Equity analyst firm William Blair thinks NetApp is failing to face up to the realities of being an incumbent storage supplier, and could even exit the hardware business.
A research note from William Blair, dated March 17th, has fluttered its way to the storage desk at El Reg. It says:
"We sense a company grappling with massive technological change affecting its industry as well as the reality that it has become an incumbent vendor (no longer the high-growth, nimble player it once was)."
The Blair people don't put "complacent" on front of incumbent but that's what they imply.
They hosted an investor meeting at NetApp's Sunnyvale HQ in mid-March and learnt that the company sees five unprecedented technological changes affecting the IT industry:
- Flash memory
- Cloud computing
- Converged infrastructures - compute + storage + networking
- Big data
NetApp execs said, when there is limited technological change then incumbent suppliers rule; when there is dramatic technological change (see bullet points above) incumbents are vulnerable. The execs said they believed NetApp would benefit from the five changes listed above, which left the Blairites puzzled:
Yet management also believes that the trends listed above are good for NetApp and will enable the company to drive up shareholder returns. This seems like a paradox to us, and shows NetApp has failed to recognize that they are now indeed an incumbent.
NetApp's management is sticking to its one-size-fits-all ONTAP strategy. The pitch is, because clustered ONTAP is multi-tenant and workload-agnostic, scale-out and good for non-disruptive operations, it's suitable for both enterprise/private cloud data centres and public cloud ones. The Blairites say:
While we admit that NetApp has come a long way with clustered ONTAP, we continue to believe that one-size-fits-all is a flawed strategy as the market shifts to new flash and cloud-based architectures and ONTAP is highly tuned to traditional disk-based systems.
The execs in Sunnyvale see flash as an opportunity and believe they can use it to take market share from EMC in the high-performance part of the storage market "where NetApp has historically not focussed."
They think VMAX is especially vulnerable as it "is well-known to be the most over-provisioned and short-stroked system in the market."
But the Blairite view is that NetApp's "current all-flash array is unimpressive," and an acquisition may be needed to to gain a more competitive offering.
NetApp execs think that the EMC and VMware entry into offering cloud services will alienate their service provider customers who may well turn to NetApp. Again the Blair number-crunchers disagree:
This could be true, but it misses the point, in our opinion. The reality is that incremental workloads are shifting to the cloud, which is a secular negative for incumbent networked storage vendors, including NetApp.
EMC realises it is being forced into becoming a cloud operator:
"If you do not eat your own young in high tech, someone else will."
The Blairites are saying, by implication, that NetApp should get into the cloud as well, or have an escape strategy. Which, helpfully, it does not.
NetApp told the Blair people that it might get out of the hardware business in the longer term, "or at least begin to sell a stand-alone storage software solution that could work with anyone’s storage hardware." The Blair boys applaud this because there is evidence that the storage industry is beginning to move in that direction.
Their caveat is that it would dramatically change NetApp's business model:
"Transitioning from a hardware to a software business model is never easy and would result in a major hit to revenue."
The Blairite conclusion is that NetApp doesn't realise the spot it's in, the trouble it could be facing:
While we have a high degree of respect for NetApp and all it has achieved, we sense a company grappling with massive technological change affecting its industry as well as the reality that it has become an incumbent vendor (no longer the high-growth, nimble player it once was). This spells to us that a prolonged transition period is ahead for the business with growth likely to remain under pressure.
Overall, the Blairites' summary of NetApp's situation is that it has a "disproportionately large exposure to European and US federal governments, an unpredictable OEM revenue stream from Engenio, and an intensifying competitive landscape."
We note, by the way, that NetApp CEO Tom Georgens has become a board director at Autodesk, the 3D design and engineering software company. Is this really the time to be taking his eye off the NetApp CEO ball? ®