NetApp (NASDAQ: NTAP) will report its quarterly results next week, and one Wall Street firm is already saying it expects the data storage company to disappoint.
Stifel Nicolaus analysts Aaron Rakers and Matthew Nahorski wrote in a research note this morning that channel checks and the performance of other storage vendors suggest that "NetApp will miss Street revenue estimates by a far margin," although cost-cutting could help the company's bottom line.
Still, compared to the rest of the data storage market, NetApp may be faring better than most. Rakers and Nahorski said data points suggest that overall enterprise storage hardware spending fell more than 20 percent sequentially in the first quarter from the fourth quarter. The analysts said they expect a 5 percent sequential decline for NetApp, compared to the Wall Street consensus estimate of a 1 percent decline for the company.
They cited weakness in EMC's (NYSE: EMC) Clariion sales and a 20 percent drop in storage sales at IBM (NYSE: IBM), which accounted for 6 percent of NetApp's January quarter revenue. Arrow and Avnet, which account for 20 percent of NetApp's total revenue, "both highlighted continued weak enterprise spending trends over the past few weeks," the analysts wrote.
Rakers and Nahorski said HP's (NYSE: HPQ) midrange EVA arrays could also pressure NetApp.
As for NetApp's outlook, they said it is "too early to view the company's widely-anticipated Data OnTap 8.0 release as a positive," although they said a high-end system refresh later this year could be a plus.
Jeff O'Neal, NetApp's senior director of Data Center Solutions, said Data OnTap 8.0 which will merge Data OnTap 7G with the Data OnTap GX cluster platform will be released later this year. "NetApp remains on track to release our first converged operating system in calendar '09," O'Neal told Enterprise Storage Forum.
The Stifel Nicolaus analysts also said they were "cautious" on NetApp as a takeover candidate, a view echoed by other analysts.
R.W. Baird analyst Jayson Noland is more upbeat on NetApp. He rates the company's shares "outperform" based on "relatively positive" channel feedback, an improvement from the company's January quarter.
Noland said NetApp shares have about a $2 built-in acquisition premium. "We don't expect HP or Cisco to acquire NetApp, and though IBM may be a more likely suitor, this is not a transaction we expect either," wrote Noland and fellow analysts Joel Inman and Sonya Banerjee.
Wedbush Morgan analyst Kaushik Roy said that with names like EMC, Emulex (NYSE: ELX), QLogic (NASDAQ: QLGC) and IBM releasing disappointing first-quarter results, "It is clear that enterprise storage spending was weaker than most analyst expectations. Thus, nobody is expecting good NetApp revenues for the April quarter. The NTAP stock, however, has outperformed its peers mostly because of acquisition rumors."
Rakers and Nahorski also wrote today that Cisco's (NASDAQ: CSCO) quarterly earnings report released last week suggests that Brocade (NASDAQ: BRCD) may have gained share in the Fibre Channel SAN switch market even as Brocade's own switch sales may come in below estimates. Brocade will report its results on May 21, a day after NetApp.
Roy noted that Cisco's storage revenues were down 45 percent from the year-ago quarter, which he took as a sign of weak storage networking demand and also a sign that Cisco continues to lose market share to Brocade.
"OEMs are telling us that Brocade's SAN products are better than Cisco's SAN products," Roy said. "Furthermore, Cisco has upset the server vendors by getting into the server market."
The result is that both IBM and HP are giving more business to Brocade. "All these are positive for Brocade," he said.
Still, Roy said he remains optimistic about enterprise storage spending because of capacity demands and disaster recovery needs and because storage spending tends to be higher in the second half of the year. "We do expect storage spending in the second half of 2009 to be seasonally stronger just like other years," he said. "Also the macro situation and the business sentiment appear to be improving and that should benefit the second half spending on enterprise storage. The question that everyone is struggling with right now is, how strong could the second half be and are the stocks getting ahead of themselves?"
Compellent, 3PAR, Data Domain Hold Up
Rakers said he expects storage spending to decline by 10 percent this year, but he said Compellent (NYSE: CML), 3PAR (NYSE: PAR) and deduplication specialist Data Domain (NASDAQ: DDUP) are holding up well in the tough environment.
Enterprise Strategy Group analyst Brian Babineau is also upbeat on Data Domain and 3PAR although he worries that 3PAR was a little too aggressive in its criticism of EMC's new Symmetrix V-Max on the company's recent conference call.
"It's never good to wake a sleeping giant, especially one with the competitive muster that everyone knows EMC has," said Babineau.
Babineau also likes Riverbed (NASDAQ: RVBD), saying it's "pretty clear customers will spend money to save money in the networking segment."
Babineau is negative on LSI (NYSE: LSI), noting a 22 percent year-over-year decline in storage systems sales, and Isilion (NASDAQ: ISLN), which grew revenue in its most recent quarter, but then immediately replaced its sales chief, which Babineau took as a sign of "sales execution issues."
"Demand is there for scale-out NAS solutions," he said. "Isilon just needs to take advantage of it."
Babineau is neutral on EMC, Quantum (NYSE: QTM) and IBM. EMC had a tough quarter for storage hardware sales even as its RSA and VMware (NYSE: VMW) divisions grew.
Quantum's tape business continues to decline, but the company has benefited from a dedupe deal with EMC and financial support from the storage giant. "That deal alone deserves some credit," Babineau said.
And one other winner: STEC (NASDAQ: STEC), the company that popularized enterprise-class solid state drives (SSDs) with the help of EMC and others, is up 20 percent in after-hours trading tonight for the second straight quarter after its flash drive sales once again exceeded estimates (see STEC Rockets on Strong Flash Storage Sales).
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