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NetApp blames sales slump on budget restraints

A rocky quarter with a disappointing forecast for this quarter left NetApp CEO Tom Georgens defensive about his company’s product portfolio and strategy.

NetApp Wednesday reported $1.55 billion in revenue, down four percent from last year and well below its previous forecast. Its forecast for this quarter of between $1.55 billion and $1.65 billion was also less than the analyst’s consensus expectation of $1.69 billion. NetApp’s revenues have decreased year-over-year for five straight quarters. It would have to hit the high end of its guidance this quarter to match its revenue for the same quarter last year.

Georgens opened the earnings call with analysts by saying, “We are clearly disappointed.” Later, he added, “probably a little bit more than disappointed. Probably I’m downright angry … we need to do better than that.” He vowed to make the necessary investments to fix NetApp’s sales execution problems, which he insists are problems with the business model and not product-related.

Georgens blamed the results on large companies putting breaks on their spending. He said the start of a new year (NetApp’s quarter included January) prompted organizations to re-think their budgets and many large deals did not get completed. Georgens emphasized that was because of budget reasons, and not because competitors won those deals instead. Perhaps the worst part of that is “deals that were pushed out may not return in the near term.”

Despite Georgens’ insistence that NetApp’s products are good enough to win deals, analysts on the earnings call questioned if the vendor’s portfolio is broad enough and raised issues with its around flash and cloud storage strategies.

An analyst asked if NetApp’s slowness to bring its all-flash FlashRay appliance to market is limiting its flash adoption. FlashRay is currently in limited release with a one-controller model. Georgens said the vendor is selling plenty of flash in its EF Series and FAS arrays.

“I think FlashRay is going to serve a segment of the market,” he said. “But that’s not the totality of the flash portfolio. The overall majority of our flash is in the other products. I think from a performance perspective, certainly all-flash FAS has a feature set far beyond any other flash array, and compelling performance and compelling efficiency. I think you’ll see a lot more of that product in the near future while we continue to evolve and develop FlashRay to serve the segments that it is targeted at.”

Another analyst asked if customers may be holding off on large deals because they are evaluating NetApp’s Cloud OnTap – a software-only version of Ontap designed for public clouds.

“I don’t think Cloud Ontap is the substitute necessarily for the types of systems that we are selling with Clustered Ontap on-premise,” he said, referring to NetApp’s main operating system. “I think cloud Ontap is the completion of a story … but I don’t think it’s changing the dynamic of ‘do I buy an on-premise system of do I buy that?’ I think Cloud OnTap is basically symbolic, and emblematic of NetApp’s end-to-end seamless cloud strategy and proving that it’s real.”

Georgens was also asked if NetApp needs to acquire companies to broaden its product portfolio. He said he would continue to pursue “tuck-in” acquisitions such as the SteelStore cloud backup appliance move it made in October, but larger deals are harder to predict and plan for. Georgens defended NetApp’s acquisition record, saying the E Series and OnCommand Insight software are selling well.

In recent quarters, NetApp revenue took a hit from a drop in OEM sales mainly because IBM ended its partnership to sell E Series storage. But last quarter, NetApp’s branded revenue also fell two percent year-over-year. NetApp’s declines compare to rival EMC’s three percent growth in storage revenue, which also came in below expectations.

Georgens said he noticed normal spending patterns in late 2014 – the fourth calendar quarter is the most active for storage sales – but things changed in January.

“Certainly we saw bullishness going into the end of the year and then still we had expectations of a relatively strong normal quarter end in January, and a fair amount of that business didn’t come through the way we would have thought,” he said.

“Every deal has a story, but when you go through 40 deals and only one or two are competitive and the rest of them are deals specific, I don’t think the competition is really the issue. And on top of that, the feedback from the field was optimistic the whole quarter.”

The poor numbers brought a series of downgrades and price share reductions from financial analysts.

“NetApp’s tone re-confirms lingering investor concerns on competitive issues,” analyst Alex Kurtz of Sterne Agee wrote in a note to clients today. “We believe the core issue for NetApp is ongoing challenges in the breadth of its product portfolio that remains more limited … relative to EMC.”

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