array players including Pure Storage, Violin Memory and Nimbus Data with the product release. [5] We have a $33 price estimate for NetApp’s stock, which is slightly higher than the current market price.

See Full Analysis For NetApp Here

IBM

Similar to NetApp, IBM has witnessed a 12% decline in revenues from the sale of external disk storage systems in the first half of the year. As a result, its share stood at 9.4% in the same period, compared to 10.8% in 2014. Weakness in IBM’s standalone storage systems can be partially attributed to the termination of the IBM-NetApp deal in May last year. Moreover, IBM sold off its x86 servers business to Lenovo in Q4 2014, which further contributed to low product sales. [6] Subsequently, the company announced virtualization software for its IBM Spectrum Storage family of storage software. The addition of virtualization will help the company reap benefits in the growth software-defined storage (SDS) market. According to research firm MarketsAndMarkets, the SDS market is expected to grow at a CAGR of almost 35% from 2014 through 2019. [7] Storage product sales contributed to about 4% of IBM’s net revenues in 2014 and in 2015 thus far. We have a $154 price estimate for IBM ,which is about 10% higher than the current market price.

See Full Analysis For IBM Here

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Notes:
  1. The Rise Of White-Box Storage, Network Computing, August 2014 []
  2. Worldwide Quarterly Disk Storage Systems Tracker Q1 2015, IDC Press Release, June 2015 []
  3. Worldwide Quarterly Disk Storage Systems Tracker Q2 2015, IDC Press Release, September 2015 []
  4. Hewlett Packard Enterprise: No, you may not call us HP Enterprise, Chennelnomics, November 2015 []
  5. NetApp Targets EMC, HP, Startups With New $25K All-Flash Storage Line Part 1, CRN, June 2015 []
  6. Lenovo says $2.1 billion IBM x86 server deal to close on Wednesday, Reuters, September 2014 []
  7. Software Defined Storage Market worth $6,217.6 Million by 2019, MarketsAndMarkets, November 2014 []