ODM Storage Vendors Gain Share From Giants: EMC, HP, IBM, NetApp Lose Market Presence

Storage systems manufacturers including EMC (NYSE:EMC), NetApp (NASDAQ:NTAP), Hewlett-Packard (NYSE:HPQ) Hitachi Data Systems and IBM (NYSE:IBM) are increasingly facing competition from new, so-called White Box storage vendors. Over the last six to eight quarters, customers are shifting preference to low-cost original design manufacturer (ODM) storage boxes, which is cutting into addressable market for large vendors. ^[1] This in fact mirrors trends in the server market that have prevailed for a longer period of time. And the key driver is the migration of server and storage investment with the mover to cloud computing to large data center implementations of Amazon Web Services and others.  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]

Moreover, a decline in worldwide spending on information storage last year led consolidated worldwide factory revenues for storage systems to decline by 0.4% year-on-year to $24.5 billion in 2014. On the other hand, combined external and internal storage systems revenues were up by 2.5% for the full year to $32.6 billion according to data compiled by IDC’s quarterly reports. Total revenues were up mainly due to a solid performance small and mid-range vendors in Q4, driven by seasonal demand for flash-based storage systems and storage systems for hyperscale datacenters. ^[3] This demand continued through the March quarter, boosting total storage systems (external and internal combined) revenues. However, external storage system revenues declined by 0.6% year-on-year to $5.6 billion in the first quarter. ((Worldwide Quarterly Disk Storage Systems Tracker Q1 2015, IDC Press Release, June 2015))

Over the last few years, the combined market shares of companies outside the top 5 fell from 33% in 2009 to 25.7% in 2013 with large vendors including EMC and NetApp solidifying their presence in this market segment. However, this bounced back to 28.2% in 2014 indicating a shift in customer preference away from big players. As a result of low expenditure on storage systems and a transition towards ODM vendors, this figure rose to 33.1% through the quarter. ^[4] Below we take a look at how the companies fared in storage system sales in the first quarter this year.

EMC

EMC has the largest share in the external storage systems market, with a significantly higher share than competing storage providers. The company’s share grew from under 23% in 2009 to 31.3% at the end of 2013 before declining to 31% in 2014. This was particularly worrying for EMC since it was the first time since 2008 that the company lost share on a year-over-year basis. This trend continued through the March quarter this year as EMC’s revenues dropped by almost 7% year over year to $1.5 billion. Correspondingly, its share in the market stood at 27.3% for Q1’15. Despite low product sales, the company witnessed a 14% year-over-year  increase for its emerging storage product sales through the quarter. The company remains optimistic about its emerging storage division and expects revenues generated by emerging storage to continue to outperform core storage with an expected 30% year-over-year growth through 2015.

• Trefis has a $29 price estimate for EMC, which is about 10% higher than the current market price. EMC’s stock price fell has fluctuated around the $27 mark since the company reported its Q1 earnings in late April.
• We expect EMC’s full year revenues to be about $25.1 billion for 2015 and an EPS of $1.99, compared to a consensus EPS of $1.91 compiled by Reuters.

See our full analysis for EMC’s stock

NetApp

Similar to EMC, NetApp’s share in the external storage systems market grew from 8.7% in 2009 to 13.1% by the end of 2013. Subsequently, its market share also fell by about 30 basis points through 2014 to 12.8%. This was mainly attributable to the termination of its agreement with one of its largest partners, IBM, in early 2014, leading to a 22% decline in its OEM revenues to $370 million through the last three quarters of 2014. Although NetApp’s share in Q1’15 stood at 13.6%, revenues were almost 11% lower than the prior year period at $765 million. The company attributed disappointing results to a shift in customer preferences towards a combination of on-premise solution deployment and cloud-based storage solutions leading to low demand for existing NetApp offerings. Additionally, unfavorable foreign exchange rates through early-2015 also contributed to the decline in revenues. The company recently introduced a sub-$25k storage array to gain presence in the storage systems market. (see: NetApp To Take On Big Vendors, Flash Storage Startups With Sub-$25K All-Flash Array)

• Trefis has a $39 price estimate for NetApp’s stock, which is over 20% higher than the current market price. NetApp’s stock price fell by about 10% to $31 after the company announced its Q4’15 results in mid-May. It has since fluctuated between $31 and $34.
• We expect NetApp’s revenues to be $6.1 billion in calendar year 2015 and an EPS of $2.52 for FY 2016 ended April, compared to a consensus EPS of $2.13 compiled by Reuters.

See Full Analysis For NetApp Here

International Business Machines

IBM’s share in the external storage systems market has consistently declined from 14.2% in 2009 to 10.8% in 2014. The company’s revenues from the sale of external disk storage systems fell by 10.5% year over year in 2014 to $2.6 billion. Similarly, its revenues in the total storage systems market (internal and external storage systems combined) declined by over 14% from $4.2 billion in 2013 to $3.6 billion in 2014. Weakness in IBM’s standalone storage systems was partially attributable to the termination of the IBM-NetApp deal in May last year. Moreover, IBM sold off its x86 servers business to Lenovo in Q4’14, which further contributed to low product sales. ^[5] In Q1 this year, IBM’s external storage systems revenues fell by 13% over the prior year period to $434 million while total storage revenues fell by almost 30% year over year to $525 million.

• Trefis has a $197 price estimate for IBM which is about 20% higher than the current market price. IBM’s stock price has risen by over 5% since the start of the year.
• We expect IBM’s revenues to be about $94 billion in 2015 and an EPS of $17.59, compared to a consensus EPS of $15.87 compiled by Reuters.

See Full Analysis For IBM Here

Hewlett-Packard

HP’s share also declined in recent years, from 11.7% in 2009 to 9.4% in 2013, before picking up to 9.6% in 2014. HP was the only large company (among the top 5 vendors by market share) to have gained share in the external storage market through 2014. HP’s external storage revenues grew by 1.5% to $2.3 billion in 2014. Similarly, the company’s revenues in the total disk storage systems market increased by over 2% to $5.2 billion. The trend continued in Q1 this year as HP’s external storage systems revenues rose by 3% to $512 million while total revenues saw a 19% jump to $1.3 billion. HP gained share due to a higher demand in the mid-range market and comparatively higher declines faced by competing storage companies. 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. ^[6]

• We currently have $30 price estimate for HP, which is in line with the current market price. HP’s stock price has fallen by over 20% since the start of 2015.
• We expect HP’s revenues to be about $114 billion for 2015 and an EPS of $3.64 for FY 2015, compared to a consensus EPS of $3.65 compiled by Reuters.

See Full Analysis For HP Here

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More Trefis Research

1. The Rise Of White-Box Storage, Network Computing, August 2014 [↩]
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 Q4 2014, IDC Press Release, March 2015 [↩]
4. Worldwide Quarterly Disk Storage Systems Tracker Q1 2015, IDC Press Release, June 2015 [↩]
5. Lenovo says $2.1 billion IBM x86 server deal to close on Wednesday, Reuters, September 2014 [↩]
6. HP Servers, Storage Decline As Split Begins, Enterprise Tech, November 2014 [↩]