Storage giants NetApp (NASDAQ:NTAP) and EMC (NYSE:EMC) are making efforts to shift away from the tag of pure “storage companies”. In its Q2 earnings call last year, NetApp management pointed out that they are more of a “data management” vendor and not just a storage hardware company.  This statement signaled the company’s intention to evolve from being predominantly a hardware manufacturer to an end-to-end storage solution provider. A similar trend was highlighted when NetApp announced its agreement with VMware (NYSE:VMW) to integrate its Clustered ONTAP Drive with VMware’s vCloud suite last year. 
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- How Has NetApp’s Revenue and EBITDA Composition Changed In The Last Five Years?
- What’s NetApp’s Fundamental Value Based On Expected 2016 Results?
- Storage Systems, Software & Maintenance: What’s NetApp’s Revenue Breakdown?
The traditional data center storage setups have lost their currency due to the increasing adoption of cloud-based storage. With software-defined data centers (SDDC) gaining traction across the industry, it is imperative for storage companies to align their products with newer storage trends. In response to the changing industry dynamics, NetApp recently launched its new enterprise storage array series, the FAS8000, which can be deployed in traditional data centers as well as across newer hybrid cloud platforms. Furthermore, the company introduced its new virtualization software, FlexArray, which enables NetApp’s enterprise array to virtualize and manage third-party arrays. The company described the software as applicable across “unbound cloud” environments, which means that it can manage data on both private and public cloud platforms.  The integrated product offerings by the company define the new-age storage that customers have been looking forward to.
The Role Of Software In Storage Solutions
With IT infrastructure demands increasingly being fulfilled via the cloud or “-as-a-Service” platforms, storage solutions are also being provided on demand, in a similar manner. The software-defined data center eliminates the need to purchase, maintain and upgrade dedicated hardware as storage requirements are fulfilled on demand, i.e., “off premise”, either on company-owned infrastructure (the so-called Private Cloud) or on service provider infrastructure (the so-called Public Cloud, provided by Amazon Web Services and a host of others). It lowers the investment and service burden of infrastructure in multiple ways. First, the immediate cost of buying and configuring expensive storage hardware is cut down if one uses a pay-per-use storage. Second, it helps over the longer term by eliminating the need to support the infrastructure and incrementally augment it as the volume of data grows. Data growth can organically by satisfied sourcing greater drive and array capacity on an as-needed basis. Moreover, the mix of on-premise and -as-a-Service storage grows, it can be managed as unified environment via the software-defined storage layer.
NetApp’s New Virtualization Software And Enterprise Arrays
NetApp introduced its new range of enterprise arrays under the brand FAS8000 (and discontinued FAS6200 and FAS3200) where FAS stands for fabric-attached storage. This range of products support Network Attached Storage (NAS), Storage Area Network (SAN), Fiber Channel and Ethernet all on the same platform, giving it versatility for access. The new arrays replace the old FAS6200 (enterprise-level) and FAS3200 (mid-level) arrays. However, the company intends to continue selling its entry level FAS2200 arrays for now, implying its targeted market segment to be mid-level enterprises to large enterprises. As a result, FAS8000 is available in three storage capacities ranging from 1.92 petabytes (1 petabyte = 1 million gigabytes) to 4.8 petabytes. 
The company’s new virtualization software, FlexArray, enables users to virtualize other storage systems such as EMC, Hitachi or NetApp’s E-series, on the FAS8000 arrays. An integration of this sort is likely to push sales of the company’s product among first-time buyers as well as among clients looking to upgrade their existing systems. Clients upgrading their storage systems need not discard their current storage drives, since they can be accessed by NetApp’s FAS8000. This sort of flexibility makes the FAS8000-FlexArray coupling a viable option. 
Going forward, the company intends to capitalize on the shift towards software-based solutions due to high profitability of software products over pure hardware. IDC estimates the software-defined data center market to grow at a CAGR of 70% to $5.4 billion by 2018.  Although this market segment doesn’t directly mirror NetApp’s product sales, the dependence of SDDCs on storage/data management companies gives NetApp an edge with the integrated offering. We estimate NetApp’s software division to become more valuable as the industry shifts towards software-defined storage.
The company is very confident of the product’s success as evidenced by the introduction of its payback guarantee program. According to company estimates, clients using the FAS8000 products with the FlexArray software could save enough to recover the cost of the product (including support) within nine months. Failing this, the customers are entitled to a full payback.  Our $43 price estimate for NetApp is around 8% above the current market price.Notes:
- NetApp Q2 Earnings Call Transcript, Seeking Alpha, November 2013 [↩]
- Software-defined Storage In Highlight At VMworld, NetApp Blog, August 2013 [↩]
- NetApp Introduces FAS8000 Storage and FlexArray Virtualization Software, Storage Review, February 2014 [↩]
- NetApp Launches New Array, Virtualization Software, Tech Target, February 2014 [↩]
- Customers Move To Software-Defined Data Centers With NetApp For VMware Environments, Market Watch, August 2013 [↩]
- Software Defined Data Center Market Worth $5.41 Billion By 2018, Markets and Markets, August 2013 [↩]
- NetApp Payback Guarantee Program, NetApp Product Info, February 2014 [↩]