NetApp To Shell Out $870 Million For All-Flash Array Startup SolidFire

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NetApp (NASDAQ:NTAP) announced the acquisition of all-flash array maker SolidFire for $870 million at the end of what has been a relatively slow year for the storage giant. [1] Fiscal 2016 (ends with the month April) has been a breakthrough period for the company in terms of customers transitioning towards a combination of on-premise solution deployments and cloud-based storage solutions from the existing storage platforms. Newly appointed CEO George Kurian highlighted this trend, with the latest figures on the decline in usage of the traditional ONTAP 7-Mode operating system and the surge in Clustered Data ONTAP in the last couple of quarters. ((NetApp Q2 FY 2016 Earnings Call Transcript, Seeking Alpha, November 2015))

NetApp has witnessed weakness in its core storage hardware division over the last few quarters. Storage product revenues generated by the company through the three quarters in 2015 thus far have fallen by over 16% year to year to just under $2.4 billion. As a result, net revenues in the same period declined by about 3% to $4.4 billion, with software and services offsetting the negative impact of weakness in hardware sales. Continued weakness in the global storage hardware market, coupled with a weak dollar, an unfavorable product mix and a weaker growth outlook, have all pressured NetApp’s stock price over the past year as it fell from the January high of $40 to the current high twenties range.  We have a $33 price estimate for NetApp’s stock, which is about 20% higher than the current market price.

See Full Analysis For NetApp Here

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All-Flash Arrays And NetApp’s Presence

With the surge in growth of Big Data and cloud storage, storage companies are struggling to achieve the required high performance with the use of traditional hard disk drives in their own data centers. All-flash arrays are storage systems that contain multiple solid state drives instead of hard disk drives.

Storage systems customers are increasingly switching over to solid state flash-based systems in an attempt to use high performance input output per second (IOPS) storage systems with a better throughput. There are two basic architectures of all-flash storage arrays that the leading companies deploy. The first architecture, which is used by EMC, NetApp, HP, utilizes off-the-shelf SSDs directly in a standard array, whereas the companies using the other approach specifically design custom flash modules according to client specification and get the array manufactured by a third party. The latter is used by various small vendors that use low-cost original design manufacturer (ODM) storage boxes and caters to non-enterprise customers or new generation infrastructure buyers. As a result, most established large vendors are only left with enterprise customers, which have limited scope of growth in demand. Newer IT and tech startups are opting for “white-box” storage systems. According to a Gartner estimate, about 82% of direct ODM server revenue came from the hyperscale segment in 2014. [2]

At the end of last year, IDC reported that global demand for storage arrays costing less than $100,000 picked up significantly, which benefited flash-array startups including Pure Storage, Violin Memory and Nimbus Data. [3] In what was possibly a solid response to this market trend, NetApp introduced its All Flash FAS 8000 series of storage arrays with a starting price as low as $25,000 in June of this year. According to NetApp’s management the all-flash FAS prodcut line primarily caters to the traditional enterprise infrastructure buyers. ((NetApp to Acquire SolidFire, NetApp Press Release, December 2015)) On the other hand, NetApp’s EF series of flash arrays offer low latency frameworks, which are ideal for application owners. The third key segment of flash array consumers is the new generation infrastructure buyers, a market primarily dominated by smaller vendors and flash array startups. The addition of SolidFire products to NetApp’s portfolio could give it a strong foothold in this all-flash array market segment. [4]

Competition From Hybrid-Flash Arrays?

Hybrid-flash arrays (HFA) or network-based storage system utilizes both flash media and traditional spinning disks in its storage architecture in the form of using both SSDs and enterprise-grade hard drives in the storage racks. This configuration balances the cost vs performance dilemma for most customers. Using SSDs in the capacity ranging from 2% to 5% of total available storage can effectively improve the total input/output operations per second (IOPS) by almost 100% and reduce latency from 10 milliseconds to as low as 3 milliseconds. [5] Although this is higher than the <1 milliseconds latency offered by a many all-flash arrays (AFA), the total cost of owning a HFA is typically lower than an AFA. Hard drive maker Seagate (NASDAQ:STX) could become a key player in the HFA market following its $645 million acquisition of storage array and storage software provider Dot Hill Systems earlier this year.

As a result of its relatively lower cost of ownership, the HFA market is currently considerably larger than the AFA market. According to IDC, the HFA market stood at about $10 billion in 2014 while the AFA market size was estimated at about $1.3 billion for the year. [6] HFA is expected to become a $14 billion market through 2018, while the AFA market is expected to grow at a faster pace to become a $3.5 billion market by 2018. [7]

Seeing the popularity of NetApp’s EF and other E-series products, AF FAS all-flash arrays and now the addition of SolidFire’s business to its portfolio, we expect NetApp to grab a significant share in the flash array market going forward. NetApp’s market share in the overall external storage segment has fallen from 13.1% in 2013 to about 11.2% in 2015. We currently forecast its share in the external storage systems market to gradually increase to about 12% through the end of our forecast period.

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Notes:
  1. NetApp to Acquire SolidFire, NetApp Press Release, December 2015 []
  2. Gartner Says Data Center Infrastructure ODMs Are a Key Threat to Data Center OEMs’ Direct Business, Gartner Press Release, September 2014 []
  3. Worldwide Quarterly Disk Storage Systems Tracker Q3 2014, IDC Press Release, December 2014 []
  4. NetApp Acquiring SolidFire for $870 Million to Boost Flash, Bloomberg, December 2015 []
  5. Hybrid storage arrays vs. all-flash arrays: A little flash or a lot?, Search Solid State Storage, January 2014 []
  6. Flash-Based Array Market Proving to Be More Than Just a Flash in the Pan as Market Soars Past $11 Billion in 2014, IDC Press Release, January 2015 []
  7. The Flash Based Array Market, Storage Networking Industry Association, April 2015 []