What To Expect From NetApp After A Weak End To 2014

-7.88%
Downside
105
Market
96.70
Trefis
NTAP: NetApp logo
NTAP
NetApp

Storage giant NetApp (NASDAQ:NTAP) had a lackluster 2014, with a 2.5% decline in net revenues through the calendar year. Much of the decline was attributable to weak storage product sales, corresponding to the industry-wide decline in storage system factory revenues. NetApp’s storage product revenues (which include hardware product sales and related software) fell by over 6% for the full year to $3.8 billion. As a result of low product revenues, the related software entitlements and maintenance (SEM) division also suffered. SEM revenues were down by about 2% on a year-over-year basis to $900 million for the full year. The company is poised to grow strongly in the coming quarters on the back of a revamped product lineup, strength in the storage software market and its presence in the fast-growing converged infrastructure and flash array market. Below we take a look at how NetApp’s storage hardware performed in 2014 relative to its peers and what to expect in the coming quarters.

We have a $40 price estimate for NetApp’s stock, which is about 10% higher than the current market price. The stock price has fallen by about 15% since the start of this year.

See Full Analysis For NetApp Here

Relevant Articles
  1. Up 27% Over The Past Year, Will Higher Margins And Cloud Sales Drive NetApp Stock Higher Post Q3 Earnings?
  2. Up 28% Since The Beginning Of 2023, What’s Next For NetApp Stock?
  3. What To Expect From NetApp’s Q4 Results?
  4. NetApp Stock Looks Attractive Despite Easing IT Spending
  5. Despite A Rise In Sales, Here’s Why NetApp Stock Has Underperformed The S&P
  6. After Strong Outperformance, Can NetApp Stock Maintain Its Streak?

Storage Systems Market And NetApp’s Presence

According to data compiled by IDC, it is evident that the storage hardware business has slowed down in recent years. The year started slow for storage system sales throughout the industry. Total worldwide external disk storage systems factory revenue for Q1 this year was over 5% lower than the comparable prior year period at $5.6 billion. Low product sales were attributable to a 25% y-o-y decline in high-end storage spending, according to IDC. [1] Weakness continued through the second quarter, as industry-wide external storage systems revenue declined by 1.4% y-o-y to just under $5.9 billion. [2] The trend reversed in Q3, as demand picked up for storage arrays costing less than $100,000. Industry-wide external storage factory revenue was up by 1% y-o-y to $5.8 billion. [3] However, end-of-year seasonality, high demand for mid-range storage arrays and storage systems for hyperscale datacenters in the December quarter led overall factory revenues to rise by about 3% y-o-y to $7.1 billion. [4] As a result, industry-wide external storage system factory revenues stood at $24.5 billion for the full year – about 0.4% lower than the previous year.

NetApp was one of the few large storage system vendors to have maintained its market share through the first half of 2014 at over 14% share in the storage systems market. The company witnessed strong demand for its all-flash arrays and storage units with attached clustered nodes in that period. Subsequently, the company’s product sales suffered in the December quarter and managed a mere 10% share in global external storage system sales. As a result, its share for the full year stood at 12.8%, which was about 25 basis points lower than 2013 levels.

How Competing Storage Providers Performed In 2014

Hewlett-Packard (NYSE:HPQ) was the only large company which gained share in the external storage market in 2014. Its revenues grew by 1.5% y-o-y to $2.3 billion while its share increased from 9.4% to 9.6% this year. Similarly, the company’s revenues in the total disk storage systems market (which includes internal storage as well) also increased by 2% to $5.2 billion for the full year. HP’s management projects growth in enterprise storage segments such as converged storage, software-defined networks and cloud infrastructure, where the company can potentially excel in the coming quarters. [5] Additionally, the company announced a revamped product line for its 3PAR midrange StorServ storage systems in January, which could further expand HP’s presence in the market. [6]

EMC is the largest player in the external storage systems market, with a share of 31% in the arena. Its share grew from under 23% in 2009 to 31.3% at the end of 2013. However, EMC’s share in this market space declined by 30 basis points to 31% through 2014. This was the first time since 2008 that EMC lost market share on a year-over-year basis. Corresponding to the share decline, EMC’s storage hardware revenues declined by 1.5% to $7.6 billion for the full year. However, the company has a strong outlook for its emerging storage products such as the all-flash array XtremIO and converged storage infrastructure ScaleIO.  These products were largely responsible for the growth in hardware sales in the latter half of 2014. We forecast EMC’s share in the market to be around the 31% mark through the end of our forecast period.

Hitachi Data Systems’ (HDS) and IBM (NYSE:IBM) both witnessed share declines similar to EMC and NetApp through the year. Hitachi’s share fell from 8.1% 2013 to 7.7% 2014. The company recently announced the acquisition of business intelligence and analytics company Pentaho for about $500-$600 million. [7] This move will enable the IT giant to have consolidated storage and data analytics offerings to compete with storage companies that currently offer integrated solutions such as EMC and NetApp. On the other hand, IBM had a difficult year, which was partially attributable to weakness in IBM’s standalone external storage systems as well as the termination of its agreement with NetApp in May 2014. Consequently, IBM’s share in the market fell from 12% in 2013 to 10.8% in 2014, with revenues declining by over 10% to $2.6 billion.

What To Look Out For

One of the key reasons for a decline in NetApp’s share was the weakness in its OEM channel, as well as the termination of the IBM-NetApp deal in May last year. Although the company initially expected a 30-40% decline in OEM revenues through FY 2015, it has witnessed only a 20% decline in OEM revenues through the first three quarters of the current fiscal year. On the other hand, NetApp introduced a significant number of new products last year, including all-flash storage array FlashRay, the Data ONTAP 8.3 operating system, Cloud ONTAP software for usage in public clouds and the new range of products from the SteelStore acquisition. [8]

Furthermore, NetApp signed an agreement with VMware (NYSE:VMW) to combine its storage arrays with VMware’s EVO: RAIL software stack. [9] VMware’s  EVO:RAIL combines compute, networking, and storage resources into a single converged appliance that makes it an easy-to-deploy solution. NetApp’s hyper-converged system will have three offerings including the NetApp FAS storage array, NetApp’s Cluster Data ONTAP operating system and VMware’s EVO: RAIL. Since NetApp’s management ruled out a large-scale acquisition of a virtualization or cloud computing firm, the company is likely to continue to collaborate with a third party such as VMware, and have integrated product offerings. We currently forecast NetApp’s external storage systems market share to gradually rise to over 15% through the end the decade. You can modify the interactive chart below to gauge the effect a change in market share of external storage systems will have on our price estimate for NetApp.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Worldwide Quarterly Disk Storage Systems Tracker Q1 2014, IDC Press Release, June 2014 []
  2. Worldwide Quarterly Disk Storage Systems Tracker Q2 2014, IDC Press Release, September 2014 []
  3. Worldwide Quarterly Disk Storage Systems Tracker Q3 2014, IDC Press Release, December 2014 []
  4. Worldwide Quarterly Disk Storage Systems Tracker Q4 2014, IDC Press Release, March 2015 []
  5. HP Servers, Storage Decline As Split Begins, Enterprise Tech, November 2014 []
  6. HP Refreshes Mid-Range 3PAR Storage, CRN, January 2015 []
  7. ​Hitachi Data Systems to buy big data analytics firm Pentaho, ZDNet, February 2014 []
  8. NetApp Helps Enterprises and Service Providers Build a Hybrid Cloud Foundation, NetApp Press Release, October 2014 []
  9. NetApp goes for a ride on VMware’s EVO: RAILs, The Register, December 2014 []