NetApp looks to recover amid sales decline, management shakeup

NetApp’s technology center in RTP.
NetApp’s technology center in RTP. NEWS & OBSERVER FILE PHOTO

Data storage giant NetApp, which ranks among the Triangle’s largest employers, is struggling in the face of a sea change in technology and competitors sporting strong product lineups.

Some Wall Street analysts have delivered blunt, harsh assessments of the state of the company in recent weeks.

“NetApp’s weak competitive positioning and lack of investment in new technologies in a rapidly changing market have finally caught up to the company,” William Blair & Co. analyst Jason Ader noted in a research note.

Adding that competitors “increasingly smell blood in the water,” he noted: “We expect NetApp’s downward spiral to continue ... ”

NetApp’s woes are just the latest example of how the shift to cloud computing is impacting the fortunes of Triangle technology companies. Some companies, such as Raleigh open source software company Red Hat, have seized new revenue opportunities, while others have adopted defensive postures.

Among NetApp’s issues:

▪ Annual revenue has declined for two consecutive years and the California-based company projects revenue in its current fiscal year will be “no better than flat.”

▪ Chairman and CEO Tom Georgens departed the company less than two weeks after it issued disappointing quarterly earnings, and it’s unclear who will lead the business long-term.

When NetApp announced Georgens’ departure June 1, the company said George Kurian, executive vice president of product operations, was the new CEO. But although Kurian’s title doesn’t include the word “interim,” the company also said it was conducting a search for a chief executive. And it cautioned in a securities filing that “any protracted delay” in naming a CEO “may cause disruption to our business.”

“In CEO transitions, it can be common practice for the board to evaluate external options and they will do so in this case,” NetApp said in a statement. “However, George has the confidence and support of the management team and the board to lead NetApp” going forward.

Macquarie Capital analyst Rajesh Ghai said of NetApp’s CEO search: “I think they probably need someone from the outside who can come in and shake up the organization.”

▪  In conjunction with its lower-than-expected quarterly earnings, NetApp announced layoffs of 500 employees worldwide, or about 4 percent of its workforce of 12,800.

The company isn’t saying how many jobs it is cutting at its Research Triangle Park campus or how many employees currently work here; last year it had more than 1,600 workers in RTP. The local workforce is focused on customer support, sales and product operations, which includes functions such as engineering and testing the company’s products.

NetApp has received more than $11 million in state incentives since 2006 and ultimately could receive more than $35 million, pegged to three separate expansions, if it meets all its investment and hiring targets. The company was 100 percent in compliance with its targets through 2013, the last year for which data is available from the state Commerce Department.

NetApp’s latest incentives package, awarded in 2012, calls for the company to receive up to $11.8 million, which is contingent on it having 1,910 employees by 2016.

Acquisition target

The challenges facing NetApp going forward have led to speculation among analysts that the company could be an attractive acquisition target for a private equity firm.

To be sure, a decline in sales of traditional storage technologies “has affected virtually every storage company,” including the likes of EMC, IBM and Hewlett-Packard, said technology analyst Charles King of Pund-IT. But, he added, NetApp’s competitors moved more aggressively into new services and new technologies, including cloud-based storage and systems that rely on flash memory rather than hard disks.

An influx of smaller storage companies flaunting the latest technology – including California-based Nimble Storage, which has 105 employees at its fast-growing office in Durham – also has eroded NetApp’s market share, analysts say.

The shift to the cloud has had a major impact on the market for storage devices.

“Companies, instead of running their applications on-premise, are increasingly running their applications on the public cloud” through providers such as Amazon, said Ghai. “The public cloud companies do not buy their equipment from the likes of NetApp.”

Instead, he said, the public cloud companies develop their own software and purchase “commodity hardware manufactured in Taiwan.”

NetApp’s woes could lessen its appeal to prospective customers.

“If your customers are seeing stories in the news about your financial problems and financial analysts are talking about the likelihood that your company is going to be acquired,” King said, “it becomes really tough to go into your customer base and have them take a risk on buying new equipment when your company may not be around, at least in its current state, within the next 6 to 12 months.”

NetApp has been looking to boost revenue with its cloud offering, which it calls clustered Data ONTAP. But that has proven to be problematic.

During the company’s latest conference call, Georgens, the CEO who has since departed, said that because of the complexities of shifting to clustered Data ONTAP, customers have been “deferring hardware refreshes and extending the life of existing gear.”

Still, the company said in a statement that it “remains confident in our strategy and portfolio,” as it looks to maximize sales of its existing portfolio of products while accelerating its customers migration to its cloud offering.

“This vision is resonating well with customers and underpins our confidence,” the company said.

NetApp also projects that its revenue will start to grow in the second half of the fiscal year that began in late April.

Some analysts, however, believe that NetApp’s problems run deeper.

“What management did not admit to,” wrote Ader, the William Blair analyst, “is the possibility that existing customers might be evaluating other vendors given the pain of data migration to clustered ONTAP. Our ... discussions indicate that this is exactly what is happening, driving share loss for NetApp.”

Ghai believes that if NetApp wants to survive and thrive over the long haul, it probably needs to make a “transformative” acquisition, buying a smaller data storage company such as Nimble or Pure Storage.

“I think that is the best option available for employees and shareholders long-term,” he said.

NetApp at a glance

Headquarters: Sunnyvale, Calif.

Business: Data management hardware and software

CEO: George Kurian

Employees: More than 12,000, including more than 1,000 in the Triangle

Latest annual revenue: $6.12 billion

Latest annual net income: $560 million