NetApp To Take On Big Vendors, Flash Storage Startups With Sub-$25K All-Flash Array

Storage giant NetApp (NASDAQ:NTAP) has seen some weakness in product sales over the last few quarters and has lost market share to smaller vendors – similar to other large storage systems providers. According to the IDC, global demand for storage arrays costing less than $100,000 has picked up in recent quarters, which has benefited flash-array startups including Pure Storage, Violin Memory and Nimbus Data. ^[1] In what can be seen as a solid response to this market trend, NetApp recently introduced its All Flash FAS 8000 series of storage arrays with a starting price as low as $25,000. Despite being cheaper than competing products, the AFF8000 range of arrays come with NetApp’s flagship fabric-attached storage (FAS) software line.

We have a $39 price estimate for NetApp’s stock, which is more than 10% higher than the current market price. NetApp’s stock price has fallen by over 15% since the beginning of the year.

See Full Analysis For NetApp Here

Where NetApp Stands In A Tough Industry

Global spending on storage systems has witnessed a slowdown in recent years, with total factory revenues growing by 18% in 2010, 10.9% in 2011 and 4.8% in 2012. According to IDC data, total factory revenues generated by external storage systems declined by 0.4% in 2013 to $24.6 billion. The trend continued in 2014 as consolidated worldwide factory revenues for storage systems declined by 0.4% to $24.5 billion through 2014 owing to a decline in worldwide spending on information storage. Subsequently, external storage system revenues declined by 0.6% y-o-y to $5.6 billion in the March quarter this year. ^[2] The combined market shares of companies outside the five largest storage systems providers fell from 33% in 2009 to 25.7% in 2013. These large companies include EMC (NYSE:EMC), NetApp (NASDAQ:NTAP), Hewlett-Packard (NYSE:HPQ) Hitachi Data Systems and IBM (NYSE:IBM). The combined market share of vendors outside the top 5 bounced back to 28.2% in 2014 indicating a shift in customer preference away from big players. The same trend was evident in IDC’s latest report for Q1’15 as well, as the figure rose to 33.1% during the quarter. ^[2]

NetApp recently reported a 7% year-over-year decline in its product revenues to $3.65 billion through fiscal year 2015 ended April. Software maintenance revenues were about 2% lower than the previous fiscal year at just about $900 million. On the other hand, hardware maintenance and services revenues were up by 7% y-o-y to $1.57 billion for the full year to partially offset the decline in product revenues. Correspondingly, NetApp’s overall revenues were about 3% lower than FY 2014 levels at $6.12 billion. After a dismal set of Q4 FY 2015 results, NetApp’s management named George Kurian as the new CEO. ^[3] Shortly afterwards, NetApp announced the release of the AFF8000 series.

Can The Sub-$25K Array Turn Tables?

The new AFF8000 flash arrays can be integrated with NetApp’s existing Clustered Data ONTAP storage operating system that enables seamless movement of data from disk based storage to flash storage. Data migration previously cost customers somewhere around 5-10% of the total cost of an array. The easier and built in data migration tools to help customers quickly transition from existing setups to an all-flash storage solution.

This series is the first range of all-flash arrays that can be procured on a software-only basis and be accessed via Amazon Web Services, Amazon’s (NASDAQ:AMZN) cloud environment. Moreover, the company has extended software support to AFF8000 customers for seven years, significantly more than the typical 3-5 year support offered by the company. ^[4]

The four models in the AFF8000 series have a maximum raw capacity of 4.6 petabytes (1 petabyte = 1000 terabytes) in the network-attached storage (NAS) configuration while the all storage-attached network setup has a maximum raw capacity of 1.6 petabytes. ^[5] The company has also built the arrays in a manner than would be compatible with Flexpod – the joint venture between NetApp and networking giant Cisco (NASDAQ:CSCO). However, channel partners are waiting for Cisco for the go ahead before they start offering converged solutions.

Despite weakness in its storage product division in recent quarters, which primarily includes storage system (hardware and corresponding software) sales, we have a slightly optimistic forecast for NetApp’s storage products division. The cheaper all-flash arrays are likely to draw customers and boost revenue figures for the company in the coming quarters. NetApp’s share in the storage systems market for 2014 at 12.8%, which was about 25 basis points lower than 2013 levels. We currently expect the company 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. Correspondingly, we forecast NetApp’s share to continue to rise, albeit more gradually than historic rates, to about 14% through the end of our forecast period.

Moreover, seven-year maintenance contracts could help drive the company’s services revenues. NetApp’s gross margin (GAAP) of the services division improved by almost 3 percentage points to 62.0% in 2014. Comparatively, gross margins of both product and software maintenance were down by 30 and 60 basis points to 54.7% and 96%, respectively. As a result, the company-wide gross margin was up by 65 basis points to 62.6%. If the services division continues to grow, the company can sustain healthy margins in the coming years.

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1. Worldwide Quarterly Disk Storage Systems Tracker Q3 2014, IDC Press Release, December 2014 [↩]
2. Worldwide Quarterly Disk Storage Systems Tracker Q1 2015, IDC Press Release, June 2015 [↩] [↩]
3. NetApp Announces Changes to Executive Leadership Team and Board of Directors, NetApp Press Release, June 2015 [↩]
4. NetApp Targets EMC, HP, Startups With New $25K All-Flash Storage Line Part 1, CRN, June 2015 [↩]
5. NetApp Targets EMC, HP, Startups With New $25K All-Flash Storage Line Part 3, CRN, June 2015 [↩]