What goes up but must come down? NetApp's customer invoices

Analysis Decline is setting in: NetApp's revenues are showing a distinctive downturn – and the latest quarterly numbers confirm the trend.

Sales in the third quarter of 2015, which finished January 23, added up to US$1.55bn, which was 3.73 per cent down on the year-ago quarter's US$1.61bn.

It was just half a per cent higher than Q2's $1.54bn. Traditionally NetApp's Q3 is significantly higher than its second quarter, as a glance at the chart shows – not so this year:

NetApp revenues and net income to Q3 financial year 2015. The trend line shows a downward turn in revenues. Click to embiggen the chart

Wall Street was expecting more, $1.6bn in fact. What went wrong, apart from not selling enough storage arrays?

Branded product sales revenues were $1.43bn for the quarter; they were $1.54bn in the year-ago period. OEM revenues rose from $109.8m a year ago to $124m. That was nice, but the amount is trivial compared to branded revenues.

Chairman and CEO Tom Georgen's prepared remarks were decidedly uninformative: "To position NetApp for success now, and in the future, we remain focused on extending our data fabric vision, a differentiated strategy for the hybrid cloud which allows customers to seamlessly manage their data regardless of where it's stored."

Yes, Tom, but customers aren't buying into this vision with sufficient energy to grow your business.

He continued:

In the third quarter we continued to deliver against this vision, enhancing our strong product portfolio with new software, services and systems to help our customers to realise the value of the hybrid cloud.

Whatever NetApp did, it simply wasn't good enough. Its channel revenues, 81 per cent of its sales, were down from the 83 per cent recorded a year ago, which can't have helped.

What's it going to do?

NetApp's adding $2.5bn to its share repurchase plan to keep stockholders' discontent in check. There is activist investor interest in NetApp, by the way, and these latest results will please them as they support their case for NetApp strategy changes.

El Reg notes that NetApp has no presence in the server SAN or virtual SAN or hyper-converged server-storage-networking market sectors. It's two shipping all-flash arrays, the EF500 SANtricity line and the all-flash ONTAP arrays, are not doing well enough to bulk up its revenues into growth. This is in spite of the EF560's SPC-1 benchmark goodness.

It's only EVO: RAIL strategy is to have Data ONTAP arrays supporting EVO: RAIL systems by providing networked external storage and data management services that EVO: RAIL lacks. This means NetApp is locked out of the direct EVO: RAIL market.

Startups – such as Nimble Storage, Tegile and Tintri – building designed-from-the-ground-up hybrid arrays, with software specifically written to efficiently use flash and spinning disk, say they are winning bids against NetApp.

NetApp's own all-new all-flash array, FlashRay, is in limited availability and lacking a second controller, and so providing no real competition to Pure Storage, and SolidFire, or all-flash arrays from EMC, IBM and others.

It has no real presence in the big data integration and analytics market, either. In essence, NetApp is a SAN and filer shared array supplier, and faces being left behind as the market moves to hot all-flash arrays, big data storage and analytics, hyper-converged systems, and server SANS.

The company looks as if it's lost an aggressive edge and is reacting to the market rather than driving it. There is no super new product or technology, apart from upgrading its base to the latest Clustered ONTAP software.

The outlook for the fourth quarter is for revenues between $1.55bn and $1.65bn. At the halfway point, full fiscal year 2015 revenues would be $6.2bn, 2.3 per cent down on fiscal 2014's $6.35bn. That would be NetApp's first annual revenue decline for several years.

The shares dropped seven per cent as investors started selling when they saw the results. ®

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